1. Managing Industry Competition
Chapter 2
Managing Industry Competition
Global Strategy Mike W. Peng
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2. Outline Defining industry competition The five forces framework
Three generic strategies
Debates and extensions
The savvy strategist
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3. Defining Industry Competition
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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4. 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
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5. The Five Forces Framework
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Figure 2.1

6. 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
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Table 2.1

7. Threats of the Five Forces (cont’d)
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
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Table 2.1 cont’d

8. Threats of the Five Forces (cont’d)
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
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Table 2.1 cont’d

9. 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
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10. Three Generic Competitive Strategies
PRODUCT DIFFERENTIATION
MARKET SEGMENTATION
KEY FUNCTIONAL AREAS
Cost Leadership
Low (mainly by price)
Low (mass market)
Manufacturing, services, and
logistics
Differentiation
High (mainly by uniqueness)
High (many market segments)
R&D, marketing, and sales
Focus
Extremely high
Low (one of a few segments)
R&D, marketing, and sales
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Table 2.4

11. Three Generic Strategies: 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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12. Three 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
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13. Three Generic Strategies: Differentiation (cont’d)
Defense against five forces
Drawbacks
Difficult to sustain differentiation in the long run
Relentless efforts of competitors to duplicate differentiation
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14. Three 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
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15. 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
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16. Debates and Extensions
Clear versus blurred boundaries of industry
Threats versus opportunities
Five forces versus a sixth force (complementors)
Stuck in the middle versus all rounder
Industry rivalry versus strategic groups
Integrating versus outsourcing
Industry-specific versus firm-specific and institution-specific determinants of performance
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17. Three Strategic Groups in the Global Automobile Industry
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Figure 2.2

18. Strategic Groups and Ownership Types in the Chinese Electronics Industry
DEFENDER
ANALYZER
REACTOR
Ownership type
State ownership
Mixed
Unstable
Customer base
Stable
Mixed
Changing
Growth strategy
Cautious
Mixed
Aggressive
Managers
Older, more conservative
Mixed
Younger, more aggressive
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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): 1105–1129.
Table 2.6

19. 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
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