Global Strategy Mike W. Peng c h a p t e r 22 Copyright © 2009 Cengage.PowerPoint Presentation by John Bowen, Columbus State Community College All rights

Global StrategyGlobal StrategyMike W. PengMike W. Peng

c h

a p

t e

rc

h a

p t

e r

c h

a p

t e

rc

h a

p t

e r

2222

Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved. Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved.

Managing Industry

Competition

Managing Industry

CompetitionPart I: Foundations of Global Strategy

Global StrategyGlobal StrategyMike W. PengMike W. Peng

chapte

rch

apte

r22

Copyright © 2009 Cengage. All rights reserved. 2–2

Outline

• Defining industry competition

• The five forces framework

• Three generic strategies

• Debates and extensions

• The savvy strategist


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


Five Forces Framework

• The Five Forces Framework“Translated” and extended from the SCP model

in 1980 by Michael PorterA 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


The Five Forces Framework

Figure 2.1


Threats of the Five Forces

Table 2.1

Threats indicative of strong competitive forces that can

Five forces 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 Little scale-based low-cost advantagespotential entry (economies of scale)

Little non-scale-based low-cost advantages

Insufficient product differentiation

Little fear of retaliation

No government policy banning or discouraging entry


Threats of the Five Forces (cont’d)



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 productsfrom focal firm

• Buyers are having economic difficulties

• Buyers are willing and able to vertically integrate backward

Table 2.1 cont’d


Threats of the Five Forces (cont’d)



Threat of • Substitutes superior to existing products in quality and of substitutes quality and function

• Switching costs to use substitutes are low

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

• Use the five forces model as an industry positioning tool

• Core features of the five forces model remain remarkably insightful when analyzing new phenomena, such as e-commerce

Copyright © 2009 Cengage. All rights reserved. 2–10Table 2.4

Three Generic Competitive Strategies

PRODUCT DIFFERENTIATION MARKET SEGMENTATION KEY FUNCTIONAL AREAS

Cost Leadership Low (mainly by price) Low (mass market) Manufacturing andmaterials management

Differentiation High (mainly by uniqueness) High (many market segments) Research and development,marketing and sales

Focus Low (mainly by price) or high(mainly by uniqueness)

Low (one of a few segments) Any kind of functionalarea


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


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


Three Generic Strategies:Differentiation (cont’d)

Defense against five forcesDrawbacks

Difficult to sustain differentiation in the long runRelentless efforts of competitors to duplicate

differentiation


Three Generic Strategies:Focus Strategy (cont’d)

• 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


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


Debates and Extensions

1. Clear versus blurred boundaries of industry

2. Threats versus opportunities

3. Five forces versus a sixth force (complementors)

4. Stuck in the middle versus all rounder

5. Industry rivalry versus strategic groups

6. Integrating versus outsourcing

7. Industry- versus firm- and institution-specific determinants of firm performance


Three Strategic Groups in the Global Automobile IndustryThis can be used to illustrate Opening Case

Figure 2.2


Strategic Groups and Ownership Types in the Chinese Electronics Industry

Table 2.5Source: 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.

STRATEGIC GROUP DEFENDER ANALYZER REACTOR

Ownership type State ownership Foreign ownership Private ownership

Customer base Stable Mixed Unstable

Product mix Stable Mixed Changing

Growth strategy Cautious Mixed Aggressive

Managers Older, more conservative Mixed Younger, more aggressive


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

Documents

Global Strategy Mike W. Peng c h a p t e r 22 Copyright © 2009 Cengage.PowerPoint Presentation by John Bowen, Columbus State Community College All rights