POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

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COMPETITIVE STRATEGY
(Summary)

PHILIPPINE BUSINESS ENVIRONMENT MBA 663

Submitted By: Jason Patrick F. Pastrana

Submitted to: Dr. Ofelia M. Carague

Part 1

Chapter 1 Structural Analysis

The essence of formulating competative strategy is relating a company to its environment. It evolves in the five basic competitive forces:

Structural Determinants of the intensity competition Competition in an industry continually work to drive down the rate of return on invested capital toward the competitive floor rate of return or the return that would be earned by the economists perfectly competitive industry.
The following forces are identified: Competition New entrants End users/buyers Suppliers Substitutes Complementary products/ the government/ the public

Threat of Entry New entrants to an industry bring new capacity, the desire to gain market share and often substantial resources. This could lead to price down and profitability. It also depends on the barriers to entry which will define the threat if it is low or high for new entry.

Six Barriers to entry: 1. Economies of scale As a company grows, not all costs increase with it, and some may even go down. Incumbent companies who have economies of scale can hence have a significant cost advantage over new entrants and smaller competitors. Economies of scale can be demand-side or supply-side and may be found in the cost of: Original research Raw materials Manufacturing and production Marketing to larger audiences Shipments and logistics Service and support Attracting talented personnel Overcoming economies of scale requires innovation and bold moves, such as devising lower-cost manufacturing methods or sourcing overseas. In practice, economies of scale are often not as significant as they may appear, as the costs associated with their increasing complexity can significantly offset any reduction in prices paid. 2. Product differentiation When a brand is well-established, it is known to many in the market, and customer loyalty is more common. This leads to lower costs and hence greater profits. Products which are different to others stand out and are the natural choice for those customers who seek what these products offer. With such differentiation and sufficient demand, companies have the choice of charging higher prices or increasing sales through lower prices. Lower prices, which is also a part of how a brand is differentiated, acts as a significant barrier. If you cannot make a product that is any better than one which is currently sold for the price that it is sold at, then entering this market will be very difficult. Overcoming product differentiation barriers often needs strong innovation to create products that leapfrog existing competitor offerings in terms of both functionality and cost. The latter may be achieved through approaches such as parts reduction and assembly simplification. 3. Capital requirements Some industries require significant investment in setting up and operating. Manufacturing, for example, can require large factories and specialist machines. Service also can be costly to set up, for example where a large number of service personnel needs to be recruited, trained and equipped. High capital costs are typical when setting up for the first time. There may also be ongoing capital investments required, for example to cope with rapid changes in technology. Other capital costs include parts inventories, customer credit, and various other start-up losses. Big and cash-rich companies are able to make a large capital investment required, or may be able to raise the funds elsewhere. Even so, this may require careful analysis that could result in a non-entry decision. For smaller companies, capital requirements can be a significant barrier. Overcoming capital requirements may be achieved by starting small and growing organically, from profit, rather than seeking large loans. When rapid growth is essential, this is a less valid approach and collaborative options such as partnering or licensing may be preferable. When there is rapid change in the industry, with such as the need to replace out of date machinery, and incumbents are slow to made needed investments, then this can play to the advantage of new entrants. - Switching Cost: one-time costs facing the buyer of switching from one suppliers products to another.

4. Cost disadvantages As well as capital costs there are all kinds of other types of cost that can give incumbents an advantage and new entrants a headache. These are often independent of the size of the company and can hence give smaller firms a big advantage over new-entrant large companies. Such additional costs/advantages may include: The learning/experience curve gained from trying different things in the marketplace. The sheer extent of how much knowledge is required to operate in the market, and the accessibility of this. Proprietary technology that cannot be copied. Preferential access to limited supplies of materials and parts. Assets bought when they were much cheaper. Advantageous locations, from shopping mall positions to being close to customers. Government subsidies and other national benefits. Overcoming cost disadvantages depends on the size of the cost. One way to help with this is to leverage experience and benefits from an already-successful marketplace elsewhere. Porter notes the importance of the experience curve and differentiates it from the learning curve (gaining skill through simple repetition). Where the rules of doing business are unwritten and different to other markets, then the only way to learn may be through a persistent cycle of trial and failure. Those who have made this journey may jealously guard marketing secrets to help sustain this barrier to entry. 5. Access to distribution channels If you have products which you produce and distribute, and particularly if these channels are held by relatively few players, then you may have difficulty in connecting with these partners or suppliers. It is also possible in developing economies that such channels simply do not exist or cannot be trusted to reliably and safely store and transport goods. One way of overcoming a lack of access to distribution channels is to set up your own. This can be very expensive, but it may provide you with a period of advantage during which you can establish your market position. 6. Government policy Governments in developing economies (and developed economies, for that matter) have a difficult task in both helping their own fledgling industries to develop while also encouraging foreign companies to set up locally. Inward investment helps by . creating more jobs and injecting investment into the wider economy. As a barrier, governments may support local firms to the extent that new entrants find it much harder to find a profitable entry to the market. Local regulations may have subtle bias while other controls may blatantly limit new entrants. Despite the need to support local firms, governments, especially in developed economies, like competition as it improves products for consumers and generally strengthens the economy. Not all governments are uncorrupted and in some countries getting permissions is based more on bribery than law. Governments may also be weak in some areas, for example in protection of intellectual property. In such cases companies with strong IP advantages may choose not to enter a local market where unfettered coping would be rife. When the general law is weak, contracts may not be worth the paper they are written on when suppliers and others can ignore agreements with you at will. Again, this can make market entry more problematic. Overcoming government blockages often needs one's own government to be involved in such as trade agreements and equalization around standards.

Expected retaliation If new entrants to a marketplace are treated seriously by existing firms, they may find themselves under attack by these incumbents. Factors that make retaliation a serious issue for market entrants include: The size of competitors and their ability to attack. The extent and duration of the retaliation. The number of competitors who retaliate. The ability of competitors to control access to resources, key suppliers and market channels. Bias in governments or local bodies towards supporting existing incumbents. Before this happens, when analyzing the market, the expected retaliation increases with:

The impact you will likely have on incumbents' business, for example by taking significant share in a static market. The resources incumbents have that they could use to retaliate. The history of retaliation by incumbents. The likelihood of damaging competitive actions, including loss-making price cuts.

The Entry Deterring Price This condition entry in an industry is the prevailing structure of prices (and related terms such as products quality and service) which just balances the potential rewards from entry (forecast by potential entrant) with the expected costs of overcoming structural entry barriers and risking retaliation. Properties of Entry Barriers: First: entry barriers can and do change as the conditions previously described change. Second: although entry barriers sometimes change for reasons largely outside the firm's control, the firm's strategic decisions also can have a major impact. Lastly: some firms may possess resources or skills which allow them to overcome entry barrier into an industry more cheaply than most other firms. Experience and Scale as entry barriers: Although they often coincide, economies of scale and experience have very different properties as entry barriers. The presence of economies scale always leads to a cost advantage for the large scale firm (or firm that can share activities) over small-scale firms, presupposing that the former have the most efficient facilities, distribution systems, service organizations or other functional activities for their size. While experience is more ethereal entry barrier than scale, because the mere presence of an experience curve does not insure an entry barrier. The limitations for economies of scale are: large scale and lower cost, technological change, commitment and for Experience are: can be nullified by products, pursuit of low cost, more than one strategy on experience curve and aggressive pursuit of cost.

Intensity of Rivalry Among existing competitors.

Rivalry among existing competitors takes the familiar form of jockeying for position - using tactics like price competition, advertising battles, product's introduction, and increased customer service or warranties. Structural factors that intensify rivalry - Numerous or Equally balanced Competitors - Slow Industry Growth - High Fixed or Storage Costs - Lack of Differentiation or Switching Costs - Capacity Augmented in Large Increments - Diverse Competitors - High Strategic Stakes - High Exit Barriers

Shifting Rivalry As industry matures its growth rate declines, resulting in intensified rivalry, declining profits, and (often) a shake-out.

Exit Barriers and Entry Barriers

Barriers and Profitability The best case from the viewpoint of industry profits is one in which entry barriers are high but exit barriers are low. Here entry will be deterred, and unsuccessful competitors will leave the industry. When both entry and exit barriers are high, profit potential is high but is usually accompanied by more risk. Although entry is deterred, unsuccessful firms will stay and fight in the industry.

Pressures from Substitute Products

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. The more attractive the price performance alternative offered by substitutes, the firmer the lid on industry profits.

Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry. Sometimes doing so can be a subtle task, and one which leads the analyst into businesses seemingly far removed from the industry.
'The impact of substitutes can be summarized as the industry's overall elasticity of demand. Bargaining Power of Buyers

Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other-all at the expense of industry profitability. The power of each of the industry's important buyer groups depends on a number of characteristics of its market situation and on the relative importance of its purchases from the industry compared with its overall business. A buyer group is powerful if the following circumstances hold true: - It is concentrated or purchases large volumes relative to seller sales - The products it purchases from the industry represent a significant fraction of the buyer's cost or purchases - The products it purchases from the industry are standard or undifferentiated. - It faces few switching costs - It earns low profits - Buyers pose a credible threat of backward integration - The industry's product is unimportant to the quality of the buyer's products or services - The buyer has full information Altering Buyer Power As the factors described above change with time or as a result of a company's strategic decisions, naturally the power of buyers rises or falls. BARGAINING POWER OF SUPPLIERS Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. A supplier group is powerful if the following apply: - It is dominated by a few companies and is more concentrated than the industry it sells to. - It is not obliged to contend with other substitute products for sale to the industry. - The industry is not an important customer of the supplier group. - The supplier's product is an important input to the buyer's business - The suppliers group poses a credible threat of forward integration - The suppliers group's products are differentiated or it has built up switching costs. Government as a force in Industry Competition

Government has been discussed primarily in terms of its possible impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence industry competition by the policies it adopts. Government can also affect the position of an industry with substitutes through regulations, subsidies, or other means. Thus no structural analysis is complete without a diagnosis of how present and future government policy, at all levels, will affect structural conditions.

Structural Analysis and Competitive Strategy

Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. From a strategic standpoint, the crucial strengths and weaknesses are the firm's posture vis-a-vis the underlying causes of each competitive force. Three Approaches for effective Competitive Strategy - Positioning the firm so that its capabilities provide the best defense against the existing array of competitive forces; - Influencing the balance of forces through strategic moves, thereby improving the firm's relative position; or - Exploiting Change/ anticipating shifts in the factors underlying the forces and responding to them, thereby exploiting change by choosing a strategy appropriate to the new competitive balance before rivals recognize it.

Diversification Strategy The framework for analyzing industry competition can be used in setting diversification strategy. It provides a guide for answering the extremely difficult question inherent in diversification decisions: "What is the potential of this business?" The framework may allow a company to spot an industry with a good future before this good future is reflected in the prices of acquisition candidates.

Structural Analysis and Industry Definition

Structural analysis, by focusing broadly on competition well beyond existing rivals, should reduce the need for debates on where to draw industry boundaries. Any definition of an industry is essentially a choice of where to draw the line between established competitors and substitute products, between existing firms and potential entrants, and between existing firms and suppliers and buyers. Drawing these lines is inherently a matter of degree that has little to do with the choice of strategy. Definition of an industry is not the same as definition of where the firm wants to compete (defining its business), however. Just because the industry is defined broadly, for example, does not mean that the firm can or should compete broadly; and there may be strong benefits to competing in a group of related industries, as has been discussed. Decoupling industry definition and that of the businesses the firm wants to be in will go far in eliminating needless confusion in drawing industry boundaries.

Chapter 2 Generic Competitive Strategies

Three Generic Strategies

In coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry: 1. overall cost leadership - The first strategy is to achieve overall cost leadership in an industry through a set of functional policies aimed at this basic objective. Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on.

2. differentiation - The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industrywide as being unique. 3. focus - The final generic strategy is focusing on a particular buyer group, segment of the product line, or geographic market; as with differentiation, focus may take many forms.

OTHER REQUIREMENTS OF THE GENERIC STRATEGIES

The generic strategies may also require different styles of leadership and can translate into very different corporate cultures and atmospheres. Different sorts of people will be attracted.

Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions-a firm that is "stuck in the middle9'-is in an extremely poor strategic situation.
RISKS OF OVERALL COST LEADERSHIP

Some of these risks are - technological change that nullifies past investments or learning; - low-cost learning by industry newcomers or followers, through imitation or through their ability to invest in stateof- the-art facilities; - inability to see required product or marketing change because of the attention placed on cost; - inflation in costs that narrow the firm's ability to maintain enough of a price differential to offset competitors' brand images or other approaches to differentiation.
RISKS OF DIFFERENTIATION

Differentiation also involves a series of risks: - the cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings; - buyers' need for the differentiating factor falls. This can occur as buyers become more sophisticated; -imitation narrows perceived differentiation, a common occurrence as industries mature.
RISKS OF FOCUS

Focus involves yet another set of risks: - the cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus; - the differences in desired products or services between the strategic target and the market as a whole narrows; -competitors find submarkets within the strategic target and outfocus the focuser.

Chapter 3 A Framework for Competitor Analysis

Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors.
There are four diagnostic components to a competitor analysis 1. future goals - At all levels of management 3. current strategy - How the business is and in multiple dimensions currently competing 2. assumptions - Held about itself and the 4. capabilities - Both Strength and weaknesses industry