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Topic 2 - Managing Industry Competition

BUSM 4486 International Strategy


Professor Rod Williams
Outline

Defining industry competition


The five forces framework
Threats of the Five Forces
Lessons from the Five Forces Framework
Three generic strategies
Lessons from the Generic Strategies
Defining Industry Competition
Industry: A group of firms producing products (goods and/or services)
that are similar to each other

Theories of industry competition


Perfect competition (rarely observed). The situation prevailing in a
market in which buyers and sellers are so numerous and well informed that
all elements of monopoly are absent and the market price of a commodity is
beyond the control of individual buyers and sellers.

Industrial organization (IO) economics model


Industry structure (external) determines strategy and firm
performance by using structureconductperformance (SCP)
paradigm.
Original goal-help regulators minimize firms excess profits
Strategists use the IO model to try to earn excess profits
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
The stronger and more competitive these forces are, the less likely
the focal firm is able to earn above-average return, and vice versa
The Five Forces Framework

Figure 2.1
Threats of the Five Forces
Threats indicative of strong competitive forces that can
Five forces depress industry profitability

Rivalry among A large number of competing firms


competitors 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 Little scale-based low-cost advantages


potential entry (economies of scale)
Little non-scale-based advantages
Inadequate product proliferation
Insufficient product differentiation
Little fear of retaliation
No government policy banning or discouraging entry
Threats of the Five Forces (contd)

Threats indicative of strong competitive forces that can


Five forces depress industry profitability

Bargaining power A small number of suppliers


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 A small number of buyers


of buyers Products provide little cost savings or quality of life
enhancement
Buyers purchase standard, undifferentiated products
from focal firm
Buyers are willing and able to vertically integrate backward
Threats of the Five Forces (contd)

Threats indicative of strong competitive forces that can


Five forces depress industry profitability

Threat of Substitutes superior to existing products in quality and


of substitutes quality and function
Switching costs to use substitutes are low

Table 2.1 contd


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 challenge is to stake out a position that is strong and
defensible relative to the five forces
Generic Competitive Strategies
Generic Strategies: Cost Leadership

Firms theory about how to compete successfully centers on low costs


and low prices
Offer better value to customers
Target average customers for mass market - little differentiation
Key functional areas are manufacturing and materials management
High volume, low margin approach
Defense against five forces
Relentless drive to cut costs might compromise value that customers
desire
Generic Strategies: Differentiation
Deliver products that customers perceive to be valuable and different
Target customers in smaller, well-defined segments who are willing to pay
premium prices
Low volume, high margin approach
Must have unique attributes (actual or perceived) - quality, sophistication,
prestige, or luxury
Challenge - identify attributes that are valued by customers in each market
segment
Key functional areas are research and development (source of innovation),
marketing/sales, and after-sale services
Defense against five forces
Drawbacks
Difficult to sustain differentiation in the long run
Relentless efforts of competitors to duplicate differentiation
Generic Strategies: 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
Generic Strategies:
Lessons from the Generic Strategies
The essence of the three strategic choices:
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
Generic Strategies/Industry Forces
These generic strategies each have attributes that can serve to defend against competitive forces.

Generic Strategies
Industry
Cost
Force Differentiation Focus
Leadership

Entry Ability to cut price in Customer loyalty can Focusing develops core
retaliation deters discourage potential competencies that can
Barriers potential entrants. entrants. act as an entry barrier.

Large buyers have less


Buyer Large buyers have less
Ability to offer lower power to negotiate
power to negotiate --
Power price to powerful buyers. because of few
few close alternatives.
alternatives.
Suppliers have power
because of low volumes,
Supplier Better able to pass on
Better insulated from but a differentiation-
supplier price increases
Power powerful suppliers. focused firm is better
to customers.
able to pass on supplier
price increases.
Customers become
Specialized products &
Threat of attached to
Use low price to defend core competency
differentiating attributes,
Substitutes against substitutes. protect against
reducing threat of
substitutes.
substitutes.
Rivals cannot meet
Better able to compete Brand loyalty to keep
Rivalry on price. customers from rivals.
differentiation-focused
customer needs.
Three Strategic Groups in the Global
Automobile Industry
Additional readings
Hill, C., Jones, G. & Schilling, M., 2015. Chapter 5 - Strategic management:
theory: an integrated approach 11 ed., South Melbourne: Cengage Learning.
Pp. 153-177. https://equella.rmit.edu.au/rmit/file/9eb5b028-89b4-4add-a0aa-
7bac6478b30b/1/141125_3_070.pdf

Miles, R. et al., 1978. Organizational strategy, structure, and process. Academy


of Management Review, 3(3), pp.546562. Available at:
https://login.ezproxy.lib.rmit.edu.au/login?url=http://search.ebscohost.com/lo
gin.aspx?direct=true&db=bth&AN=4305755&site=ehost-live&scope=site

Porter, Michael E. 2004, 'The structural analysis of industries' in Competitive


strategy: techniques for analyzing industries and competitors, Free, New York;
London, pp. 3-33. (Available:
https://equella.rmit.edu.au/rmit/items/e14a4b05-e445-0a71-293c-
6702dbb9c572/1/
Youtube
Managing industry competition:
https://www.youtube.com/watch?v=4VQZBxyZw5g

Michael Porter on Competitiveness: http://youtu.be/y5I_cnpP99U

Jay Barney Resource Based View of the Firm: http://youtu.be/-


KN81_oYl1s
1. Compare and contrast the five forces affecting the airline industry, the fast
food industry, the beauty products industry, and the pharmaceutical industry
(1) on a worldwide basis and (2) in your country. Which industry holds more
promise for earning higher returns? Why?

2. Using the Five Forces framework, how would you characterize the
competition in the luxury goods industry?