Module 2: Understanding and managing industry competition 3 August - - PowerPoint PPT Presentation

UTS CRICOS 00099F

Module 2: Understanding and managing industry competition

3 August 2020

Overview

• Defining industry competition
• The five forces framework
• Three generic strategies

Opening case: Global beer industry

Hierarchical industry – ‘David-and-Goliath’

Craft breweries Mainstream breweries Competition among mainstream breweries

Industry-based competition Firm-specific resources and capabilities Institutional conditions and transitions Strategy Performance

Strategy tripod – see module 1

• 1. Defining industry competition

Defining industry competition

• Industry: A group of firms producing products (goods and/or services) that are

similar to each other

Source: www.uts.edu.au

Theori ries o

• f industry competition
• Perfect competition (rarely observed)
• Industrial organization (IO) economics model
• Government and regulations – invisible hand
• Imperfect competition: monopolies, oligopolies

and duopolies

• Industry structure determines strategy and firm

performance

• SCP model: Structure -> Conduct -> Performance
• IO economists and policymakers concerned with

minimization of firm’s above-average profits

• Firms use the IO model to try to earn excess profits

Source: www.penguin.co.uk

Source: https://checksbalances.clio.nl/

• 2. Five forces framework

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

• f 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

Source: www.isc.hbs.edu

The Five Forces Framework

Threat of entrants Rivalry among competitors Bargaining power of suppliers Bargaining power of buyers Threat of substitutes Industry competitiveness Source: Michael Porter, 1980

Rivalry among competitors

• A large number of competing firms
• 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

Source: https://eftm.com/

Source: https://sensortower.com/blog/top-ridesharing-and-taxi-apps-worldwide-june-2019

Threat of potential entry

• Little scale-based low-cost advantages
• Economies of scale: reductions in per

unit costs by increasing the scale of production and distribution

• Little non-scale-based advantages
• Inadequate product proliferation
• Insufficient product differentiation
• Little fear of retaliation
• No government policy banning or

discouraging entry

Source: www.dailymail.co.uk/ Source: www.airway1.com

Bargaining power

…of suppliers

• A small number 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

…of buyers

• A small number 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

Source: HEINEKEN Sustainability Report 2011 Source: www.pngreport.com Source: https://theconversation.com/

Threat of substitutes

• Substitutes superior to existing

products in quality and function

• Switching costs to use

substitutes are low

Source: https://fortune.com/

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

• 3. Three generic strategies

Three generic strategies

Cost leadership Differentiation Focus strategy

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
• High volume, low margin approach

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

• Relentless efforts of competitors to duplicate differentiation

Source: https://www.nielsen.com/content/dam/nielsenglobal/eu/docs/reports/nielsen-global-premiumization-report-december-2016.pdf

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

• Focusing may be successful when a firm possesses intimate

knowledge about a particular segment

• A specialized differentiator has a smaller, narrower, and sharper focus

than a large differentiator (e.g., Rolls Royce versus Toyota)

• A specialized cost leader deals with a narrower segment compared

with the traditional cost leader (e.g., Dollar King stores versus Kmart)

Lessons from the three generic strategies

• The essence of the three strategic choices is whether to perform

activities differently or to perform different activities relative to competitors

• There are two fundamental strategic dimensions: cost and

differentiation

• According to Porter, firms that are “stuck in the middle” either have no

strategy or are drifting strategically

• However, this point is debatable – international business

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