Notes Feb

Chapter 3: Industries
I. What is an Industry?
A. Gut level: if it seems like it, it is probably in that industry
B. Nested: industries can exist within industries
C. “Official”
1. SIC (Standard Industrial Classification): 6 digit number, first two are primary industry
2. NAICS (North American Industrial Classification System)
D. In practice => not so good!
1. Substitutability
a. Supply-side => seller
i. Who all sells x? ii. Or could sell x in the future?
b. Demand-side => buyer
i. Who all sells x? ii. Here and now
2. Buyers and sellers are likely to define industry slightly differently
3. All buyers are likely to define industry slightly differently
4. All sellers are likely to define industry slightly differently

II. Analyzing an industry
A. Systems (many!)
B. Porter 5 forces model
a. Competition among rivals
b. Customer power
c. Supplier power
d. Threat of new entrants
e. Threat of substitutes

C. Empirical observation
a. Some industries appear to be more profitable than others

III. Diversification and Corporate Office
A. Observation: some firms are in one business, others are in more than one
a. Why?
b. Many reasons
Cyclicality
Risk management
Complementarities
Others
B. Terminology
a. Focus(ed) => 1 business
b. Diversified => more than 1 business
C. Diversification types
a. Related: similar customers, similar price points, similar products, etc. (YUM!)
b. Unrelated: (PPG- paint, glass)
c. Conglomerate: relatively rare, huge number of businesses (GE, Phillips Electric)
D. Performance
a. Focus => successful/unsuccessful
b. Diversified
Related => successful/unsuccessful
Unrelated => successful/unsuccessful
Conglomerate => successful/unsuccessful
E. Rationale
a. Risk management
b. Most risky: Focused…………………………..Least risky: Conglomerate
c. Resources: Focused…………………………..Resources: Dispersed
F. Structure
a. Focus
i. CEO => GM
b. Diverse (Unrelated)
i. CEO isn’t likely to be equally knowledgeable about every business ii. CEO is responsible for managing