Strategy in Context

BHS0035H

Industry and Competition

Anna Zueva

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Lecture overview
• Porter’s 5 Forces
– A way to understand the competitive intensity and
therefore the rent-generating potential of
particular industries and markets
• Porter’s Generic Strategies
– Broad strategic choices available to an
organisation to position itself on the market

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 Topic 3.8

Michael Porter and the firm-industry

relationship

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 Michael Porter!
Strategy as a product of industry conditions

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Image source: Wikipedia
Average return on invested capital in U.S.
industries, 1992-2006

Porter (2008)
Industry impact on
financial
performance of
firms:

Profitability of
selected U.S.
industries
Average return on
invested capital
1992-2006
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Porter (2008)
Porter’s assumptions
• “In essence, the job of the strategist is to understand and cope with
competition” (Porter, 2008: 25)
• Market/industry structure – conduct – performance framework:
– Market/industry structure shapes the conduct of a firm: profit objectives,
pricing strategies, growth plans, product development, M&A decisions,
branding, etc.
– …and firm conduct determines its performance

• Disclaimer: Michael Porter was not the first to point out the influence
of market and industry structure on organisational strategy

Clegg et al. (2001)

 Topic 3.9

Porter’s Five Forces framework

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Porter’s Five Forces Model

Bargaining power
of customers
This model is
intended to help in
assessing the degree
of competition in a
Intensity
particular industry Threat of
substitute of Bargaining power
of suppliers
or market and products/services
Rivalry
therefore the
possibility of
generating profits in
that industry or Threat of new
entrants
market

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 Threat of new entrants

• New entrants are new firms entering existing markets

• New entrants put pressure on the prices and
innovations/quality levels of companies already
present in the industry
• New entrants can be particularly dangerous when they
– Face few entry restrictions (e.g. low resource requirements)
– Diversify from other markets and
– Can leverage their existing capabilities (e.g. Apple entering
the music distribution business)
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Porter (2008)
Power of suppliers
• Suppliers can have a lot of power over firms through:
– Controlling the prices , quality and availability of production
inputs

• Suppliers can be particularly powerful when:

– They are more concentrated than the firms they supply (e.g. they
are few and large and their customers are smaller and more
numerous)
– They do not greatly depend on the revenue from the industry in
question
– Switching from one supplier to another is expensive (e.g. supplier11
products are very differentiated, there are few or no substitutes)
Porter (2008)
Power of buyers
• Very similar analysis to the power of suppliers
• Buyers can be particularly powerful when :
– They are more concentrated than the firms that supply them
– The industry in question trades in standardised, undifferentiated
products
– Switching from one supplier to another is easy for buyers
– Buyers are price-sensitive (e.g. have low margins, are cash-poor)
– Buyers’ operations are not significantly affected by the inputs the
industry provides
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Porter (2008)
Threat of substitutes
• A substitute is a product or service that performs the
same or a similar function to the industry’s product or
service
• Whether something is a substitute depends on a
situation (e.g. many things can substitute for others
when one is searching for New Year presents)
• The threat of substitutes is high when:
– They offer better functionality/are cheaper than the industry
– Switching to substitutes is easy for customers
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Porter (2008)
Intensity of rivalry
• Factors contributing to intense rivalry in an
industrial/market sector:
– High power of buyers and suppliers
– High threat of substitutes and new entrants
– Many small/smaller competing firms
– Few large but equally powerful firms (oligopoly)
– High sunk costs, high market exit costs
– Commodity/undifferentiated product/service, etc., etc.
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Porter (2008)
 Topic 3.10

Porter’s Five Forces framework:

Implications for strategy

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Five Forces: Implications for strategy

• When threats of new entrants and substitutes

and the power of buyers and suppliers are high
– Profit potential of the industry decreases
– Highly competitive industries may not be attractive
to enter/remain in
• Organisations need to monitor the powers and
abilities of organisations in related industries
• Industry structure can push firms into one of
the four Generic Strategies 16
Example: creating barriers to new entrants

• Incumbent competitors can create barriers to new entrants

through:
– Supply-side economies of scale
– Demand-side benefits of scale (network effect)
– Customer switching costs
– Capital requirements for entry
– Other advantages: access to scarce raw materials, quality of
existing products, access to efficient distribution channels, etc.
– Restrictive government policy (e.g. licensing requirements in the
airline, taxi, alcohol industry)
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Porter (2008)
 Topic 3.10 Activity – Live
Discussion
Tesla in China
Tesla is an American manufacturer of electric vehicles. In 2019, it built factory in
Shanghai and became one of the newest players on the Chinese electric passenger
vehicle market.

• How successful do you think Tesla is in China?

In your answer, consider how competitive the Chinese electric vehicle market is.
Who are the competitors? Who are the potential substitutes? How powerful are
buyers and suppliers?

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 Topic 3.11

Industry positioning:
Porter’s Generic Strategies

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 Porter’s Generic Strategies
Competitive Advantage

Lower Cost Differentiation

Competitive Scope

Broad Target Cost Leadership Differentiation

Narrow Target Cost Focus Differentiation Focus

Strategies are ‘Generic’ as they are the most basic strategic

options that can apply in any industry 20

Clegg et al. (2001)

Cost leadership
• Having the lowest cost base (not necessarily the
lowest price!) on the market
• Sources of cost leadership:
– Economies of scale, access to scarce raw materials,
proprietary technology, superior organisation, etc.
• Cost leadership strategies are commonly found in:
– Commodity markets
– Mature markets
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Clegg et al. (2001)

Differentiation
• Offering superior and unique quality,
functionality, aesthetics or convenience at a
premium price
• Sources of differentiation are very varied:
– Technical knowledge, intellectual property,
branding, design capabilities, etc.
• Strong and stable customer base is important

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Clegg et al. (2001)

Cost leadership focus and
differentiation focus
• Target a narrow customer base with a highly
specialised offer
– Closely meet the needs of niche customers
– Can achieve above-average customer loyalty
• Cost leadership focus may be very hard to
achieve

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Clegg et al. (2001)

 Stuck in the middle?
• Porter says it’s a recipe for mediocrity and failure
• But:

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Clegg et al. (2001)

Generic strategies in industry context 1
Differentiation Cost Leadership Focus
Buyer Buyers have less Firms may be able to Buyers have less
Power power because of offer lower prices to power because of
limited alternatives powerful buyers limited alternatives

Supplier Firms may be able to Firms may be Lower-volume cost

Power charge customers protected from leadership firms will
higher prices to powerful suppliers have less power in
tolerate higher by their own size and relation to suppliers.
supplier prices efficiency Differentiation-
focused firms may
tolerate higher
supplier prices.
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Clegg et al. (2001)

Generic strategies in industry context 2
Differentiation Cost Leadership Focus
Entry Firms are in a Existing efficiencies Unique
Barriers stronger position may deter potential competencies of
as customer entrants existing firms may
loyalty will serve as entry
discourage barriers
switching

Threat of Firms are in a Substitutes may Specialised

Substitutes stronger position struggle to compete products/services
as customer against existing protect against
loyalty will efficiencies substitutes
discourage
switching

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Clegg et al. (2001)

 Topic 3.12

Applying Porter’s ideas to

management practice

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Usefulness of Porter’s approach
• Porter’s models can help organisations make a
variety of strategic decisions, such as:
– Whether to enter a particular market
– Whether a particular industry is attractive
– Who to pay attention to as the most powerful
industry players
– How to position themselves on the market

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But ….
• The relationship between market structures and
performance is not always clear
– E.g. it’s not ways clear which factors belong to
structure, conduct or performance.
• Is high level of innovation part of performance, type of
conduct or a structural aspect of the industry?
– Firm conduct can influence market structure (e.g. firms
behaving in a similar way).
– Firm performance can affect market structure (e.g.
highly performing firms can form oligopolies)
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Clegg et al. (2001)

Also .....
• Defining the boundaries of a market/industry may be
difficult
– Especially in today’s increasingly interconnected economies
• Did Porter ignore other important actors?
– Government
– Other societal stakeholders
• Does Porter focus too much on competition at the
expense of cooperation?
– Financial and ethical implications
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Clegg et al. (2001)

Conclusions
• Porter’s approach can be related to
Mintzberg’s positioning perspective
– Firms must position themselves within industries
and in relation to other industry actors
• Industrial forces are powerful shapers of firm
activity
• But firms also contribute to the shaping of
industries
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References and further readings
• Clegg, S. R., Carter, C., Kornberger, M., &
Schweitzer, J. (2011). Strategy: theory and
practice. Sage Publications.
• Porter, M. E. (2008). The five competitive
forces that shape strategy. Harvard business
review, 86(1), 78-93.

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