Groupe ESC Toulouse
International Management Option
Cherian S. Thachenkary, Ph.D.
Associate Professor
Department of Managerial Sciences
The J. Mack Robinson College of Business
Georgia State University
35 Broad Street, Suite 824
Atlanta, Georgia 30303
Tel (404) 413-7551
thachenkary@gsu.edu
© Thachenkary
1
Module 1
Drivers of Industry Competition and Globalization
• In Module 1, we examine the forces driving industry competition and
globalization. The main readings will be the writings of Michael
Porter. His concepts of a. the five forces model of industry
competition, b. three generic strategies, and c. the value chain are
discussed in detail and critiqued.
• The five driving forces are: bargaining power of buyers and sellers,
threat of new entrants and substitutes, and rivalry of existing firms.
• Porter's three generic strategies are: overall cost leadership, product
or service differentiation, and focus or segmentation.
• A firm's value chain consists of a set of primary and secondary
activities. The primary activities are: inbound and outbound logistics,
operations, marketing and sales, and service. The secondary ones
are: infrastructure, human resource management, technology
development, and procurement. We will discuss how these
concepts can be integrated into a coherent framework to discuss the
role of technology to alter competition and add value
© Thachenkary
2
Module 1: Learning Objectives
•
•
From Michael Porter:
What are the five forces of competition?
–
–
–
–
–
•
Bargaining power of buyers
Bargaining power of suppliers
Threat of entry
Intensity of rivalry among existing firms
Pressure from substitute products
What are the three generic strategies and their significance to competition?
– Overall cost leadership
– Differentiation
– Focus
•
What is the “value chain” and its significance to competition?
–
–
–
–
Primary activities
Support activities
Competitive scope
Ten cost drivers
© Thachenkary
3
Drivers of Industry Competition and
Globalization
•
•
•
•
What is an industry?
What is competition?
Why study industry competition?
Attitudes towards competition
– U. S. vs. other countries?
– Free markets, capitalism, and democracy
– Role of government
© Thachenkary
4
Competition and Technology
• What is technology?
• Types of technologies?
• Role of technology in competition?
© Thachenkary
5
Michael Porter on Strategy, Competition,
and Technology
• “Competitive Strategy: Techniques for
Analyzing Industries and Competitors”
– The Free Press, 1980
• “Competitive Advantage: Creating and
Sustaining Superior Performance”
– The Free Press, 1985
© Thachenkary
6
Five Forces of Competition
•
•
•
•
•
Bargaining power of buyers
Bargaining power of suppliers
Threat of entry
Threat of substitutes
Rivalry among competitors
© Thachenkary
7
POTENTIAL
ENTRANTS
Threat
SUPPLIERS
INDUSTRY
COMPETITORS
BUYERS
Bargaining Power
Bargaining Power
Threat
SUBSTITUTES
© Thachenkary
Five Forces
of Competition
8
Five Forces: Bargaining Power of Buyers
• Buyers bargain for:
– Prices
– Quality
– Service
© Thachenkary
9
Five Forces: Bargaining Power of Buyers
• Buyer’s volume is large relative to seller’s sales
• Small fraction of buyer’s costs
– Buyers are less price sensitive
• Seller’s products are standard or unimportant
items
– Find alternative sellers
•
•
•
•
Switching costs: Low
Earns low profits: Price sensitive
Threat of backward integration: self manufacture
Buyer has full information
© Thachenkary
10
Five Forces: Bargaining Power of Suppliers
•
•
•
•
•
Few, concentrated, suppliers
Few or no substitutes
Not a significant buyer
Product is important to the buyer
Differentiated products and switching cost
– Buyer cannot play one supplier against
another!
• Threat of forward integration by supplier
© Thachenkary
11
Five Forces: Threat of Entry
• New firms or entrants
– Add new capacity
– Gain/dilute market share
– Bring new resources
© Thachenkary
12
Barriers to Entry: Six major barriers
• Economies of Scale
– Large scale to enter
– Strong reaction from established firms
– Joint cargo: air cargo vs. passengers
– Integrated industry?
© Thachenkary
13
Barriers to Entry: Six major barriers
• Product Differentiation
– Brand identification
– Customer loyalty
– Time to build branding
• Capital requirements
–
–
–
–
Airline, Drilling/Extraction
Heavy capital upfront
High risk
Command risk premium?
© Thachenkary
14
Barriers to Entry: Six major barriers
• Switching Costs
–
–
–
–
Supplier-Buyer relations well entrenched?
Vendor qualifying
Customer training
Psychic costs?
• Access to distribution channels
– Channel acceptance of new entrant?
– Limited number of channels
– Existing firms are tied in
• Price breaks, other allowances
• Reduce profit margins
© Thachenkary
15
Barriers to Entry: Six major barriers
• Cost disadvantages independent of scale
–
–
–
–
–
Proprietary product technology or know-how
Favorable access to raw materials
Favorable locations
Government subsidies
Learning or experience curve
• Government Policy
– Licensing requirements?
• Nuclear industry
– Safety standards
– Pollution standards (EPA)
© Thachenkary
16
Five Forces: Pressure from Substitute Products
• Products that can perform the same
function
• Limits potential returns on investment
• Imposes price ceilings
• Detecting substitutes: Subtle
– Near or far from “home”
– Security guards vs. electronic alarm systems
© Thachenkary
17
Five Forces: Intensity of Rivalry Among Existing Firms
• Jockeying for Position:
– Warlike, cut-throat
– Polite, gentlemanly
• Competitors:
– Numerous, equally balanced, or concentrated?
– Industry growth: Slow?
– High fixed costs?Lack of differentiation or switching
costs?
– High exit barriers?
• Specialized assets
• Government restrictions
© Thachenkary
18
POTENTIAL
ENTRANTS
Threat
INDUSTRY
COMPETITORS
SUPPLIERS
BUYERS
Bargaining Power
Bargaining Power
Threat
SUBSTITUTES
© Thachenkary
Five Forces
of Competition
19
Three Generic Strategies
• Overall Cost Leadership
• Differentiation
• Focus
© Thachenkary
20
LOWER COSTS
BROAD
1. COST LEADERSHIP
DIFFERENTIATION
2. DIFFERENTIATION
COMPETITIVE SCOPE
3A. COST FOCUS
NARROW
3B. DIFFERENTIATION
FOCUS
THREE GENERIC STRATEGIES
© Thachenkary
21
Generic Strategy: Cost Leadership
• How to achieve cost leadership?
– Plant and facilities: efficient?
– Experience?
– Tight control on overhead
– R&D, sales, Advertisement?
© Thachenkary
22
Generic Strategy: Cost Leadership
• What are the advantages?
– Above average returns
• Protection against the five forces of competition
–
–
–
–
–
Defense against competition: rivals
Defense against powerful buyers
Defense against powerful suppliers
Provides entry barriers
Favorable position relative to substitutes
© Thachenkary
23
Generic Strategy: Cost Leadership
• Requires high relative market share
– Preferred access to raw materials?
• Serve all customer groups to build volume
• Heavy upfront capital investment
– State of the art equipment
• Utilize high returns to re-invest and sustain
leadership
© Thachenkary
24
Generic Strategy: Differentiation
• Product perceived as “unique”
–
–
–
–
•
•
•
•
Brand image (Mercedes)
Features
Customer service
Dealer network
Many dimensions (Caterpillar)
May require tradeoff with cost position
Customers willing to pay premium price?
Discussion: How does differentiation help with
the five forces of competition?
© Thachenkary
25
Generic Strategy: Focus
• Focus on buyer groups, niches, segments
– More effective or efficient than serving whole
industry
– Cost or differentiation or both
– Earn above average returns
– Trade off; Market share/volume
– Defense against the five forces of competition
© Thachenkary
26
Generic Strategies: Risks
• Failure to attain or sustain the chosen
strategy
• Lose value over industry evolution
• Cost Leadership:
– Technological change: nullifies advantage
– Low cost learning by newcomers or imitators
– Inability to see changes in the market
© Thachenkary
27
Generic Strategies: Risks
• Differentiation
– Cost to differentiate too high
– Buyer’s need falls
– Imitation narrows the benefit
• Focus
– Cost to serve segment changes
– Rivals create new sub-markets
© Thachenkary
28
LOWER COSTS
BROAD
1. COST LEADERSHIP
DIFFERENTIATION
2. DIFFERENTIATION
COMPETITIVE SCOPE
3A. COST FOCUS
NARROW
3B. DIFFERENTIATION
FOCUS
THREE GENERIC STRATEGIES
© Thachenkary
29
Value Chain
• “A Systematic way of examining all the
activities a firm performs and how they
interact”
• Value System
– Upstream (suppliers)
– Channel value
– Buyers value Chain
• Identify sources of competitive advantage
© Thachenkary
30
SUPPORT ACTIVITIES
FIRM INFRASTRUCTURE
HUMNA RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND
LOGISTICS
PROCUREMENT
PRIMARY ACTIVITIES
© Thachenkary
THE GENERIC VALUE CHAIN
31
Value Chain
• Level of analysis
– The business unit, a firm’s activities in a
particular industry
• Value = Amount buyers willing to pay or
total revenue
• Firm is profitable if:
– value > costs of creating product
© Thachenkary
32
Value Chain
• Primary Activities (create product, sell, and
transfer to buyer)
– Inbound logistics (receive, store, distribute)
– Operations (input to output transformation)
– Outbound logistics (collect, store, deliver)
– Marketing and sales (induce buyers to buy)
– Service (repair, train, supply parts, etc.)
© Thachenkary
33
Value Chain
• Primary Activities
• Support Activities (support primary activities)
– Procurement (function of purchasing, more broad and
dispersed)
– Technology development (more than R&D)
– Human resource management (hiring, training,
development, retention)
• McDonalds “Hamburger College”
– Firm infrastructure (finance, legal, accounting,
external affairs…)
© Thachenkary
34
Value Chain
• Three activity types in primary and support
– Direct (assembly, advertising,…)
– Indirect (make direct possible: maintenance,
scheduling,…)
– Quality assurance (monitoring, inspecting,
testing,…)
© Thachenkary
35
Value Chain
•
Defining value chain for a firm
–
–
–
–
•
List all discrete activities in each category
Activities are linked, interdependent
Be exhaustive
Fine art of distinguishing
Basic Principle: Activities that
1. Have different economics
2. Have a high potential impact on differentiation
3. Represent a significant or growing proportion of cost
© Thachenkary
36
Value Chain
• Activities are linked, interdependent
• Competitive advantage via linkages?
– Optimization
– Coordination
•
•
•
•
Obvious linkages: Primary and Support
Subtle: Between primary activities
Causes of Linkages
Vertical linkages: spanning firm’s boundaries
– Buyers, suppliers, …
© Thachenkary
37
Competitive scope
• Segment scope
– Different segments, different value chains
• Vertical scope
– Potential benefits of integration
• Geographic scope
– Share or coordinate costs of value activities to serve
different regions?
• Industry scope
– Competing in related industries
© Thachenkary
38
Cost Drivers
• Cost Drivers
– “Structural determinants of the cost of an
activity” in the value chain
– Relevance: Firm’s cost position depends on
its cost behavior
© Thachenkary
39
Ten Cost Drivers
1. Economies or Diseconomies of Scale
– Scale sensitive activities: advertising, product
development
– If regional, stress regional not national scale
2. Learning and Spillovers
– via: suppliers, consultants, ex-employees
3. Pattern of Capacity Utilization
– Using brokers vs. in-house sales force
© Thachenkary
40
Ten Cost Drivers
4. Linkages
–
–
–
–
Within vs. outside (vertical)
What activities elsewhere impact this activity?
Joint coordination: procurement and assembly
Supplier linkages:
• Timeliness of delivery, Raw materials
• Bulk liquid chocolate vs. molded bars
5. Interrelationships
– With other business units
– Sharing know-how, marketing, etc. with a sister unit
© Thachenkary
41
Ten Cost Drivers
6. Integration
– Vertical, Control
– In-house vs. contracting
7. Timing
– First mover vs. Late mover
8. Discretionary Policies
– Airlines: meals, baggage, electronic ticketing
9. Location
– Labor cost, tax rate,proximity to suppliers
10.Institutional Factors
– Regulatory, Unions
– Beyond firm’s control, but lobby, influence?
© Thachenkary
42
Gaining Cost Advantage
• Control Cost Drivers
– Scale, Learning, Linkages, etc.
• Reconfigure the Value Chain
– FedEx: small packages
– How to do activities differently
© Thachenkary
43
Gaining Cost Advantage
• Pitfalls
– Focus on manufacturing
– Ignoring procurement
– Overlooking indirect or small activities
– False perception of cost drivers
– Failure to exploit linkages
© Thachenkary
44
Module 1: Summary
•
•
•
•
•
What did we learn?
How does Porter’s work help managers?
Critique Porter’s (U.S.) models?
Apply concepts to French firms, industry?
Develop French models of competition?
© Thachenkary
45