Global StrategyMike W. Peng

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22Industry

CompetitionIndustry

Competition

Part I: Foundations of Global Strategy

Global Strategic ManagementMike W. Peng

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Outline

• Defining industry competition• The five forces framework• Three generic strategies• Debates and extensions• The savvy strategist

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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) Industrial organization (IO) economics model

Industry structure determines strategy and firm performance (SCP model)

Original goal-help regulators minimize firm’s excess profits Strategists use the IO model to try to earn excess profits

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Five Forces Framework

• The Five Forces Framework “Translated” and extended from the SCP model in

1980 by Michael PorterA key proposition: The focal firm’s 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

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The Five Forces Framework

Figure 2.1

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Threats of the Five Forces

Table 2.1

Threats indicative of strong competitive forces that canFive forces depress industry profitability

Rivalry among A large number of competing firmscompetitors 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 advantagespotential entry (economies of scale)

Little non-scale-based low-cost advantages Insufficient product differentiation Little fear of retaliation No government policy banning or discouraging entry

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Threats of the Five Forces (cont’d)

Threats indicative of strong competitive forces that canFive forces depress industry profitability

Bargaining power • A small number of suppliersof 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 buyersof 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 cont’d

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Threats of the Five Forces (cont’d)

Threats indicative of strong competitive forces that canFive 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 cont’d

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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

• Use the five forces model as an industry positioning tool• Core features of the five forces model remain remarkably

insightful when analyzing new phenomena, such as e-commerce

2–10Table 2.4

Three Generic Competitive Strategies

PRODUCT DIFFERENTIATION MARKET SEGMENTATION KEY FUNCTIONAL AREAS

Cost Leadership Low (mainly by price) Low (mass market) Manufacturing andmaterials management

Differentiation High (mainly by uniqueness) High (many market segments) Research and development,marketing and sales

Focus Low (mainly by price) or high(mainly by uniqueness)

Low (one of a few segments) Any kind of functionalarea

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Three Generic Strategies:Cost Leadership

• Cost leadership Firm‘s 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

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Three Generic Strategies:Differentiation

• 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

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Three Generic Strategies:Differentiation (cont’d)

Defense against five forcesDrawbacksDifficult to sustain differentiation in the long runRelentless efforts of competitors to duplicate

differentiation

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Three Generic Strategies:Focus Strategy (cont’d)

• 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:Lessons from the Three 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: costand 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. Clear versus blurred boundaries of industry2. Threats versus opportunities 3. Five forces versus a sixth force (complementors)4. Stuck in the middle versus all rounder5. Industry rivalry versus strategic groups 6. Integrating versus outsourcing 7. Industry- versus firm- and institution-specific

determinants of firm performance

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Three Strategic Groups in the Global Automobile IndustryThis can be used to illustrate Opening Case

Figure 2.2

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Strategic Groups and Ownership Types in the Chinese Electronics Industry

Table 2.5

STRATEGIC GROUP DEFENDER ANALYZER REACTOR

Ownership type State ownership Foreign ownership Private ownership

Customer base Stable Mixed Unstable

Product mix Stable Mixed Changing

Growth strategy Cautious Mixed Aggressive

Managers Older, more conservative Mixed Younger, more aggressive

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The Savvy Strategist

• 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