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Managing Industry
Competition
Part I: Foundations of Global Strategy
Global Strategy
Mike W. Peng
Copyright © 2009 Cengage.
All rights reserved.
PowerPoint Presentation by John Bowen, Columbus State Community College
Outline
• Defining industry competition
• The five forces framework
• Three generic strategies
• Debates and extensions
• The savvy strategist
Copyright © 2009 Cengage. All rights reserved.
2–2
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
Copyright © 2009 Cengage. All rights reserved.
2–3
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
Copyright © 2009 Cengage. All rights reserved.
2–4
The Five Forces
Framework
Figure 2.1
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2–5
Threats of the Five Forces
Five forces
Threats indicative of strong competitive forces that can
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
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
Copyright © 2009 Cengage. All rights reserved.
2–6
Threats of the Five Forces (cont’d)
Five forces
Threats indicative of strong competitive forces that can
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 having economic difficulties
• Buyers are willing and able to vertically integrate backward
Table 2.1 cont’d
Copyright © 2009 Cengage. All rights reserved.
2–7
Threats of the Five Forces (cont’d)
Threats indicative of strong competitive forces that can
Five forces
depress industry profitability
Threat of
of substitutes
• Substitutes superior to existing products in quality and
quality and function
• Switching costs to use substitutes are low
Table 2.1 cont’d
Copyright © 2009 Cengage. All rights reserved.
2–8
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
Copyright © 2009 Cengage. All rights reserved.
2–9
Three Generic Competitive Strategies
PRODUCT DIFFERENTIATION
MARKET SEGMENTATION
KEY FUNCTIONAL AREAS
Cost Leadership
Low (mainly by price)
Low (mass market)
Manufacturing and
materials 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 functional
area
Table 2.4
Copyright © 2009 Cengage. All rights reserved.
2–10
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
Copyright © 2009 Cengage. All rights reserved.
2–11
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
Copyright © 2009 Cengage. All rights reserved.
2–12
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
Copyright © 2009 Cengage. All rights reserved.
2–13
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
Copyright © 2009 Cengage. All rights reserved.
2–14
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
Copyright © 2009 Cengage. All rights reserved.
2–15
Debates and Extensions
1.
2.
3.
4.
5.
6.
7.
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- versus firm- and institution-specific
determinants of firm performance
Copyright © 2009 Cengage. All rights reserved.
2–16
Three Strategic Groups in the Global Automobile Industry
This can be used to illustrate Opening Case
Figure 2.2
Copyright © 2009 Cengage. All rights reserved.
2–17
Strategic Groups and Ownership Types
in the Chinese Electronics Industry
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
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.
Copyright © 2009 Cengage. All rights reserved.
Table 2.5
2–18
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
Copyright © 2009 Cengage. All rights reserved.
2–19