3

Managing Industry Competition

Part I:

. harveyzjq@126.com

Three Leading Perspectives

Figure 1.3
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 Managing Industry Competition

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Outline
Defining industry competition The five forces framework Three generic strategies Debates and extensions Implications for strategists

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 Industry:

Industry Competition and the IO Model

A group of firms producing products (goods and/or services) that are similar to each other.

Structure-Conduct-Performance (SCP) model

The primary contribution of the Industrial Organization (IO) economics model
Structure: Conduct:

Structural attributes of an industry

The firms actions

Performance:

The result of the firms conduct in response to industry structure

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Defining Industry Competition

The original goal of IO economics is not to help
firms compete; instead, it is to help policymakers better understand how firms compete in order to properly regulate them and ensure competition.

Business strategists have turned the SCP model

from IO economics upside down, by drawing on its insights to help firms perform better.

This transformation is the heart of this chapter.

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Five Forces Framework

The Five Forces Framework
Translated and extended from the SCP model in 1980 by Michael Porter. A key proposition:
The

focal firms performance critically depends on the degree of competitiveness of the five forces within an industry. stronger and more competitive these forces are, the less likely the focal firm is able to earn above-average return, and vice versa.

The

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The Five Forces Framework

Figure 2.1
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Threats of the Five Forces

Five forces
Rivalry among competitors Threats indicative of strong competitive forces that can depress industry profitability A large number of competing firms Rivals are similar in size, influence, and product offerings High-price, low-frequency purchases Capacity is added in large increments Industry slow growth or decline High exit costs Threat of potential entry Little scale-based low-cost advantages (economies of scale) Little non-scale-based low-cost advantages Insufficient product differentiation Little fear of retaliation No government policy banning or discouraging entry
Table 2.1
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Threats of the Five Forces (contd)

Five forces
Bargaining power of suppliers Threats indicative of strong competitive forces that can depress industry profitability A small number of suppliers Suppliers provide unique, differentiated products Focal firm is not an important customer of suppliers Suppliers are willing and able to vertically integrate forward Bargaining power of buyers A small number of buyers Products provide little cost savings or quality of life enhancement Buyers purchase standard, undifferentiated products from focal firm Buyers are having economic difficulties Buyers are willing and able to vertically integrate backward
Table 2.1 contd
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Threats of the Five Forces (contd)

Threats indicative of strong competitive forces that can

Five forces
Threat of of substitutes

can depress industry profitability Substitutes superior to existing products in quality and quality and function Switching costs to use substitutes are low

Table 2.1 contd

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Five Forces Framework: Intensity of Rivalry among Competitors Actions indicative of a high degree of rivalry:
frequent price wars proliferation of new products intense advertising campaigns high cost competitive actions and reactions

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Five Forces Framework:

Intensity of Rivalry among Competitors (contd) Conditions leading to a high degree of rivalry:
The more concentrated an industry is, the fewer the competitors are, and the more likely that competitors will recognize their mutual interdependence and so restrain their rivalry. Competitors of similar size, market influence, and product offerings vigorously compete with each other. In big ticket industries where products are purchased infrequently, it is difficult to establish dominance, therefore resulting in more intense rivalry (Table 2.2).

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Big Tickets versus Staple Goods

Source: Adapted from J. Shamsie, 2003, The context of dominance: An industry-driven framework for exploiting reputation (pp. 214215), Strategic Management Journal, 24: 199215. All data are average US market share data during 198794; numbers are rounded up by the present author.

Table 2.2
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Five Forces Framework:

Intensity of Rivalry among Competitors Conditions leading (contd)degree of rivalry: to a high
In some industries new capacity has to be added in large increments, thus fueling intense rivalry. Slow industry growth or decline makes competitors more desperate, often unleashing competitive actions not used previously. Industries experiencing high exit costs are likely to see firms continue to operate at a loss.

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Five Forces Framework: Threat of Potential Entry

Incumbents Primary Weapon: Entry Barriers
Scale-based low cost advantages (economies of scale) Non-scale-based low cost advantages (proprietary technology / know-how / access to raw materials and channels / good locations) Product differentiation Possible retaliation by incumbents Government policy banning or discouraging entries

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Five Forces Framework: Bargaining Power of Suppliers

Suppliers:
Organizations that provide inputs (materials, services, and manpower) to firms in the focal industry.

Sources of bargaining power of suppliers:

Their ability to raise prices and/or reduce quality of goods and services.

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Five Forces Framework: Bargaining Power of Suppliers (contd) Conditions leading to strong bargaining power:
If the supplier industry is dominated by a few firms. If they provide unique differentiated products with few or no substitutes. If the focal firm is not an important customer. If they are willing and able to enter the focal industry by integrating forward.

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Five Forces Framework: Bargaining Power of Buyers

Conditions leading to strong bargaining power of
buyers:
If there are only a small number of buyers. If products of an industry do not clearly produce cost savings or enhance the quality of life for buyers. If buyers purchase standard, undifferentiated commodity products from suppliers. If buyers are having economic difficulties. Entering the focal industry through backward integration.

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Five Forces Framework: Threat of Substitutes

Substitute products:
Products of different industries that satisfy customer needs currently met by the focal industry.
Example:

Pepsi is not a substitute for Coke; instead, it is a rival in the same industry

Substitutes are particularly threatening:

If substitutes are superior to existing products in quality and function. If switching costs are low.

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Five Forces Framework: Lessons from the Five Forces Framework Not all industries are equal in terms of their potential
profitability.

The task for strategists is to assess the opportunities (O)

and threats (T) underlying each competitive force affecting an industry, and then estimate the likely profit potential of the industry.

The key, according to Porter, is to stake out a position

that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitutes.

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The Five Forces and the Internet

Sources: Based on (1) B. Canzer, 2003, E-Business: Strategic Thinking and Practice, Boston: Houghton Mifflin; (2) M. Porter, 2001, Strategy and the Internet, Harvard Business Review, March: 6378; (3) S. Rangan & R. Adner, 2001, Profits and the Internet: Seven misconceptions, MIT Sloan Management Review, summer: 4453.

Table 2.3
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Three Generic Competitive Strategies

Table 2.4
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Three Generic Strategies: Cost Leadership

Cost leadership centers on low costs and prices.
A high-volume, low-margin approach.
Firms

undertaking this strategy are often very innovative on the production process side of the business.

The advantage for a cost leader (such as WalMart) is to minimize the threats from the five forces. Many companies try to become cost leaders, however, only a few succeed.

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Three Generic Strategies: Cost Leadership (contd)

Drawbacks:
The danger of being outcompeted on costs.
This

forces the leader to continuously search for ways to further reduce costs. the relentless drive to cut costs, a cost leader may make trade-offs that compromise the value customers perceive in its products or services and hurt sales.

In

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Three Generic Strategies: Differentiation

Differentiation:
Strategically focusing on how to deliver products that are perceived to be valuable and different.
A

low-volume, high-margin approach in targeting smaller, well-defined customer segments willing to pay premium prices. and marketing/sales are important functional areas. less a differentiator resembles its rivals, the more protected its products are.
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Research/development The

Three Generic Strategies: Differentiation (contd)

The Strategic Requirement:
Differentiated products must have truly or perceived unique attributes such as quality, sophistication, prestige, and luxury

The Challenge:
To identify these attributes and deliver value centered on them for each market segment.

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Three Generic Strategies: Differentiation (contd)

Drawbacks:
A differentiator can have difficulty sustaining the basis of its differentiation over the long run. Customers may decide that the price differential between the differentiators and cost leaders products is not worth paying for. The differentiator also has to confront relentless efforts of competitive imitation. As the overall quality of the industry increases, brand loyalty to differentiators may decline The IBM PC was a differentiated product commanding a premium in 1984. PCs became a low-profit commodity and IBM sold its PC division to Lenovo, a Chinese firm, in 2004.

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Three Generic Strategies: Focus Strategy (contd)

Focus Strategy:
Serving the needs of a particular segment or niche of an industry such as a geographical market, type of customer, or product line. A specialized differentiator has a smaller, narrower, and sharper focus than a large differentiator.
A specialized cost leader deals with a narrower segment compared with the traditional cost leader.

Focusing may be successful when a firm possesses intimate knowledge about a particular segment.

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Three Generic Strategies:

The essence of the three strategic choices:

Lessons from the Three Generic Strategies

Whether to perform activities differently or to perform different activities relative to competitors.

There are two fundamental strategic dimensions: cost

and differentiation
The key is to choose one dimension and execute on it consistently.

According to Porter, firms that are stuck in the middle either have no strategy or are drifting strategically. However, this point is debatable

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Debates and Extensions

1. 2. 3. 4. 5. 6. 7. 8.
Clear versus blurred boundaries of industry Threats versus opportunities Five forces versus a sixth force (complementors) Industry rivalry versus strategic groups (see Figure 2.2, Figure 2.3, Table 2.5, and Opening Case) Integrating versus outsourcing Stuck in the middle versus all rounder (SIA 2.2 Instant noodles in Asia) Positioning versus hypercompetition (SIA 2.3 Toy industry) Industry- versus firm- and institution-specific determinants of firm performance
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Three Strategic Groups in the Global Automobile Industry

This can be used to illustrate Opening Case

Figure 2.2
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Subgroups Within the Mass Market Strategic Group in the US Automobile Industry

Source: Adapted from R. Hamilton, E. Eskin, & M. Michaels, 1998, Assessing competitors: The gap between strategic intent and core capability (p. 413, 415), Long Range Planning, 31: 406417.

Figure 2.3
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Subgroups Within the Mass Market Strategic Group in the US Automobile Industry

Source: Adapted from R. Hamilton, E. Eskin, & M. Michaels, 1998, Assessing competitors: The gap between strategic intent and core capability (p. 413, 415), Long Range Planning, 31: 406417.

Figure 2.3 (contd)

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Strategic Groups and Ownership Types in the Chinese Electronics Industry

Source: Adapted from M. W. Peng, J. Tan, & T. Tong, 2004, Ownership types and strategic groups in an emerging economy (p. 1110), Journal of Management Studies, 41 (7): 11051129.

Table 2.5
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Debates and Extensions (contd)

All eight debates direct their attention to Porters
work, which has become an incumbent in the strategy field.
Porters framework has succeeded in identifying variables and raising questions, while not necessarily providing definitive answers. The industry-based viewas well as the entire field of global strategyis alive, evolving, and full of debates, controversies, and (hopefully) some fun (!) Every chapter after this one will have a similar section on Debates and Extensions

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Implications for Strategists

For strategic practice, the industry-based view
provides:
A systematic foundation for industry analysis and competitor analysis, to which a more detailed examination, introduced in later chapters, can be added. A set of answers to the four fundamental questions in strategy discussed in Chapter 1. Evidence that industry-specific conditions play an important role in determining firm performance.

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Key Terms
backward integration bargaining power of suppliers complementors conduct cost leadership differentiation dominance duopoly economies of scale entry barriers excess capacity experience curves five forces framework flexible manufacturing technology focus forward integration generic strategies hypercompetition incumbents industrial organization (IO) economics

industry industry positioning institution-based view know-how mass customization mobility barriers monopoly network externalities non-scale-based low cost advantages oligopoly outsourcing perfect competition performance product differentiation resource-based view scale-based low cost advantages strategic groups structure structure-conduct-performance (SCP) model substitutes

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