Chapter 8: Competitive Strategy (1. Michael Porter's 5 Forces (Assess…
1. Michael Porter's 5 Forces
Assess attractiveness of the industry
Firms plans if it should enter or leave the industry.
1. Threat of New Entrants
High barrier to entry = Low threats of new rivals = High profits
Difficult gov. restrictions - such as Licensing, tax regimes, etc.
Economies of scale - steel, semi-conductor, pharmaceutical companies
High experience & learning needed to succeed in the industry
2. Threats of Substitutes
High threats = Low profits
(Customers can easily switch between alternatives)
Substitutes: Products/services that offer similar benefits to the current ones available in the market
High-speed trains vs Airlines from cities to cities in Europe
Netflix’s substitutes are like: Opera houses, other kind of entertainments
3. Bargaining power of Customers
High bargaining power of customers = Low switch costs = Low profits
Buyers that are powerful can demand cheap prices or product/service improvements to reduce costs.
Buyers are powerful when
Buyers are concentrated (few buyers account for majority of the sales)
E.g. Toyota in Guangzhou is surrounded by more than 30 supplier factories. Suppliers locate themselves closely because Toyota wanted low transaction costs, and strong control over its suppliers.
Buyers have low switching costs
E.g. Global chains like Starbucks can switch between coffee suppliers easily.
Buyers can increase their power by supplying their own inputs with backward vertical integration.
E.g. Chinese steel companies gained power over their iron ore suppliers by acquiring iron ore sources for themselves.
4. Bargaining power of Suppliers
High switching costs = High power of suppliers = Low profits
Suppliers power are high when:
Suppliers are concentrated (they provide special inputs)
E.g. Coca-Cola bottlers only has one supplier—Coca-Cola— of Coke syrup. If Coca-Cola changes the price, there is little the bottlers can do but pay.
Buyers represent only a small part of sales by the supplier
Boeing will not offer lower prices for new aircraft to small airlines, but only to larger buyers like Singapore Airlines, Malaysian Airlines, or British Airways.
Switching costs are high
E.g. Microsoft is a powerful supplier in the PC industry because of the high switching costs of moving from one operating system to another.
Suppliers can integrate forward to increase its power
E.g. Pepsi bought over KFC and Pizza Hut so that they sell Pepsi drinks. (Both are no longer under Pepsi)
E.g. Nike set up their own retail shops instead of selling it to traditional footwear stores.
5. Competitive Rivalry
Organisations offering similar products/services aimed at the same customer group
High rivalry = Low profits
Rivalry level increases when:
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs (spread their fixed costs across increased sales)
Exit barriers are high (Pressure to maintain market shares)
Low level of differentiation
Coca-cola VS Pepsi: Equal size & low level of differentiation
Netflix: Many establish competitors (Direct - Amazon Prime, Indirect - Google Chromecast) + Piracy issues prevalent
Good starting point to decide whether to enter/leave the industry + how to make biz more profitable
Analyses how competitors in the same industry will react to the 5 forces and our firm’s moves.
Assumed too much stability - Blurring of industries, especially in high tech areas.
(E.g. Smart phones are in the mobile phones business, MP3, camera and data processing device industry) - more difficult to do analysis
a) Customers value your product more when used with another company’s product/service than just your product alone.
(E.g. Microsoft Windows and McAfee computer security systems are complements.)
b) More attractive for suppliers to provide resources to both you and the other organisations, rather than to you alone. (E.g. Boeing)
E.g. PC industry: Firms that produce software applications. When a complementor produces a new winning computer game, for example, then demand for both PCs and the game increases.
Firms cooperate to compete.
(E.g. Samsung supply battery for Apple’s iPhones)
Rationale: Samsung has economies of scale for producing batteries, which helps Apple to lower their cost and selling price of their iPhones. Samsung helps Apple because there are many iPhone buyers in the market, helping Samsung to increase its profits too indirectly.
Companies do not need to integrate forward or backwards to compete.
(E.g. Toyota vs GM: Toyota has always had a lot fewer full-time employees than GM but has uses its keiretsu network of strategic suppliers with whom it has very strong relationships to, for example, co-develop technologies, deliver materials just-in-time, and support the financial position of Toyota in times of market difficulty.)
Neglects firm’s VRIO
Neglects the importance of external environment analysis : such as PESTLE, CAGE, formal & informal institutions.
Firms look at the industry and alter its position
Michael Porter's 5 forces (Competitive positioning approach)
Porter's 3 Generic Strategies
Resource-based approach (VRIO)
2. Porter's 3 Generic Strategies
(after analysing the external environment and the competitive forces in the industry)
1. Cost leadership strategy
Compete with low costs and lower prices but same value to customers
(Buy raw materials in bulk at a discount price - Invest in technology to increase production efficiency)
No frills product or service
(E.g. budget airlines customers have to pay more for meals or checked-in luggages)
Targets average customers in the mass market (Offer little differentiation)
High volume, low margin approach
Strategy: Drive cost low and sell low, and yet still make more profit than the rivals
Examples: Fast food restaurants, Hawker centres, Walmart
Driving cost low may compromise the value that customers desire
Competitors can follow by undercutting your prices by innovating on their value chain or find substitutes
(E.g. Consider the impact if Tata Nano car are exported out of India. They are sold for US$3,000 in India, while abroad, competitors’ cheapest cars were selling for US$8-10,000.)
2. Differentiation strategy
Products/services that are perceived valuable and different
Command a premium price due to buyer loyalty
Difficult or expensive for rivals to replicate
Strategy: Low volume, high margin approach
Unique attributes of products/services: E.g. Quality, prestige, luxury
Key areas for differentiation: R&D (as a source of innovation), marketing/sales, and after-sale services.
Need to have unique capabilities: patents or other Intellectual property (IP), unique technical expertise (E.g. Apple designs.)
Example: Michelin Star Restaurants
Differentiation also erodes and becomes commoditized as competitors find ways of replicating the original product.
Specialised competitors - better able to serve niche market.
Solution: Companies needs constant innovation
E.g. Fashion industry: new designs of dresses can be replicated by competitors at much lower prices within a few days of the original design being launched.
E.g. Starbucks: Followed by McCafe
3. Niche/Focus strategy
Serving customers in the niche market
Need deep understanding & unique needs of customers
Differentiate products/services for specific market
Very strong brand loyalty amongst customers in small markets, making it less attractive to competitors.
E.g. Scandinavian shipbuilders tend to narrow their focus to building icebreakers, cruise ships, and other specialized vessels (vs Japanese shipbuilders who build high quality vessels at premium prices for the global market – more for the general market)
E.g. Ultra luxury hotels, Vegan restaurants
Possible for Niche strategy companies to be market leader one day
E.g. iPod: Digital music took over CD players
Help companies decide which strategy to adopt based on the type of industries and market
(Companies must choose only 1 of these strategies. “Middle of the road” strategy will be ineffective.)?
Companies must practise both cost leadership and differentiation in the same market segment due to increased competitive pressure from foreign firms
E.g. Car industry: Flexible manufacturing system & advance automation made mass customisation possible - quality cars can be produced in smaller batches at highly competitive prices.
3. Resource-based View
(Looks into an organisation and assess weakness and strengths)
Tangible resources & capabilities
Financial (generate internal funds and raise external capital)
Physical (plant, office, equipment, access to raw materials, distribution channels)
Technological (patents, trademarks, copyrights)
Organisational (planning, control systems, integrated management Info system)
Can be imitated by competitors
Intangible resources & capabilities
Humans (Knowledge, trust, managerial talents, organisational culture)
Innovation (Supportive atmosphere for ideas, R&D capabilities, capacity for organsational change)
Reputational (Perceptional of quality, durability, reliability among customers, good employer, socially responsible firms)
Hard to imitate and are therefore more important to the company.
Innovation capabilities: (1) research and develop new products and services and (2) innovate and change ways of organising.
Capabilities in marketing: enable firms to develop and sustain brands awareness and values and to
induce consumers to buy these brands.
Capabilities in sales and distribution: enable firms to manage interactions with (potential) customers and in bringing products to the right customer at the right time.
Capabilities in corporate functions: include a firm’s planning, command, and control systems and structures
Rarity of the valuable resources and capabilities. Something competitors do not have.
Valuable but common do not give an advantage
(E.g. Water in a cooling weather vs water in the hot dry country)
(E.g. Coke's brand name - valuable but not rare, as competitors like 7-up, Pepsi, etc. have widely recognised brand names too)
Valuable and rarity is not good enough – others can catch up and differentiation becomes commoditized (imitate)
(E.g. Japanese cars had quality advantage in US and Europe, until quality now becomes minimum requirement to compete in the industry)
Netflix: Plans to come up with 17 Asian original content soon. If this is realised, it will provide rarity to its capabilities and capture a bigger share of the Asian consumer market.
Difficult to imitate resources/capabilities
2 ways to imitate:
Tangible resources easier to imitate than intangible ones
Example of hard to imitate intangible resources:
The Toyota way: Other automobile makers tried to replicate Toyota’s way of combining all factors and resources in a distinctive way that makes it the top automobile maker in the world, but rarely anyone succeeded/
Apple: Company's culture of innovation
Example of Substitution:
Netflix: Some competitors have larger libraries than Netflix especially in Asian languages. Besides content, some of them have a freemium model, offering limited content for free, while Netflix only has a subscription-based model. Competitors also have tie-ups to telecast popular sporting events.
How firms are organised to develop and leverage the full potential of its resources and capabilities.
Movie business film stars are valuable, rare, and hard to imitate, but they need a studio and an organization to make the film into a success. This involves using complementary assets—film crews, directors, make-up artists, business managers, etc.
dependent on using complementary assets effectively
makes imitation much more difficult
Examines in-house capabilities to achieve sustained competitive advantage.
(E.g. IBM: Realised that its hardware is no longer valued by customers and sell off to Lenovo at a profit)
Neglects analysis of industry competition and external environment.
Does not explain how a company can convert its capabilities into performance, and they are firm specific.
Capabilities can only be proven in performance at a later date. Firms may be misled because they don’t know how good their competitors are.
(E.g. US car industry thought they had world-class capabilities in building cars until they were compared with the Japanese.)
Does not tell which capabilities to build. Capabilities take a long time to develop. They can become outdated and no longer needed in a fast-moving industry.
Resource and capabilities valued by customers willing to pay for it
-Adding value is necessary to achieve competitive advantage:
E.g. Netflix has one of the most recognizable brand names in the West and many customers were already waiting for it to be launched.
Netflix also has a recommendation algorithm that helps personalise content based on users preferences. The algorithm learns these preference from earlier usage and recommendation from friends of users.
E.g. Xbox: The only game console with the rights to Halo games. Halo fans, which makes up a big number of gamers, would purchase an Xbox just to play the Halo games.
Companies with both Valuable and Rare capabilities:
Dell, Amazon: Logistics - efficiency in order processing and distribution
BMW, Mercedes: Reputation for quality
Apple: R&D - innovative new product development
Zara: R&D - Fast cycle, new product development
Google: Strategic innovation (Corporate function)
Unilever: Brand management (Marketing)
Tangible/intangible assets used to implement strategies
The capacity deploy the resources to deliver strategies (must be able to connect different stages of value chains)