BUSA 4800 Lecture Porter model 1/17/2008

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Gordon Carter
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1 Forces Driving Industry Competition POTENTIAL ENTRANTS Threat of new entrants Bargaining power of suppliers INDUSTRY COMPETITORS SUPPLIERS BUYERS Rivalry Among Existing Firms Bargaining power of buyers Threat of substitute products or services SUBSTITUTES 1 Porter Competitive Strategy Potential Entrants Barriers to Entry: 1. Economies of scale and scope 2. Product Differentiation 3. Capital Requirements 4. Patents and the Learning Curve 5. Access to distribution channels 6. Government Policy Suppliers have power if: Only a few companies supply input Input is unique or switching costs are high No close substitutes Credible threat of forward integration Industry not a significant customer of supplier group 1

2 Buyers Are powerful if: A concentrated group or buy in large volume The industry s product is homogeneous The product is a significant % of buyer s cost The product is unimportant to quality of buyer s final good or service The product does not offer buyer cost advantage Threat of backward integration Substitutes Place ceiling on Prices Are of concern: The greater the price/quality trade-off Produced by industries earning high margins Produced by industries that have high level of competition internally Are constantly changing due to R & D, trends Rivalry Factors influencing intensity : Many equal sized firms Mature industry or slow growth Homogeneous product Low switching costs Excess capacity Exit Barriers 2

3 Generic Strategies Porter describes strategy as actions that create defendable positions. Defensive: Take market structure as given match its strengths and weaknesses Offensive: alter the competitive environment Three Generic Strategies 1. COST LEADERSHIP 2. DIFFERENTIATION 3. FOCUS OR NICHE STRATEGY Cost Leadership the lowest per-unit (i.e., average) cost in the industry profits will be low but higher than competitors having lowest cost among a few rivals where each firm enjoys pricing power and high profits. Cost leadership is independent of market structure. 3

4 Cost Leadership Defendable Strategy: It defends the firm against powerful buyers. It defends against powerful suppliers by providing flexibility to absorb an increase in input costs Cost leadership provides entry barriers Economies of scale requires entry with substantial capacity to produce, and this means the cost of entry may be prohibitive Cost Leadership Requirements: Large up-front capital investment in new technology Continued capital investment Process innovation Intensive monitoring of labour frequently have an incentive-based pay structure Tight control of overhead. Differentiation Approaches to differentiation: Different design Brand image Number of features New technology A differentiation strategy may mean differentiating along 2 or more of these dimensions. 4

5 Differentiation Defendable strategy: Insulates a firm by creating brand loyalty Lowers the price elasticity of demand Creates barriers and reduces substitutes. This leads to higher h margins, which h reduces the need for a lowcost advantage. Higher margins give the firm room to deal with powerful suppliers. Mitigates buyer power - fewer alternatives. Differentiation Requirements: Exclusivity Strong marketing skills. Product innovation as opposed to process innovation. Applied R&D. Customer support. Less emphasis on incentive based pay structure. Focus or Niche Strategy Focus on a buyer group, product segment, or geographical market. The focus or niche strategy is built on serving a particular target (customer, product, or location) very well. A focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market. 5

6 Stuck in the Middle Failure to develop a strategy in one of these 3 directions Lack the market share, capital, and overhead control to be a cost leader lack the industry wide differentiation necessary to create margins implies low profits Classic examples of this problem are large, international airline companies Depending on capabilities and resources, must gravitate toward either low cost or focus or differentiation Risks Cost leadership risks: Innovations nullify past inventions and learning Requires continual capital investment Attention to cost can blind firms to changes in product requirements. Cost increases narrow price differentials between competitors Differentiation risks : Cost difference between low cost and differentiating firms becomes too large Buyers trade-off features, service, or image for price. Buyers need for differentiation falls. Imitation decreases perceived differentiation. Forward Integration Gaining ownership or increased control over distributors or retailers i.e. Coke purchases more bottlers 6

7 Forward Integration When an organization's present distributors are especially expensive, or unreliable, or incapable of meeting the firm s distribution needs When the availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward When the industry is growing and will continue When an org n has both the $ and people When the distributors have high profit margins Backward Integration Seeking ownership or increased control over a firm s suppliers i.e. Motel * acquires a furniture manufacturer Backward Integration When the present suppliers are >$, unreliable or incapable of meeting needs When # of suppliers is few and number of competitors is many Where the industry is growing quickly When you have the $ and people When suppliers have high profit margins When an organization needs to acquire a needed resource quickly 7

8 Horizontal Integration Seeking ownership or increased control over competitors I.e. Bank Mergers (TD purchases Canada Trust) Horizontal Integration When and org n can gain monopolistic characteristics When competing in a growing industry When increased economies of scale provide major competitive advantages When you have the $ and people When competitors are faltering because of lack of mgrl experience or lack of resources Market Penetration Seeking increased market share for present products or svcs in present markets through greater mktg efforts I.e. Johnson Insurance doubles the number of agents I.e. Johnson Insurance doubles the number of agents in Mexico 8

9 Market Penetration When current markets are not saturated When the usage rate could be increased When mkt share of competition is decreasing and the total market is increasing When dollar sales and mktg costs have been high When increased economies of scale provide major competitive advantage Market Development Introducing present products or svcs into new geographic areas I.e. Walmart goes to see Tony Blair s country Market Development When new channels are reliable, inexpensive and of good quality When an org n is very successful When new or untapped mkts exist When you have the $ and peoplep When the org n has excess prod n cap y When the basic industry is becoming global in scope 9

10 Product Development Seeking increased sales by improving present products or developing new products Chrysler introduces the Prowler Hot-rod-sports sedan Product Development When the products are in the maturity stage When the industry has rapid tech developments When competitors offer better quality products When competing in a high grow industry When you have strong R&D capabilities Concentric Diversification Adding new, but related, products or services I.e. Quebecor, the newsprinter and newspublisher, acquires Multimedia, the television and cable company 10

11 Concentric Diversification When competing in slow or no-growth industry When adding new, but related product When new, related, products can be added at high competitive prices When seasonality can be counter-balanced During the decline stage of the product life cycle When the org n has a strong mgt team Conglomerate Diversification Adding new, but unrelated, products or services I.e. WestingHouse Electric acquires CBS Entertainment, Seagrams acquires MGM Conglomerate Diversification When the industry is experiencing declining sales and profits When an attractive purchase comes along Some commonality with markets/products When exiting markets for an org n are saturated When anti-trust problems arise from being too large in one industry 11

12 Horizontal Diversification Adding new, unrelated products/svcs, for CURRENT customers I.e. MCI, the phone company, adds consulting and paging, and advertising (yellow pages) Horizontal Diversification When profits increase from a non-related product When competing in a no-growth or highly competitive mkt When current dist n channels can be used for the new product/service When the new products are counter-cyclical Joint Venture Two or more sponsoring firms form a NEW/separate organization for cooperative purposes I.e. Ford and Song Cong Diesel in Vietnam build an auto assembly plant near Hanoi 12

13 Joint Venture For a marriage of private and public firms In a foreign country When distinctive competencies complement When high profits are potential, but high risk requires over-whelming resource commitment When two or more firms have problems competing with a large firm When new tech y needs to be introduced quickly Retrenchment Regrouping through cost and asset reduction to reverse declining sales and profits i.e. Ford is restructuring, cutting 40,000 jobs, Nortel restructures and cuts 80, jobs` Retrenchment When a firm has a distinctive competency, but consistently fails to meet its goals When the org n is weak in an industry When an org n is plagued with inefficiency, low profits, poor employees, pressure form sthldrs When an org fails to take adv of opp y or gets smacked by a threat, or is overcome by an internal weakness When a firm has grown too quickly and a reorg n is needed 13

14 Divestiture Selling a division or part of an organization When retrenchment has failed When a division needs more resources than the company can provide When the division pulls the rest of the org n down (profits) A misfit with mkts, customers, products, channels, values, mgt When a large amount of cash is needed but cannot be easily obtained When gov t anti-trust is threatened Liquidation Selling off all of the company s assets, in parts, for their tangible worth -. i.e. Eaton s When all else fails When facing bankruptcy When stockholders can minimize their losses by selling the assets When ordered Value Chain SUPPORT ACTIVITIES FIRM INFRASTRUCTURE (e.g., Finance, Planning) HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS LOGISTICS (Manufacturing) PROCUREMENT OUTBOUND LOGISTICS MARKETING AFTER-SALE AND SALES SERVICE M A R G I N 42 PRIMARY ACTIVITIES M. Porter 14

15 Supply Chain for Soft Drink Industry Inputs Concentrate Producer Bottler Distributors 43 January The Soft Drink Industry Value Chain Inputs CP Bottler Distributors Players: Packaging Sweeteners Coke Pepsi Dr. Pepper 7-up RC Company owned Independent - exclusive franchise Foodstores Fountain Vending Machines Convenience Stores Value added: Operations Secret formula Brand identity Marketing & Sales - Distribution 44 January Assessing the Environment Macro Forces - PEST Political Economic Social Technological Micro Forces - Supply Competition Demand 15

Strategic Management Process: Strategy formulation 2.

Strategic Management Process: Strategy formulation 2. By: Prof. Dr. András s NábrN brádi PhD, MBA University of Debrecen Faculty of Ag. Economics and Rural Development Dept.: Business Management and Marketing