The Competitive Environment

This session will explore:  The Methodology of an Industry Analysis  Strategic Groups and Market Segments  The Industry Life Cycle and Hypercompetition  Game Theory  First-Mover Advantage

Definition of an Industry The concept of Industry Analysis was first developed by economists as a means of analysing the degree of competition that exists within a particular industry or sector. “…An industry is a group of firms producing the same principal product.”

“…Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers.” Johnson et al, pp. 67

Supply-Lead Convergence When organisations begin to behave as if there were linkages between separate industries or sectors. Example: Skype, that provides internet telephony through peoples’ computers. Demand-Lead Convergence When consumers start to behave as though industries have converged. Example: people substituting the PC for the TV as a source of entertainment. Industry convergence is most likely when both sets of forces are at work!

 Bargaining Power of Buyers;  Bargaining Power of Suppliers;  Threat of New Entrants;  Threat of Substitutes;  Competitive Rivalry. Michael Porter, 1960

Power of Suppliers Competitive Rivalry Power of Buyers Threat of Entry Threat of Substitutes Porter, 1980

The Bargaining Power of Buyers  Buyer concentration  Number of alternative sources of supply  Switching costs  Potential for backward integration The Bargaining Power of Suppliers  Degree of competition  Switching costs  Potential for forward integration

The Threat of New Entrants  Economies of scale  High capital requirements  Product differentiation  Switching costs The Threat of Substitutes  Product-for-Product Substitution  Substitution of Need  Generic Substitution

Competitive Rivalry  Number and Size of Competitors  Market Growth Rates  High Fixed Costs  High Exit Barriers  Product Differentiation

Main Strengths  It provides a broad analytical framework  It builds on strong theoretical foundations  It identifies how strategies may be used to influence an industry’s competitive forces  It may be used to evaluate how competitors stand in relation to an industry’s competitive forces.

Main Weaknesses  Difficulties with defining an industry  Its main focus is on the threats an environment poses to organisations  It is an inherently static model  It views corporate strategy as deliberate rather than emergent  It was primarily developed for the private sector

Strategic Groups “…Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies on similar bases.” Johnson et al, pp. 73 Example : Hypermarkets, supermarkets, and convenience stores may constitute three quite different strategic groups within one industry. Market Segments “… A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.” Johnson et al, pp. 77 Example : Performance cars, eg BMW as a niche car producer.

Hypercompetition “ …Where organisations aggressively position themselves against each other and create new competitive advantages which make opponents’ advantage obsolete.” Example : video games and software industries. A. Henry, pp. 93 Industry Life Cycle The industry life cycle is the supply side analogue of the better-known product life cycle: “…The industry life cycle suggests that industries go through four stages of development which include introduction, growth, maturity and decline.” A. Henry, pp. 206

Annual Development Growth Shakeout Maturity Decline Sales Time Few: Growing adopters Growing Saturation of users Drop-off Users/ trial of early trial of selectivity of in usage Buyers adopters product/service purchases Repeat purchases Reliance Entry of competitors Many Fight to maintain Few competitors share. Difficult to Exit of some Competitive competitors Fight for share Price-cutting gain or take share competitors Conditions Undifferentiated Shakeout of Efficiency/low cost Product/service weakest emphasised

Definition Game theory has been used by economists to study competition in oligopolistic markets. “…Game theory is concerned with the interrelationships between the competitive moves of a set of competitors.” Johnson et al, pp. 241

“…refers to organisations which benefit from the learning and experience they acquire as a result of being first in the marketplace.” A Henry, pp. 130 “…benefit gained by firms that are the first to enter new markets, establish brand identity, implement administrative techniques, or adopt new operating technologies…” Dess et al, pp. 435 “…are advantages that come to firms that make important strategic and technological decisions early in the development of an industry… In general first-mover advantages can arise from three sources: 1. technological leadership; 2. pre-emption of strategically valuable assets; and 3. the creation of customer- switching costs.” Barney & Hesterly, pp.54-55

A Definition A Strategic Lock-in “… is where an organisation achieves a propriety position in its industry, it becomes an industry standard.” Johnson et al, pp. 235 Example: Microsoft Software.

Please read Case Study 5 and address the following : Discussion Questions 1. Are British supermarkets more profitable than their European and US counterparts? 2. Use the industry analysis framework to explain the profitability of the main supermarket chains in the UK. Please Post Your Comments for Discussion These may be included in your ‘Assessment Profile’ Address at least one question. Please Note: 250 Word Maximum (i.e. Total word count per student posting per case study)