COURSE: GLOBAL BUSINESS MANAGEMENT MGT610

DR. DIMITRIS STAVROULAKISPROFESSOR OF HUMAN RESOURCE MANAGEMENTDEPT OF ACCOUNTINGTEI OF PIRAEUS

Unit 4: MNC Strategy “Outside-In”

Training Material: Textbook (103-109, Ch4 & Ch5)

Business Strategy

Michael Porter

Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School and Director, Institute for Strategy and Competitiveness

He is the author of many seminal books on competition and strategy, including On Competition, The Competitive Advantage of Nations, Competitive Advantage: Creating and Sustaining Superior Performance, etc

The pace of change is relentless....and increasing

The pace of change is relentless....and increasing

Traditional industry boundaries are blurring, such as in ...

Traditional industry boundaries are blurring, such as in ...

• Computers• Telecommunications• Television• Information• Visual Arts

• Computers• Telecommunications• Television• Information• Visual Arts

21st Century Competitive Landscape21st Century Competitive Landscape

Fundamental nature of competition is changing:

•Rapid technological changes

•Rapid technology diffusions

•Dramatic changes in information and communication

•Increasing importance of knowledge

Political/LegalPolitical/Legal

CompetitiveEnvironment

Industry Industry EnvironmentEnvironment

(5 Forces)(5 Forces)

Industry Industry EnvironmentEnvironment

(5 Forces)(5 Forces)

TechnologicalTechnological

Socio-CulturalSocio-Cultural

DemographicDemographic

GlobalGlobal EconomicEconomic

How Environment Affects Industry and Competition

Porter’s 5 Forces Model of CompetitionPorter’s 5 Forces Model of Competition

The Five Forces Model of Competition

CompetitionIntensity

Threat of EntryCost advantagesGovernment policyEconomies of scaleCapital requirementsBrand identitySwitching costsAccess to distributionExpected retaliation

Threat of SubstitutesPrice differencesPerformance of substitutesSwitching costsAppeal of substitutes

Supplier PowerFew concentrated suppliersLow importance of buyer to supplierDifferentiated products Product is important to the buyerHigh switching costs Scarcity of substitute products

Degree of RivalryDeclining industryUndifferentiated productsNumerous competitorsSwitching costsExit barriersHigh strategic stakes

Determinants of Buyer PowerBargaining leverage Price sensitivityBuyer concentration Price/Total PurchasesBuyer volume Impact on qualityBuyer information Product differencesBuyer switching cost Brand identityDegree of differentiation of products

9

Barriers to Entry

Economies of Scale

Government policy

- Bureaucracy, licensing and permit requirements that may be forbidding to new entrants (closed professions)

-Regulation / Deregulation of industries (telecoms, power, water etc)

Switching costs

- Customers may be loyal to existing businesses due to favorable prices, psychological contract, or technology compatibility.

10

Barriers to Entry (cont)

Capital Requirements Facilities, Inventories, Marketing activities (sales,

advertisement, distribution), Availability of capital

Expected retaliation Responses by existing competitors may depend

on a firm’s present stake in the industry (available business options). Established firms may retaliate through advertizing campaigns, price wars, political lobbying, monopolization of distribution channels (e.g. 3E), battle for the super market selves, slander (e.g. British Airways vs. Virgin) etc.

Substitute products

Existence of similar products For example, digital encyclopedias (Wikipedia,

Encarta, Magenta) have posed a threat to traditional paper publishers

Switching costs Switching costs of industrial customers may involve

production redesign and retraining their workforce.

Consumers’ preference to substitutes Preferences of consumers are dependent upon

prices and performance of substitutes (e.g. e-readers & tablets vs. paper books).

** Supplier industry is dominated by a few Supplier industry is dominated by a few firms (ore suppliers vs. steel customers)firms (ore suppliers vs. steel customers)

** Buyer is not an important customer to Buyer is not an important customer to suppliersupplier

** Suppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product

** Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers are powerful if:Suppliers are powerful if:

** Suppliers’ products have high Suppliers’ products have high switching costsswitching costs

**Supplier poses credible threat of forward Supplier poses credible threat of forward integration, thus competing customers (e.g. integration, thus competing customers (e.g. establishing super markets)establishing super markets)

Suppliers exert power in the industry by:

Threatening to raise prices or to reduce quality

Powerful suppliers can Powerful suppliers can squeeze client industry squeeze client industry profitability if firms are profitability if firms are unable to absorbunable to absorb cost increasescost increases

Suppliers’ goods have few substitutesSuppliers’ goods have few substitutes**

Bargaining Power of SuppliersBargaining Power of Suppliers

The reverse The reverse also applies also applies (( ))

Playing firms off ofPlaying firms off of

each othereach other

Buyers compete Buyers compete with supplying with supplying

industry by:industry by:

Bargaining down pricesBargaining down prices

Forcing higher qualityForcing higher quality

Buyer groups are powerful if:Buyer groups are powerful if:

** Buyers are concentrated, or volume of purchases Buyers are concentrated, or volume of purchases is large compared to seller’s overall salesis large compared to seller’s overall sales

** Purchase accounts for a significant fraction Purchase accounts for a significant fraction of supplier’s sales (Carrefour, Tesco)of supplier’s sales (Carrefour, Tesco)

** Products are undifferentiated (cement)Products are undifferentiated (cement)

** Buyers face few switching costsBuyers face few switching costs

** Buyers’ industry earns low profitsBuyers’ industry earns low profits

** Buyer presents a credible threat of Buyer presents a credible threat of backward/vertical integration (glass backward/vertical integration (glass producers vs. glass frame manufacturers) producers vs. glass frame manufacturers)

Buyer has full information on supplier’s Buyer has full information on supplier’s costs and transactions costs and transactions

Bargaining Power of BuyersBargaining Power of Buyers

The reverse The reverse also appliesalso applies(( ))

14

Intensity of Rivalry Among Competitors Industry rivalry increases when:

There are numerous or equally

balanced competitors Industry growth slows or

declines There are high fixed costs or

high storage costs → low profit margins Products are undifferentiated Switching costs are low Strategic stakes are high (e.g. energy) High exit barriers prevent competitors from

leaving the industry

3-15

Intensity of RivalryRivalry is generally stronger when:•Rivals are active in making fresh moves to increase sales and market shareBuyer demand is decliningThe number of rivals is largeRivals are of roughly equal size and capabilityBuyer costs to switch brands are lowOne or more rivals is dissatisfied with their current position and market share and make aggressive moves to improve their market prospectsWhen one or two rivals have powerful strategies and other rivals are scrambling to stay in the game

Rivalry is generally weaker when:Firms draw sales and market share away from rivalsBuyer demand is growing rapidlyBuyer costs to switch brands are high

The “Weapons” of Competitive Rivalry•Lower pricesMore appealing featuresBetter product performanceHigher qualityStrong brand image and appealBetter customer service Wider product selectionBigger/better sales networkStronger product innovation capabilitiesLonger warrantiesHigher levels of advertising

Rivalry among

Competing Sellers

Efforts of rivals to gainbetter market

position, higher sales and market

share,and

competitiveadvantage

gl

16

Low entry barriers

Interpreting Industry Analyses

UnattractiveIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

17

AttractiveIndustry

High entry barriers

Interpreting Industry Analyses

Suppliers and buyers have undefined positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential

19

Competitor Analysis

Components

Competitive Industries of Selected Nations

SWEDENcar carrierscommunication products for handicapped personsenvironmental control equipmentheavy trucksmining equipment

teller-operated cash dispensersnewsprintrefrigerated shippingrock drillssemihard wood flooring

UNITED STATESadvertisingagricultural chemicalscommercial aircraft*commercial refrigeration and air-conditioningcomputer software

construction equipmentdetergentsengineering/constructionmotion picturespatient monitoring equipmentsyringeswaste management services

KOREAapparelautomobilesconstructionfootwearpianos

semiconductorsshipbuildingsteeltravel goodsvideo and audio recording tapewigs

SINGAPOREairlinesapparelbeveragesship repairtrading

SWITZERLANDbankingchocolateconfectionerydyestuffsfire protection equipment

freight forwardinghearing aidsheating controlsinsurancemarine enginespaper product manufacturing machinerypharmaceuticals

surveying equipmenttextile machinery

tradingwatches

DENMARKagricultural machinerybuilding maintenance servicesconsultancy engineeringdairy productsfood additives

furnitureindustrial enzymespharmaceuticalsspecialty electronicstelecommunications equipmentwaste treatment equipment

ITALYceramic tilesdance club and theater equipmentdomestic appliancesengineering/constructionfactory automation equipment

footwearpackaging and filling equipmentski bootswool fabrics

GERMANYautomobileschemicalscutleryeyeglass framesharvesting/threshing combines

optical instrumentspackaging, bottling equipmentpens and pencilsprinting pressesrubber, plastic working machineryX-ray apparatus

JAPANair-conditioningmachineryhome audio equipmentcar audiocarbon fibers

continuous synthetic weavesfacsimileforklift trucksmicrowave and satellite communications equipmentmusical instrumentsoptical elements and instrumentsrobotics

semiconductorssewing machinesshipbuildingtires for trucks and buses

truckstypewritersvideocassette recorderswatches