Chapter 2

Strategy, Competitive Forces and

Positioning
Learning objectives

• Understand the importance of differences in competitive

environments
• Explain what competitive advantage is and how it can
be achieved
• Distinguish different types of industries
• Understand and analyse the role of industry,
competitive forces and generic strategic positioning
• Analyse the macro environment and know about how it
can affect strategic choices
• Appreciate the role of strategic groups
Levels of strategy

• Corporate-level strategy
– ‘What business should we be in?’
• Business-level strategy
– ‘How do we compete in this business?’
• Functional-level strategy
– ‘How do we implement the decisions made about
corporate- and/or business-level strategy?’
Business environments

Business environments can be conceptualized in different ways,

in terms of:
• industry, ecosystem, field, market, institutional and legal
structures
• the key ‘rules of the game’, e.g. government regulations,
demand drivers
• relationships with other organizations, individuals, government
bodies and many other institutions
• competition between rivals
• supplier and buyer relationships
Industrial organization approach

• Industrial organization (IO) is a field of economic theory that

helps to explain the structure of markets, the strategic
behaviour of firms, their interactions and the industries to
which they belong
• IO takes an external perspective on strategy and is concerned
with the environmental settings within which firms operate and
behave as producers, sellers and buyers of goods and
services
Structure-Conduct-Performance

• The SCP approach proposes that a firm’s performance is

largely a function of the industry environment in which it
competes
• SCP proposes that industry structure drives firm conduct,
which in turn determines firm performance
• Strategists therefore need to examine industry structure to
decide which industries to enter and how to compete in
them
Industrial Organization and the Structure
Conduct Performance approach
Factors that influence industry structures include:
• Supply conditions
• Demand for a product
• Degree of differentiation of products
• Extent of vertical integration and diversification
• Government policy
Defining ‘industry’

A key issue is to define accurately the industry within which one

is competing. For instance:
• A narrow definition of an industry might be the one for train
travel on inter-city routes
• A broader definition of the industry would be the rail industry
as a whole
• An even broader definition would be the transportation
industry (which would also include car and bus transport)
Defining ‘industry’

• Strategic errors are made when firms define their industry too
narrowly:
– for example, a video rental firm that fails to define its
industry as ‘film entertainment’ would miss the threat of
cinemas and movie streaming
– an even wider definition would include all forms of ‘leisure
entertainment’ that could rival or substitute it (e.g. video
games, theatre)
• Wider definitions enable strategists to consider more firms as
potential rivals (e.g. a bus company rivalling inter-city train
lines) and understand the threat of substitutes (e.g. car
transport becoming cheaper or easier than train travel)
Boston Matrix

The Boston Consulting Group developed an influential ‘matrix’ to

assist large diversified corporations like GE in deciding which
businesses to obtain (or which to divest or wind down)
Boston Matrix
 Industrial Organization and the Structure
Conduct Performance approach
Qualifications and criticisms:
• The SCP approach does not always specify precise
relationships between market structures, firm conduct and
firm performance, nor is it clear which factors belong to
structure, conduct and performance.
• Not all players have the same knowledge of market
structure. Asymmetry of information can enable one
player to take advantage of that asymmetry and tip the
balance of power in their favour.
• Firm performance may affect market structure, such as
when large players set prices or control access to scarce
resources.
Sustainable competitive advantage

• Achieving sustainable competitive advantage (SCA) is the

purpose of strategic management since it allows a firm to
make a profit in a sustained way
• SCA is what allows a business to out-perform its competitors
in the long term; an advantage quickly lost is not a sustainable
advantage
• Strategists have diverging ideas about how SCA can best be
achieved
Organizational performance and
Sustainable Competitive Advantage
• SCA enables firms to make economic rent
• Economic rent is when an organization earns above-average
industry returns on the capital invested:
– The strategy question is: how do firms achieve economic
rent?
– Answers include advantages from things such as size and
economies of scale and superior stakeholder relationships
(e.g. with competitors, allies, governments, suppliers,
customers)
Organizational performance and
Sustainable Competitive Advantage
What factors explain variations in organization performance in
an industry?
• Industry characteristics
• Market structures
• Organizational attributes
• Competitive forces
• Horizontal (e.g. competitors, alliance partners) and vertical
(e.g. customers, suppliers) relationships
Understanding the macro environment

PESTEL analysis:
• Political
• Economic
• Social
• Technological
• Environmental
• Legal
PESTEL analysis example
Market and industry structure

• Market structure is about how competitive a market is (i.e. the

level of rivalry between competitors)
• Industry structure refers to the group of companies that are
related in terms of their primary business activities, involving
the similarity of products and/or the processes surrounding
the transformation of inputs to outputs
Different types of markets
Homogenous or pure market
Easy for a firm to imitate success almost immediately because
information about the market, its customers, products or production
costs is available to all players. Foreign currency is a good example
Monopoly
There are no direct competitors to worry about. If an organization is
in the fortunate position of having no competitors, its strategic
objective will be to retain full control and protect that position
Oligopoly
Characterized by a limited number of players acting in relatively
predictable and coordinated ways to supply products and services
Hypercompetition
Depicts a market in which the sources of competitive advantage can
change quickly, making it difficult to maintain above-average profits
for long
Industry analysis: how five forces
determine competitive attractiveness
Bargaining power of customers

Factors that help determine the relative power of customers

include:
• the degree of buyer concentration in relation to firm
concentration within the industry
• the typical volume that a buyer demands
• the costs of switching to a new producer
• the availability of information for buyers about products
and services in an industry
• the overall price structure and price sensitivity of buyers
Bargaining power of suppliers

Factors that help determine supplier power in an industry

include:
• the degree of supplier concentration in relation to firm
concentration
• the supplier’s switching costs relative to the firm’s switching
costs
• the degree of differentiation of inputs
• the availability and presence of substitute inputs
• the threat of forward integration by suppliers relative to the
threat of backward integration by firms
• the cost of inputs relative to the selling price of the product
• the importance of the buyer’s volume to the supplier
Threat of new entrants
Factors affecting the threat of new entrants include:
• the most attractive segments will have high entry barriers and
low exit barriers
• entry barriers might include capital requirements, brand
equity, product differentiation, profits based on economies of
scale, switching costs for buyers, access to distribution
channels, etc.
• barriers to exit the industry are often similar to barriers to
entry: they limit the ability of a company to leave the market,
even if they want to do so, making competition more intense
because one company that otherwise might prefer to leave is
forced to stay in the industry
Threat of substitutes
Factors affecting the threat of substitute products include:
• where substitute products are readily available in other industries
and have the potential to satisfy a similar need for customers
• as more substitutes become available and affordable, the
competition is more intense since customers have more
alternatives
• substitute products may limit the ability of firms within an industry
to raise prices and improve margins
• likelihood of substitutes being sought by buyers is shaped by:
– the buyer’s propensity to substitute
– the relative price performance and quality of substitutes
– buyer switching costs
– the perceived level of product differentiation within an industry
Intensity of rivalry
Factors shaping the intensity of competitive rivalry include:
• the number of players and their relative size
• a larger number of firms, for example, will increase rivalry
because more firms will be competing for the same customers
and resources
• the rivalry also intensifies if the firms have a similar market
share, leading to a struggle for market leadership
• slow market growth means firms will compete more intensely
for market share
• companies facing a high level of fixed costs in producing
goods and services experience intense rivalry because the
firms must produce near capacity to attain the lowest unit
costs (economies of scale)
Strategic groups

• The presence of strategic groups in an industry has a

significant effect on the industry’s profitability, countering the
assumption of IO economics that industry members differ only
in market share
• Michael Porter (1980) defined a strategic group as a group of
firms in the same industry that follow the same or similar
strategies
Mobility barriers

Mobility barriers are similar to barriers to entry, but act as

barriers for a group within an industry rather than for the industry
as a whole:
• firm-specific sources of mobility barriers include organizational
structure and control systems, management skills and
capabilities, the nature and extent of diversification and of
vertical integration, and the nature of the firm’s ownership and
its connections with powerful groups such as unions,
consumer groups and state regulators
Isolating mechanisms

Isolating mechanisms (also known as ‘barriers to imitation’) exist

when certain firms (or ‘strategic groups’ of firms) possess unique
resources, or ways of combining resources that are hard to
decipher, that others cannot imitate:
• When other firms cannot easily acquire resources, or don’t
know how to combine and coordinate them in the right way,
they will be less profitable, which explains why intra-industry
differences in firm performance exist
Strategic action

Firms make three key calculations in relation to industry

structure and ‘forces’ when deciding which market to enter:
• Attractiveness: what makes an industry attractive to diversify
into will be one with a high return on investment accompanied
by high barriers to entry, low buyer and supplier power, and
with few substitute products
• Cost of entry: the cost of entry has to pass the hurdle test: it
should not be so high that it will potentially reduce the
profitability of entering the industry
• Mutual competitive advantage: the acquisition must be such
that both parties see an advantage in the deal; otherwise it is
not likely to be successful
Generic strategies
Cost leadership strategies

To implement a cost leadership strategy successfully, a firm has

to develop efficiencies in the use of facilities and production
processes to create the same benefit for customers at a much
lower cost than competitors
Differentiation strategies

In a differentiation strategy, a firm seeks to be unique in its

industry by offering products or services that stand out from the
competition based on features or components that customers
value and are willing to pay more for
Focus strategies
• A focus strategy entails targeting a particular segment with the
objective to meet the needs of this particular group, thereby
achieving high levels of customer loyalty and subsequent
above-average returns
• The focus strategy has two variants:
– Differentiation focus involves a firm meeting the unique
needs of a particular segment by producing products that
are different in order to meet those unique needs
– Cost focus involves a firm seeking a cost advantage in a
target segment to exploit differences in cost sensitivity
The colour of oceans

• Kim and Mauborgne (2004, 2005) observed that while, for

Porter, most industries are taken to exist, in reality
entrepreneurs often create industries
• Isaascson (2011) claimed that during his life Steve Jobs, the
famed founder and CEO of Apple, created five new industries
Blue ocean strategy

For Kim and Mauborgne (2004, 2005), the best way to compete
is to create an uncontested ‘blue ocean’, not try to compete in a
‘red ocean’ with fierce competition:
• imagine a blue ocean as one with no sharks swimming in it
• the opposite is trying to compete within an ocean made red by
the ‘blood’ of competition from all the sharks fighting for the
same customers
Conclusion

You should now know about:

• Industrial organizations approach
• Structure-conduct-performance (SCP)
• Five Forces
• Strategic groups
• Generic strategies
References

Isaacson, W. (2011) Steve Jobs: The Exclusive Biography. New

York: Simon & Schuster.
Kim, W.C. and Mauborgne, R. (2004) ‘Blue ocean strategy’,
Harvard Business Review, October.
Kim, W.C. and Mauborgne, R. (2005) Blue Ocean Strategy: How
to Create Uncontested Market Space and Make the
Competition Irrelevant. Boston: Harvard Business School
Press.
Porter, M. (1980) Competitive Strategy: Techniques for Analyzing
Industries and Competitors. New York: Free Press.