Competitive Strategy Glen Whitman Dept. of Economics CSUN

The Industry Perspective Industry means all firms producing a product, plus their customers and suppliers. Industry means all firms producing a product, plus their customers and suppliers. The definition depends on the meaning of “product,” which is not always obvious. The definition depends on the meaning of “product,” which is not always obvious. Industry perspective is a means of categorizing the various forces relevant to a firm’s choice of strategy. Industry perspective is a means of categorizing the various forces relevant to a firm’s choice of strategy.

Porter’s Five Forces Bargaining Power of Customers Bargaining Power of Customers Bargaining Power of Suppliers Bargaining Power of Suppliers Rivalry Among Existing Firms Rivalry Among Existing Firms Threat of New Entrants Threat of New Entrants Threat of Substitute Products Threat of Substitute Products

The Porter Cross Industry Competitors (Existing Firms) SuppliersBuyers Substitutes Potential Entrants

Competitive Relationships Industry Competitors (Existing Firms) SuppliersBuyers Substitutes Potential Entrants

Products and Substitutes A product can be defined broadly or narrowly. A product can be defined broadly or narrowly. Any product competes against substitute products (possibly produced by the same firm). Any product competes against substitute products (possibly produced by the same firm). The main question: how close are the substitutes? The main question: how close are the substitutes? Homogeneous products: definitely same industry Homogeneous products: definitely same industry Heterogeneous products: “closeness” is largely a matter of consumer preferences and perceptions Heterogeneous products: “closeness” is largely a matter of consumer preferences and perceptions

Competition with Existing Firms Existence of viable alternative products places a constraint on the price your firm can charge. Existence of viable alternative products places a constraint on the price your firm can charge. How similar are the competitors’ products to yours? How similar are the competitors’ products to yours? The more similar they are, the greater the threat to both you and them. The more similar they are, the greater the threat to both you and them. How much cheaper are the competitors’ products? How much cheaper are the competitors’ products? The better the price-performance combination, the more binding is the constraint on your price. The better the price-performance combination, the more binding is the constraint on your price.

The Threat of Entry Just because you can’t see competitors doesn’t mean they’re not there! Just because you can’t see competitors doesn’t mean they’re not there! Threat of future entry can affect present choices. Threat of future entry can affect present choices. Barriers to entry reduce the threat: Barriers to entry reduce the threat: economies of scale economies of scale customer loyalty, brand identification customer loyalty, brand identification proprietary technology proprietary technology You can sometimes influence barriers to entry. You can sometimes influence barriers to entry.

Buyer/Seller Relationships Industry Competitors (Existing Firms) SuppliersBuyers Substitutes Potential Entrants

Bargaining Power in Buyer/Seller Relationships Bargaining Power : the ability of a buyer (seller) to negotiate a lower (higher) price Bargaining Power : the ability of a buyer (seller) to negotiate a lower (higher) price Depends primarily on substitution or “escape” opportunities, or the lack thereof Depends primarily on substitution or “escape” opportunities, or the lack thereof Customers/buyers can buy from someone else, do it themselves, or do without Customers/buyers can buy from someone else, do it themselves, or do without Sellers/suppliers can sell to someone else, sell something else, or integrate downward Sellers/suppliers can sell to someone else, sell something else, or integrate downward

How Competition Affects Bargaining Power Competition on your own side of the market tends to reduce your bargaining power. Competition on your own side of the market tends to reduce your bargaining power. Competition on the other side of the market tends to increase your bargaining power. Competition on the other side of the market tends to increase your bargaining power. Competition can be actual or potential. Competition can be actual or potential.

Other Factors That Affect Bargaining Power Switching costs: how difficult is it to find a new supplier or a new buyer? Switching costs: how difficult is it to find a new supplier or a new buyer? Substitutability: could you do without? Substitutability: could you do without? Make-or-buy: could you integrate upward or downward in the supply chain? Make-or-buy: could you integrate upward or downward in the supply chain? Fixed costs: do you have inputs/resources committed to your current industry or strategy? Fixed costs: do you have inputs/resources committed to your current industry or strategy? Legal restrictions: are some strategies forbidden? Legal restrictions: are some strategies forbidden?

Thinking Strategically Strategy as defined by management scholars: seeing the “big picture”; having an integrated plan of action Strategy as defined by management scholars: seeing the “big picture”; having an integrated plan of action Strategy as defined by economists: choosing your plans with a full awareness of interdependence Strategy as defined by economists: choosing your plans with a full awareness of interdependence Your best choice of plan depends on what others are doing; others’ best choice of plan depend on what you’re doing. Your best choice of plan depends on what others are doing; others’ best choice of plan depend on what you’re doing. You can affect others’ behavior through your own choice of plans. You can affect others’ behavior through your own choice of plans.

The Prisoners’ Dilemma Prisoner #2 Prisoner #1 MumFink Mum

The Prisoners’ Dilemma: Price-Setting Application Firm #2 Firm #1 High PriceLow Price High Price

The Game of Chicken Spike Biff Continue Swerve Continue

The Game of Chicken: Bargaining Application Seller Buyer Hard Bargain Easy Bargain Easy Bargain Hard Bargain