2
Chapter
2
chapter
Managing
Industry
Competition
Global Strategy
Strategy
Global
Mike W. Peng
Mike W. Peng
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Outline
• Defining industry competition
• The five forces framework
• Three generic strategies
• Debates and extensions
• The savvy strategist
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be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
What Industry is This?
© 2009 Peng Global Strategy 2E
2–3
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
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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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accessible website, in whole or in part.
The Five Forces
Framework
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publicly accessible website, in whole or in part.
Figure 2.1
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 advantages
 Inadequate product proliferation
 Insufficient product differentiation
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Learning. All Rights Reserved. May
not be scanned, copied or
duplicated, or posted to a publicly
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part.
 Little fear of retaliation
 No government policy banning or discouraging entry
Table 2.1
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 willing and able to vertically integrate backward
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Table 2.1 cont’d
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
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Table 2.1 cont’d
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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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
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
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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.
2–13
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
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accessible website, in whole or in part.
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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accessible website, in whole or in part.
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. It became a commodity in 2004,
which was hardly profitable – IBM sold its PC division
to Lenovo in 2004
2–16
Three Generic Strategies:
Focus Strategy
• 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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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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be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
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-specific versus firm-specific and institutionspecific determinants of performance
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be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Three Strategic Groups in the Global Automobile Industry
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Figure 2.2
Strategic Groups and Ownership Types
in the Chinese Electronics Industry
STRATEGIC GROUP
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
Copyright © 2014 Cengage
Learning. All Rights
Reserved. May not be
scanned, copied or
duplicated, or posted to a
publicly accessible website,
in whole or in part.
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
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 © 2014 Cengage Learning. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.