Managing Industry Competition

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Managing Managing Industry Industry

CompetitionCompetition

Part I: 管理产业竞争Part I: 管理产业竞争

朱吉庆博士讲师 . [email protected]朱吉庆博士讲师 . [email protected]

管理产业竞争 3–2

Three Leading Perspectives

Figure 1.3


• Managing Industry CompetitionManaging Industry Competition


Outline

• Defining industry competition

• The five forces framework

• Three generic strategies

• Debates and extensions

• Implications for strategists


Industry Competition and the IO Model

• Industry:A group of firms producing products (goods

and/or services) that are similar to each other.

• Structure-Conduct-Performance (SCP) modelThe primary contribution of the Industrial

Organization (IO) economics modelStructure: Structural attributes of an industryConduct: The firm’s actionsPerformance: The result of the firm’s conduct in

response to industry structure


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.


Five Forces Framework

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

in 1980 by Michael Porter.A 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.


The Five Forces Framework

Figure 2.1


Threats of the Five Forces

Table 2.1

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 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


Threats of the Five Forces (cont’d)


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 productsfrom focal firm

• Buyers are having economic difficulties

• Buyers are willing and able to vertically integrate backward

Table 2.1 cont’d


Threats of the Five Forces (cont’d)


Five forces can 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


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


Five Forces Framework: Intensity of Rivalry among Competitors

(cont’d)• 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).


Big Tickets versus Staple Goods

Table 2.2

Source: Adapted from J. Shamsie, 2003, The context of dominance: An industry-driven framework for exploiting reputation (pp. 214–215), Strategic Management Journal, 24: 199–215. All data are average US market share data during 1987–94; numbers are rounded up by the present author.


Five Forces Framework: Intensity of Rivalry among Competitors

(cont’d)• Conditions leading to a high degree of rivalry:

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.


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


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.


Five Forces Framework: Bargaining Power of Suppliers

(cont’d)• 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.


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.


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.


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.”

管理产业竞争 3–22Table 2.3

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: 63–78; (3) S. Rangan & R. Adner, 2001, Profits and the Internet: Seven misconceptions, MIT Sloan Management Review, summer: 44–53.

管理产业竞争 3–23Table 2.4

Three Generic Competitive Strategies


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 Wal-Mart) is to minimize the threats from the five forces.

Many companies try to become cost leaders, however, only a few succeed.


Three Generic Strategies:Cost Leadership (cont’d)

• Drawbacks:

The danger of being outcompeted on costs.

This forces the leader to continuously search for ways to further reduce costs.

In 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.


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.

Research/development and marketing/sales are important functional areas.

The less a differentiator resembles its rivals, the more protected its products are.


Three Generic Strategies:Differentiation (cont’d)

• 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.


Three Generic Strategies:Differentiation (cont’d)

• 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

differentiator’s and cost leader’s 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.


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.


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: 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


Debates and Extensions

1. Clear versus blurred boundaries of industry

2. Threats versus opportunities

3. Five forces versus a sixth force (complementors)

4. Industry rivalry versus strategic groups (see Figure 2.2, Figure 2.3, Table 2.5, and Opening Case)

5. Integrating versus outsourcing

6. Stuck in the middle versus all rounder (SIA 2.2 Instant noodles in Asia)

7. Positioning versus hypercompetition (SIA 2.3 Toy industry)

8. Industry- versus firm- and institution-specific determinants of firm performance


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

Figure 2.2


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

Figure 2.3Source: 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: 406–417.


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

Figure 2.3 (cont’d)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: 406–417.


Strategic Groups and Ownership Types in the Chinese Electronics Industry

Table 2.5Source: 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): 1105–1129.


Debates and Extensions (cont’d)

• All eight debates direct their attention to Porter’s work, which has become an incumbent in the strategy field.Porter‘s framework has succeeded in identifying

variables and raising questions, while not necessarily providing definitive answers.

The industry-based view—as well as the entire field of global strategy—is 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”


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.


Key Terms

backward integrationbargaining power of supplierscomplementorsconductcost leadershipdifferentiationdominanceduopolyeconomies of scaleentry barriersexcess capacityexperience curvesfive forces frameworkflexible manufacturing technologyfocusforward integrationgeneric strategieshypercompetitionincumbentsindustrial organization (IO) economics

industryindustry positioninginstitution-based viewknow-howmass customizationmobility barriersmonopolynetwork externalitiesnon-scale-based low cost advantagesoligopolyoutsourcingperfect competitionperformanceproduct differentiationresource-based viewscale-based low cost advantagesstrategic groupsstructurestructure-conduct-performance (SCP) modelsubstitutes

Managing Industry Competition

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