Lecture 6 Prepared by Mansour Abu Helal An industry is a group of firms producing similar products or services, and competes for

the same buyers or consumers. Porter views strategy as position and argues that the structure of the industry determines the strategy adopted by an organisation. STRUCTURAL INDUSTRY ANALYSIS refers to external situational-company analysis and is a way of thinking strategically about an industrys overall situation and drawing conclusions about whether the industry is attractive or not. We need to analyze industries, prior to entry, according to five competitive forces. The organisation needs to assess the importance to its success of each of the five forces (threat of new entrants, rivalry among existing firms, threat of substitute, bargaining power of buyers and bargaining power of suppliers. A sixth force proposed by Ed Freeman is the Relative power of other stakeholders. The collective strength of these forces determines firm profitability and growth, hence the attractiveness of the industry. 1. THREAT OF POTENTIAL NEW ENTRANTS which depends on barriers to entry such as: Product differentiation, Economies of scale, Capital requirements, Switching costs, Access to distribution channels, Brand preferences and customer loyalty, Learning and experience curves, expected retaliation by existing competitors, Legal framework. 2. BARGAINING POWER OF SUPPLIERS which depends on: the availability of the item, Switching costs, The uniqueness of product, The number of suppliers, The size of the major customers, Suppliers ability to integrate forwards or industry members to integrate backward and self-manufacture items they have been buying from suppliers...etc. 3. BARGAINING POWER OF BUYERS depends on: Consumers need for quality, Volumes bought, Customers ability to shop around and change brands, the Size of customers, buyers Profit margins, buyers income, buyer ability to negotiate, Buyers ability to integrate backwards and produce the product themselves. 4. THREAT OF SUBSTITUTE PRODUCTS depends on: Relative price of substitutes, switching costs to substitute. Keep in mind that substitutes might not have similar characteristics, but are still able to satisfy the same need.(Read Blue Oceans Strategy) 5. RIVALRY AMONG EXISTING COMPETITORS, WHICH IS THE MOST POWERFUL FORCE AND depends on: Number of competitors, Exit barriers, Strategies and resources employed by competitors, Rate of industry growth. Critics of Porters theories have argued that the task of analyzing a companys external situation cannot be reduced to a mechanical, formula-like exercise and that the emphasis on the industry tends to ignore a firm's core skills and competencies.

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Lecture 6 Prepared by Mansour Abu Helal There are three (3) generic strategies to overcome the five forces and achieve competitive advantage: Overall cost leadership, Differentiation and Focus strategy 1. Overall cost leadership Strategy: Here the company boost sales volumes, construct efficient facilities, pursue cost reductions and overhead control, minimize the cost in all activities in the firms value chain, such as R&D, service, sales force, and advertising, Takes advantage of learning/experience curve effects gained over time and use the companys bargaining power to gain concessions. Cost leadership must attain differentiation parity, which permits a cost leader to translate cost advantages directly into higher profits than competitors Cost leadership improve the firm competitive position against the five forces by protecting it from competitors and powerful buyers, it provides more flexibility to cope with demands from powerful suppliers, Provides substantial entry barriers. Such a firm can sell its products at average industry prices to earn higher profit than rivals or sell below average industry prices to gain market share. On the other hand, this strategy is imitated easily, cost-saving Technology breakthroughs or the emergence of lower cost value chain models can nullify a low-cost leaders hard won position, and thus differentiation is lost. There is also a risk of cutting prices below the cost advantage thereby eroding profits and that the added gains in unit sales might not be large enough to bring in bigger profits. 2. Differentiation Strategy: Differentiation can be achieved from many angles: Multiple features, Superior customer service, Engineering design, Technological leadership, Prestige or brand, Dealer network...etc. Successful differentiation leads to premium prices, growth in sales and greater buyer loyalty to its brand, but it must maintain cost parity or proximity to competitors to achieve above average profitability. Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique Differentiation improve the firm competitive position against the five forces by Creating higher entry barriers due to customer loyalty, this loyalty will also eliminate the risk of substitute. This strategy provides higher margins that enable the firm to deal with supplier power, it reduces buyer power due to lack of alternative, it also reduces supplier power due to prestige associated with supplying to highly differentiated products. However, firms can create differentiation that buyers do not value its uniqueness or charge an excessive price premium that not many people might be willing to spend. They also might overspend to differentiate the product, thus eroding profitability, fail to recognize buyer segments, create differentiation that competitors can emulate quickly or cheaply or dilute the brand through product line extensions.

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Lecture 6 Prepared by Mansour Abu Helal 3. Focus Strategy: Focus is based on the choice of a narrow competitive scope within an industry. Firm selects a segment or group of segments (niche) and tailors its strategy to serve them and dedicate itself to these segments exclusively. Focus creates barriers to entrants and targets selected niches that are least vulnerable to substitutes. There are two variants of Focus Strategy, Cost focus; here firm selects narrow target segments with unusual needs or distinctive preferences (niche market) and attempt to achieve a cost advantage within that segment and Differentiation focus that depends on there being a particular buyer group or geographic market that demands unique product attributes. Differentiation focus serves the special needs of a narrow group of customers who are willing to pay a big premium for finest items available. It works well when no other rival is attempting to specialize in the same targeted market and when an organisations resources do not permit it to serve a wide market. Pitfalls to Focus Strategy are: it can be imitated, the target segment can become unattractive and customers preferences and needs might shift over time toward the product attributes desired by the majority of buyers. COMBINATION STRATEGIES: Some authors suggested that generic strategies are often inconsistent with one another, they seem inherently unrelated. Porter recommends that you stick to one strategy and indicated that attempting to follow too many different opportunities may result in the outstripping of managerial resources hence the need to focus. However, opportunities available in any one area may be limited, so it may not be possible for firms to maintain a steady rate of growth unless multiple strategies are followed at the same point. Toyota proved that pursuing more than one generic strategy is sometimes possible; it have been able to jointly follow overall low cost and high quality differentiation strategy. Primary benefit of successful integration of low-cost and differentiation strategies is the difficulty it poses for competitors to duplicate or imitate strategy, its produce high entry barrier and enhance bargaining power of buyers. On the other hand, a firm pursuing multiple generic strategies risks becoming stuck in the middle of the competitive market place with no competitive advantage and might miscalculate sources of revenue and profit pools in the firms industry

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