Industry Based View Flashcards
What is is the industry-based view and what does it tell us?
(a) This view argues that conditions within an industry determine firm performance.
(b) It centres upon the opportunities and threats facing the firm and underpinned by Porter’s 5 faces framework that “governs the competitiveness of an industry” (Peng, 2014).
Intensity of Rivalry Amongst firms
There are 6 main conditions and 1 extra:
(1) The concentration of the industry. “The more concentrated the industry, the more likely it is that those competitors will recognise their mutual interdependence and refrain from rivalry
(2) Rivals of similar size,market influence and product offering often compete vigorously with each other (e.g. the Airline industry).
(3) High-price, low frequency purchases that may make it easier for leading firms to dominate in ‘staple goods’ where consumers find it conventional to stick with well-known brands.
(4) “In some industries, new capacity may be added in large increments, thus fuelling intense rivalry: industries such as hotels, pharmaceuticals, semiconductors and steel, often periodically experience over-capacity, leading to price-cutting as a primary coping mechanism
(5) Slow industry growth will make competitors more desperate, often unleashing actions not used previously.
(6) High exit costs are likely to see firms continue to operate at a loss; specialised equipment and personal emotional career costs, are very difficult to recoup.
The Threat of Entry
The primary tool used by incumbents is an entry barrier: industry structures that increase the cost of entry, “when the threat is high, incumbents must hold down their prices or boost investment to deter new competitors” (Porter, 2008)
6 attributes associated with entry barriers:
(1) Scale-based advantages e.g. economies of scale.
(2) Non-scale based advantages e.g. propriety technology and ‘know-how’.
(3) Product proliferation: efforts to fill product space in a manner that leaves little “unmet demand” for potential entrants
(4) Product differentiation: The uniqueness of products that customers value
(5) Network externalities: The value a user derives from a product increases with the number (or the network) of other users of the same product
(6) Excess capacity: additional production capacity currently under-utilised or not utilised e.g. the army, they cost the taxpayer large sums of money and are clearly under used, however they serve the purpose of deterring countries from invading.
(7) Government policy, banning or discouraging entry.
The Bargaining Power of Suppliers
This refers to the ability of suppliers to raise their prices.
Four conditions are attributable to this:
(1) If the supplier industry is dominated by a few firms, they may gain the upper hand.
(2) Suppliers power is increased if they are providing unique, differentiated products with few or no substitutes.
(3) Suppliers enjoy strong bargaining power if the focal firm is not an important customer.
(4) Suppliers may enhance their bargaining power if they are willing and able to enter the focal industry by forward integration: acquiring and owning downstream assets, i.e. suppliers may threaten to become both suppliers and rivals.
Bargaining power of buyers
This refers to the ability of buyers to reduce prices and/or enhance the quality of the goods or services.
Four conditions are attributable to this:
(1) A small number of buyers leads to a strong bargaining power e.g. hundreds of automobile component suppliers try to sell to a small number of automakers such as BMW, Ford and Honda. These buyers frequently extract price concessions ad quality improvements by playing off suppliers against each other.
(2) Buyers bargaining power may be enhanced where products of an industry do not clearly produce cost savings or enhance the cost savings or the quality of life for buyers.
(3) Buyers may have strong bargaining power where they purchase standard, undifferentiated commodity products from suppliers.
(4) Buyers may enhance their bargaining power by entering the focal industry through backward integration: acquiring and owning upstream assets e.g. buyers such as COSTCO & Tesco, compete directly with their suppliers by procuring private label products.
The Threat of Substitutes
Substitutes are products of different industries that satisfy customer needs currentlypet by the focal industry.
Substitutes can be particularly threatening for 2 reasons:
(1) If substitutes are superior to existing products in quality and function, they may rapidly emerge to attract a large number of customers e.g. music downloads vs. CD’s.
(2) Substitutes may pose significant threats if switching costs are low e.g. customer insure no cost when switching from sugar to a sugar substitute like Nutrasweet, whereby, both are readily available in restaurants and grocery stores.
Lessons from the 5 forces framework
(1) Industries are not equal in terms of their potential profitability
(2) The task is to assess the opportunities and threats and each competitive force underlying an industry
(3) According to Porter, the challenge is “to stake out a position that is less vulnerable to attack from head to head opponents, whether established or new and less vulnerable to erosion from the direction of buyers, suppliers and substitutes. I.e. Industry positioning - ways to position a firm within an industry in order to minimise the threats presented by the 5 forces.
Cost Leadership
This centres on competing on low cost and prices.
A cost leader will often position its products to target “average” customers for the mass market with little differentiation.
Problems:
(1) Danger of being outcompeted on costs
(2) The relentless drive to cut costs, a cost leader may cut corners and upset customers
Differentiation
This focuses on how to deliver products that customer perceive as valuable and different.
Differentiators targets customers in smaller, well-defined segments whom are willing to pay premium prices.
The key is to adopt a low-volume, high-margin approach.
The ability to charge higher prices enables differentiators to outperform competitors unable to do so.
Problems:
(1) The longevity of this approach is questionable
(2) The “differentiator has to confront relentless efforts of imitation.
Focus Strategies
Firms adopting focus strategies are essentially more specialised differentiators in comparison to the larger differentiators.
‘Focus strategies serve the needs of a particular segment or niche if an industry” that broad-based firms tend not to serve.
Problems:
(1) Similar to the problems of differentiation.
Considerations
(a) “The essence of these strategies is whether to perform them activities differently, or to perform different activities relative to competitors”.
(b) However, the concept of an industry may become increasingly elusive.
(c) Moreover, not all of the 5 forces are threats where strategic alliances and collaborations are increasingly prominent e.g. firm can be a complementer: a firm that sells products that add value to the products of a social industry e.g. Intel and Microsoft.
(d) A sixth force?A key proposition with the IBV is that firms must choose either cost leadership or differentiation. However, firms can do both e,g, Singapore airlines.
Thus the name of the game may become ‘mass customisation: pursuing both cost leadership and differentiation simultaneously.
