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GSBS6481 International Business Strategy
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Week 2: The Industry-Based View of International Business Strategy
A group of firms producing products or services that are similar to each other
The structural attributes of an industry such as the costs of entry/exit.
Firm actions (strategies) such as product differentiation.
Performance
The result of firm conduct in response to industry structure, e.g.
Average (normal),
Below-average, and
Above-average
Some key concepts
Peng, (2021), Global Strategy, 5th ed. USA: Cengage Learning.
Chapter 2 Management industry competition
Supplementary reading available in the course Blackboard site (in Week 2 Folder)
Porter: The Five Competitive Forces That Shape Strategy, available through the UoN library link
(In this 2008 article in the Harvard Business Review, Porter reaffirms, updates and extends the classic five competitive force framework he first introduced in 1979.)
Intellectual roots of the industry-based view of international business strategy
Introduction to the industry-based view of international business strategy
The five-force framework
Three generic strategies
Strategic groups
Class activity: Five-force analysis of an industry
Industrial economics as the root of the industry-based view of IB strategy
Management vs. Economics: What are the differences?
Motivation/purpose: social view vs. private view
Unit of analysis: industry vs. firm
Views of the decision maker: single decision making unit vs. collection of individuals
View of the firm: free-standing entity vs. portfolio of businesses
Perspective: static vs. dynamic
Variables of consideration: limited vs. many
Firm-industry relation: one-way vs. two-way
Reference: Porter, M. E. 1981. The contribution of industrial organization to strategic management. Academy of Management Review, 6(4), 609-620.
Fundamental questions in management – especially in strategy
Why do firms differ?
How do firms behave?
What determines the scope of the firm?
What determines the success and/or failure of firms?
Frameworks of analysis:
pre-1980s Economic variables and industry characteristics
1980s Porter framework (the Industry-based view)
1990s The Resource-Based View (RBV)
2000s The Institution-based view
The industrial organization (IO) economics
In searching the explanations for above-average returns, the IO model argues that the firm’s performance is primarily determined by a range of industry properties, e.g.
Economies of scale, barriers to market entry, diversification, product differentiation and the degree of concentration of firms in the industry
The profitability of industries varies greatly
Pharmaceuticals 26.8 Gas & Electric Utilities 10.5
Tobacco 22.0 Food and Drug Stores 10.3
Household & Personal Products 20.5 Motor Vehicles & Parts 9.8
Food Consumer Products 20.3 Home Equipment 9.5
Medical Products & Equipment 18.8 Railroads 9.0
Beverages 18.8 Hotels, Casinos, Resorts 8.0
Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6
Commercial Banks 16.0 Building Materials, Glass 7.0
Publishing, Printing 14.3 Metals 6.0
Petroleum Refining 14.3 Semiconductors &
Apparel 14. 3 Electronic Components 5.8
Computer Software 13.5 Insurance: Property & Casualty 5.3
Electronics, Electrical Equipment 13.3 Food Production 5.3
Furniture 13.3 Telecommunications 3.5
Chemicals 12.8 Forest and Paper Products 3.5
Computers, Office Equipment 11.8 Communications Equipment (4.0)
Health Care 11.5 Airlines (34.8)
Median return on
equity (%), 1999-2002
The SCP model and the underlying assumption
SCP model: Industry structure determine the behaviour or conduct of firms, whose joint conduct then determine the collective performance of the firms in the market place
Underlying assumptions
The external environment impose pressures and constraints that determine the strategies that would result in above-average return
Most firms within an industry or within a certain segment of the industry control similar resources and pursue similar strategies in view of those resources
Resources are highly mobile across firms
Organization decision makers are rational
Industry Structure
Conduct (Strategy)
Performance
The industry-based view of strategy
The Five Forces Framework: “Translated” and extended from the SCP model in 1980 by Porter.
Industry Structure
Conduct (Strategy)
Performance
Firms are not simply passive recipients of those competitive forces in their industry environment
SUBSTITUTES
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
new entrants
substitutes
Five Forces Framework
1. Rivalry among competitors
Conditions that can depress industry profitability
A large number of competing firms (e.g. luxury vs mass market cars)
Rivals are similar in size, influence, and product offerings (e.g. airlines)
High-price, low-frequency purchases (e.g. ”big tickets” vs “staple goods”)
Capacity is added in large increments (e.g. semiconductor)
Industry slow growth or decline
High exit costs (e.g. airlines)
2. Threat of potential entry
Conditions that lift up entry barriers
Large scale-based advantages (economies of scale) (e.g. telecommunication)
large non-scale-based advantages (e.g. drug firms using patent)
Adequate product proliferation
Sufficient product differentiation
Fear of retaliation
Government policy banning or discouraging entry
3. Bargaining power of suppliers
Conditions that empower suppliers
A small number of suppliers
Suppliers provide unique, differentiated products
Focal firm is not an important customer of suppliers
Suppliers are willing and able to vertically integrate forward
Bargaining power – The ability to raise prices and/or reduce the quality of goods and services.
4. Bargaining power of buyers
Conditions that empower buyers
A small number of buyers
Products provide little cost savings or quality-of-life enhancement
Buyers purchase standard, undifferentiated products from focal firm
Buyers are willing and able to vertically integrate backward
5. Threat of substitutes
Conditions that increase the threat of substitutes
Substitutes are superior to existing products in quality and function
Switching costs to use substitutes are low
Substitute are products or services from outside a given industry that perform similar functions.
The sixth competitive force?
Porter later added the sixth competitive force in the framework
Complementors – the related and supporting industries
Additional resources for an industry analysis based on the five forces model
Porter: The Five Competitive Forces That Shape Strategy, available through the UoN library link available in the course site
In this 2008 article in the Harvard Business Review, Porter reaffirms, updates and extends the classic five competitive force framework he first introduced in 1979
The website that shows the five forces at work in selected U.S industries (https://s3.amazonaws.com/he-assets-prod/interactives/074_link_between_econ_profit/Launch.html )
This website that provides illustrations regarding the forces, their impacts on profitability and the root causes (https://s3.amazonaws.com/he-assets-prod/interactives/057_porters_forces_framework/Launch.html)
Additional resources for an industry analysis based on the five forces model
The website that provides a practical guide for Porter’s Five Forces Research https://libguides.babson.edu/c.php?g=26453&p=161511
Some criteria or references you can use to define an industry: 1, official industry classification. E.g. North American Industry Classification System; Australian and Standard Industrial Classification which is provided by Australian Bureau of Statistics
2, Defined by industry itself, and reflected by the composition of industry association
3, by equity analysts according to companies publically listed in stock markets
Industry reports/profiles available in database e.g. Marketline Advantage or IBISWorld, both available through UoN Library online
Five forces and attractiveness of an industry
Intense rivalry among competitors
Low entry barriers
Unattractive
Strong positions of suppliers and buyers
Strong threats from substitute products
Low profit potential
Moderate rivalry among competitors
High entry barriers
Weak positions of suppliers and buyers
Little threats from substitute products
High profit potential
Attractive industry
Hanson, D., Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management: Competitiveness and globalisation. Australia: Cengage.
The three generic strategies identified by Porter
Cost leadership: centers on low costs and prices.
A high-volume, low margin approach.
Key function areas: manufacturing, materials, logistics management
Differentiation: Strategically focusing on how to deliver products that perceive to be valuable and different.
A low-volume, high-margin approach
Research/development and marketing/sales are important functional areas.
Focus strategy: Serving the needs of a particular niche of an industry such as a geographical market, or product line.
Knowledge about a particular segment
Cost leadership Strategy
centers on low costs and prices.
A high-volume, low margin approach.
Key function areas: manufacturing, materials, logistics management
How to achieve cost leadership?
The Sources of Cost Advantages
Input costs
Economies of scale
Capacity utilization
Production techniques
Product design
Managerial efficiency
Institutional factors
How to achieve cost leadership? The case of budget airlines (e.g. Jetstar, Scoot, Southwest Airlines, Ryanair, etc.)
The Sources of Cost Advantages
Input costs e.g. using secondary airports, no on-board “frills”, small seat size
Economies of scale e.g. using one type of aircraft
Learning e.g. using one type of aircraft
Capacity utilization e.g. short turnarounds
Production techniques e.g. point-to-point service, mostly short/medium haul flights
Product design e.g. All baggage charged separately to fares
Managerial efficiency
Institutional factors e.g. low tax
Example – Low Cost Competitive Strategy:
Ryanair Europe’s oldest Budget-Airline
June 2007 the International Air Transport Association ranked Ryanair World No 1 in carrying more International passengers than any other airline and one of the most profitable airlines in the world.
low-cost does not mean low –profit!
aircraft have been delivered with non-reclining synthetic leather seats, no seat-back pockets, safety cards stuck on the back of the seats, and life jackets stowed overhead rather than under the seat. This allows the airline to save on aircraft costs and enables faster cleaning and safety checks during the short turnaround times.
Other proposed measures to reduce frills further have included
eliminating two toilets to add six more seats,
redesigning the aircraft to allow standing passengers,
suggesting that passengers should pay to use the toilets,
charging extra for overweight passengers,
asking passengers to carry their checked-in luggage to the plane.
Differentiation strategy
Strategically focusing on how to deliver products that perceive to be valuable and different.
A low-volume, high-margin approach
Research/development and marketing/sales are important functional areas.
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics relating to image, status, exclusivity, identity
TANGIBLE DIFFERENTATION
Observable product characteristics:
size, color, materials, etc.
performance
complementary services
How to achieve differentiation?
— Providing something unique that is valuable to the buyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
Market Share (Quantity)
Profitability
Differentiation-based Strategies
Low Cost Leadership Strategies
Stuck-in-the-Middle
“Porter’s Bucket”
Segmentation (Focus) strategy
Serving the needs of a particular niche of an industry such as a geographical market, or product line, not all the potential marketplace.
Superior Knowledge about a particular segment
Strategic Group
A group of firms in an industry following the same or similar strategy
Strategic groups often differ in their product or marketing approaches
Mobility barriers: barriers to shifting strategic position from one strategic group to another
Because firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense (perhaps more intense than inter-strategic group competition)
Competitive Advantages
(Sources of Rates of Profit in Excess of the Competitive Level)
Competition
Be Better Than
Competitors
Attractive
Attractive
Differentiation
Attractive
Strategic Group
Entry Barriers
Mobility Barriers
Isolating Mechanisms
Sources of competitive advantage
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