This document discusses industry competition and Porter's five forces framework. It begins with definitions of industry and the structure-conduct-performance model. It then explains Porter's five competitive forces that shape industry competition - the threat of new entrants, power of suppliers and buyers, threat of substitutes, and rivalry among existing competitors. The document also discusses generic strategies of cost leadership, differentiation, focus, and speed. Finally, it covers the tensions between global integration and local responsiveness, and how the integration-responsiveness grid can help companies address these pressures.

1. LEARNING OBJECTIVES:
1. define industry competition
2. discuss the five forces framework by michael
porter
3. explain four generic strategies
4. discuss global integration vs. local
responsiveness
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2. DEFINITION AND OVERVIEW:
1. an industry is a group of companies that are related in their
primary business activities, i.e. producing goods and
services that are similar to one another.
2. the traditional understanding is based on Adam Smith’s
(1776) model of perfect competition, in which price is set by
the “market”, all firms are price takers, and entries and exits
are relatively easy.
3. this however was far from practicable and thus since the late
1930s, a more practical branch of economics, known as
industrial organization (IO) economics (or industrial
economics), emerged whereby its main feature was a
structure-conduct-performance (SCP) model.
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3. DEFINITION AND OVERVIEW:
1. structure points to the structural qualities of an industry (for
example, the cost of entry/exit)
2. conduct points to the company's action (for example, product
differentiation).
3. performance is the result of firm conduct in response to industry
structure, which can be classified as (1) average (normal), (2) below-
average, and (3) above-average. the model infers that industry
structure confirms firm conduct (or strategy), which, in turn,
determines firm performance.
4. nonetheless, the initial objective of IO economics was not to help
firms compete, rather, it was to help policymakers better
understand how firms compete in order to fittingly regulate them.
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4. DEFINITION AND OVERVIEW:
1. the IO paradigm presumes that markets demonstrate perfect
competition.
2. however, markets are not always perfectly competitive and
some firms consistently outperform industry averages—
suggesting that industry structure is not entirely deterministic
of firm performance.
3. instead, firm performance is influenced by the presence of
bright, motivated managers and their keen sense of
innovative products or processes.
4. the idea of industry structure helps explain the functions, form,
and interrelationships among: suppliers of inputs, buyers of
outputs, substitute products, potential new entrants and rivalry
among competing sellers.
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5. DEFINITION AND OVERVIEW:
1. the IO paradigm presumes that markets demonstrate perfect
competition.
2. however, markets are not always perfectly competitive and
some firms consistently outperform industry averages—
suggesting that industry structure is not entirely deterministic
of firm performance.
3. instead, firm performance is influenced by the presence of
bright, motivated managers and their keen sense of
innovative products or processes.
4. the idea of industry structure helps explain the functions, form,
and interrelationships among: suppliers of inputs, buyers of
outputs, substitute products, potential new entrants and rivalry
among competing sellers.
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MANAGING INDUSTRY COMPETITION

6. When Porter “translated” and extended the SCP model for strategy audiences in
1980, the result was precisely this five forces framework.
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7. 7

8. FIVE FORCES FRAMEWORK
INTENSITY OF RIVALRY
 Firstly, in term of the number of
competitors, the larger the number of
firms, the more rivalry will exist.
 Secondly, competitors that have a similar
size, market influence, and product often
vigorously compete with each other,
especially if there is no product
differentiation e.g. US Airways
 Thirdly, intense rivalry happens in
commercial enterprises that produce high
value and luxury goods that are acquired
rarely like mattresses and motorcycle.
 Fourthly, the level of capacity utilization,
as new capacity has to be added in large
percentages in certain industries, and this
brings about intense rivalry e.g. shipping
companies
 Fifthly, slow industry growth or decline
makes competitors more desperate, often
using new competitive ideas e.g. fast food
 Reputable firms in an industry, known as
incumbents, also have a vested interest in
keeping potential brand new entrants out.
E.g. EMC Storage (now under Dell
company) topped the global data-storage
industry, with gross margins reaching a high
of 59 percent.
 The incumbents’ essential weapons are
entry barriers, characterized as the industry
structures that increase the costs of entry.
E.g. Boeing spent $5 billion developing 777
Airliner, and Airbus spent $10-$15 billion on
its A380.
 There are four potential sources for non-
based low cost advantage including:
Proprietary technology e.g. patents, Know-
how or the knowledge and expertise, Good
access to raw materials and distribution
channels & Real-estate locations.
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9. FIVE FORCES FRAMEWORK (2)
BARGAINING POWER OF
SUPPLIERS
 The bargaining power of suppliers
points to their capability to raise
price and/or decrease value of
goods and services. In the
personal computer industry for
instance, the most drastically
beneficial players are not Dell,
IBM, or Sony, but their suppliers,
Microsoft (operating systems) and
Intel (microprocessors), which
monopolizes these two important
areas.
BARGAINING POWER OF
BUYERS
 Firms in the main industry are
essentially suppliers e.g.
automobile component suppliers.
There are thousands of
automobile component suppliers
globally trying to sell to the top
three automakers in the world
such as Toyota, GM, and
Volkswagen. These buyers fuel
price concessions and quality
improvements by playing off
suppliers against each other.
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10.  Substitutes are normally derived from distinctive
businesses that manage to fulfill consumers’
necessities and needs.
 If substitutes have better-quality, function and value
when contrasted to existing products, they may swiftly
come out to draw a hefty size of customers e.g.
E*trade, Ameritrade, and Scottrade vs. Merrill Lynch.
 Substitutes can also cause critical threats if switching
costs are low. E.g. consumers practically do not have to
pay additional cost when switching from sugar to
artificial sweeteners such as NutraSweet or Equal. Both
are readily available at any retailer.
Threats of Substitutes 10

11.  In 1985, Porter recommended three generic strategies;
(1) cost leadership, (2) differentiation, and (3) focus,
all of which are intended to fortify the focal firm’s
position relative to the five competitive forces. Due to
internet revolution, speed was added as the fourth
generic strategy.
 A cost leadership strategy primarily shows that a firm’s
value proposition of how to battle successfully on
minimizing costs and maximizing prices. Offering the
same product value at a lower price has a propensity to
draw many more customers into buying the products. A
cost leader frequently positions its product to target
customers for the mass-market with modest
differentiation. E.g. Wal-Mart
Generic Strategies 11

12.  A differentiation strategy centers on the most proficient
method to transfer items that clients observe as
valuable and special. Differentiators’ would normally
targets customers in well-defined and smaller
segments who are eager to pay premium costs.
 Customers are willing to pay more if the differentiated
products are perceived off having unique features,
such as prestige or status symbol, quality,
sophistication, and luxury e.g. BMW/AUDI cars, Ritz
Carlton Hotel, etc.
Generic Strategies (2) 12

13.  A focus strategy was driven by the needs of a specific
segment or niche of an industry. The segment can be
classified by type of customer, geographical market
or by product line. This segment is so unique and
usually is served by a much focused company. Most
competitors choose to stay out from this segment. A
focused firm is either a specialized differentiator or a
specialized cost leader e.g. Ferrari, AirAsia, etc.
Generic Strategies (3) 13

14.  Recently, the concept of speed has started to be noticed by many
businesses particularly those that wanted to foray into a foreign
market and compete at a global scale.
 Speed explains the time line needed for a firm to market its
product or services and reach the consumers. For example,
Apple didn’t invent the iPod. Several companies including
Diamond, Creative Labs, and Sony had been selling other types
MP3 players for a few years before iPod debuted in October
2001.
 But none of these MP3 players prior to the iPod had been big
hits. This was partly due to the price and features e.g. the 1999
Creative Labs Nomad had only 32MB of memory space and cost
US$429.
 Furthermore, the digital music market was still in infancy.
Generic Strategies (4) 14

15.  There are two drivers of global integration: the
globalization of markets and the efficiency gains of
standardization.
1) Globalization of Markets-
Due to convergence of consumers’ tastes, preferences,
lifestyles and global buying patterns, strategies,
suggest that consumers worldwide seek global
products whether they are Apple iPods, Samsung
plasma screens, Facebook connections, Starbucks
espressos, Google searches, or Zara blouses.
Pressures for Global Integration 15

16. 2) Efficiency Gains of Standardization-
 Standardization is the handmaiden of globalization,
encouraging supply conditions that produce volumes of
low-cost, high-quality products. That is, standardization
is the push dynamic that converge consumer
preferences e.g. Zara, one of the largest retailer in the
world realized that by offering standardized fashion
styles at reasonable prices, it could leverage fixed
design, manufacturing, and retail costs.
Pressures for Global Integration (2) 16

17. Configuring Advantages Coordination Advantages
 Minimize differences in operating
procedures among values activities
 Optimizes routine coordination
procedures
 Provides standards to improve quality
and reliability of value-chain
performance
 Improves communication by lowering the
transaction costs of information
gathering, negotiating, and market
planning
 Drives down the production costs of
higher-quality products
 Promotes systematic dissemination of
ideas and highlights opportunities for
collaboration
 Increase competition among suppliers in
providing inputs or support services
 Facilitates cooperation among dispersed
units by setting standards of credible
knowledge
 Simplifies agreements with joint-venture
partners and alliance members
The Benefits of Standardization to the Value Chain
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18. Prominent pressures responsiveness are consumer divergence and
host-government policies.
1) Consumer Divergence
Divergences in consumer preferences across countries
necessitate locally responsive value chains. Local
responsiveness takes in many forms e.g. designing and making
a product that local customer prefer (e.g., smaller cars in
Europe), tailoring channel structures to buyer preferences (e.g.
personal selling in Brazil), and adapting marketing practices to
consumption patterns (e.g., large package size in Australia,
smaller size in Japan, single-unit size in poorer countries).
Adapting to these sorts of local preferences spurs companies to
sacrifice degrees of global standardization, a response that
requires fine-tuning the configuration of values activities.
Pressures for Local responsiveness
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19. 2) Host-Government Policies
Differences in policies among host-country
governments contribute to great variability in
political, legal, and economic situations in various
markets. Policies such as trade protectionism,
local content rules, and national product standards
require some degree of local responsiveness and
counterbalance the policy shifts toward
privatization, economic freedom, legal uniformity,
and deregulation that encourage standardization.
.
Pressures for Local responsiveness
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20. Integration Responsiveness (IR) Grid
The Integration-Responsiveness grid helps managers measure the global
and local pressures that influence the configuration and coordination of their
value chains.
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