Phân tích ngành công nghiệp thuốc lá tại việt nam và lợi thế cạnh tranh của công ty thuốc lá anh mỹ tại việt nam

vietnam national university, HANOI hanoi school of business Ngo Thi Ngoc Anh A STUDY ON TOBACCO INDUSTRY IN VIETNAM AND COMPETITIVE ADVANTAGES OF BRITISH AMERICAN TOBACCO VIETNAM Mas

vietnam national university, HANOI

hanoi school of business

Ngo Thi Ngoc Anh

A STUDY ON TOBACCO INDUSTRY IN VIETNAM AND COMPETITIVE ADVANTAGES OF BRITISH

AMERICAN TOBACCO VIETNAM

Master of business administration thesis

vietnam national university, HANOI

hanoi school of business

Ngo Thi Ngoc Anh

A STUDY ON TOBACCO INDUSTRY IN VIETNAM AND COMPETITIVE ADVANTAGES OF BRITISH

AMERICAN TOBACCO VIETNAM

Major: Business Administration

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT iii

TÓM TẮT iv

TABLE OF CONTENTS v

LIST OF FIGURES ix

LIST OF TABLES x

LIST OF ABBREVIATIONS xi

INTRODUCTION 1

1 THE PROBLEM 1

2 THE OBJECTIVES AND AIM 2

3 RESEARCH QUESTIONS 3

4 SCOPE OF WORK 3

5 DATA SOURCES AND PROCESSING 4

6 METHODS/ APPROACHES 4

7 SIGNIFICANCE 4

8 LIMITATIONS 5

9 EXPECTED FINDINGS 5

10 SHORT INTRODUCTION 5

CHAPTER 1 THEORETICAL FOUNDATION 7

1.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS 8

1.1.1 Political factors 9

1.1.2 Economic factors 9

1.1.3 Social factors 10

1.1.4 Technological factors 10

1.2 INDUSTRY STRUCTURAL DETERMINANTS 10

1.2.1 Threat of entry 13

1.2.2 Intensity of rivalry among existing competitors 21

1.2.3 Pressure from substitute products 27

1.2.4 Bargaining power of buyers 28

1.2.5 Bargaining power of suppliers 31

1.3 SWOT ANALYSIS 33

1.3.1 Strengths 34

1.3.2 Weaknesses 34

1.3.3 Opportunities 34

1.3.4 Threats 34

1.4 COMPETITIVE ADVANTAGES 35

1.4.1 Resources 36

1.4.2 Capabilities 37

1.5 GENERIC COMPETITIVE STRATEGIES 37

1.5.1 Overall cost leadership 38

1.5.2 Differentiation 40

1.5.3 Focus 42

CHAPTER 2 INDUSTRY STRUCTURAL ANALYSIS OF BRITISH AMERICAN TOBACCO VIETNAM 44

2.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS OF TOBACCO INDUSTRY IN VIETNAM 44

2.1.1 Political factors 44

2.1.2 Economic factors 47

2.1.3 Social factors 48

2.1.4 Technological factors 49

2.2 INDUSTRY STRUCTURAL ANALYSIS OF BRITISH AMERICAN TOBACCO VIETNAM 50

2.2.1 Overview on tobacco industry in Vietnam 50

2.2.2 Rivalry among competitors 57

2.3.3 Bargaining power of buyers 67

2.3.4 Bargaining power of suppliers 70

2.3.5 Substitute products 71

2.3.6 Threat of entry 72

CHAPTER 3 MARKET TRENDS OF TOBACCO MARKET IN VIETNAM AND COMPETITIVE ADVANTAGES OF BRITISH AMERICAN TOBACCO VIETNAM 77

3.1 MARKET TRENDS IN VIETNAM 77

3.1.1 Stricter regulations from the government on tobacco industry 77

3.1.2 People will be more health conscious 79

3.1.3 Increasing social pressure from health organizations and from the society 81

3.2 SWOT ANALYSIS OF BRITISH AMERICAN TOBACCO VIETNAM 83

3.2.1 Strengths 84

3.2.2 Weaknesses 85

3.2.3 Threats 86

3.2.4 Opportunities 87 3.3 COMPETITIVE ADVANTAGES OF BRITISH AMERICAN TOBACCO

3.3.1 Resources 88

3.3.2 Capabilities 91

CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS 93

4.1 CONCLUSIONS 93

4.1.1 External environment of tobacco industry in Vietnam 93

4.1.2 Tobacco industry in Vietnam and structural industry analysis of British American Tobacco 93

4.1.3 Market trends and competitive advantages of British American Tobacco Vietnam 95

4.2 RECOMMENDATIONS 96

4.2.1 Competitive strategy of British American Tobacco 96

4.2.2 Recommendations to Vietnamese government control on tobacco industry in Vietnam 105

CONCLUSIONS 107

REFERENCES 108

APPENDIX 109

GLOBAL TOBACCO MARKET OVERVIEW 109

LIST OF FIGURES

Figure 1.1 Strategy formulation process 8

Figure 1.2 External macro environment factors affecting companies 8

Figure 1.3 The Five Competitive forces that determine Industry profitability 11

Figure 1.4 Barriers and Profitability 25

Figure 1.5 SWOT Analysis 35

Figure 1.6 Competitive advantages 36

Figure 1.7 Three Generic Strategies 38

Figure 2.1 GDP growth rate bi-annually of Vietnam from 2002 to 2008 (estimation) 47

Figure 2.2 Vietnam tobacco market price segment – 2005 51

Figure 2.3 Vietnam tobacco market by corporations – 2005 53

Figure 2.4 Absolute cigarette volumes in 36 cities of Vietnam by tobacco companies 56

Figure 2.5 Key contributors in tobacco product quality 61

Figure 2.6 Distribution channels of tobacco companies in Vietnam 67

Figure 2.7 Tobacco manufacturing process 70

Figure 3.1 Graphic health warning 78

Figure 4.1 Snus and snus user 103

Figure A.1 Tobacco global Retail Value Sales % Growth 1999/2004 110

Figure A.2 Tobacco Retail Volume Sales % Growth by Major Market 1999/2004 111

Figure A.3 Global Company Shares of Cigarettes by Retail Volume 2003 112

Figure A.4 Forecast on Cigarettes Retail Volume Sales % Growth by Region -2004/2009 115

LIST OF TABLES

Table 1.1 External macro environment factors with examples 9

Table 2.1 Brands and Tobacco companies by price segment – 2006 58

Table 2.2 Blending types of tobacco 62

Table 3.1 SWOT Analysis of British American Tobacco Vietnam 83

Table A.1 Global Company Shares of Cigarettes by Volume 2001-2003 114

LIST OF ABBREVIATIONS

BATV British American Tobacco Vietnam

PMI Philip Morris International

JTI Japan Tobacco Incorporation

SWOT Strengths, Weaknesses, Opportunities, Threats HORECA Hotels – Restaurants – Cafés

R&D Research and Development

VND Vietnam Dong

GDP Gross Domestic Product

VFM Value for Money

DNP Duty Not Paid

INTRODUCTION

1 THE PROBLEM

Firstly, tobacco industry is a social controversial yet highly profitable industry The product nature of tobacco is harmful for health Since this fact is already proven by researches and statistics data of tobacco related diseases, tobacco industry in the world is facing increasing opposition from health and social organizations and governments However, this industry is getting high profit margin compared to many other industries In short, this industry is a distinctive industry with high profitability but is facing with increasing social pressure, leading to declined market

Secondly, tobacco market in Vietnam is expanding, but in the future tobacco demand tends to decrease Tobacco market in Vietnam is currently expanding with high smoking incidence of 55% (Smoking incidence is the ratio of smokers per people at the smoking age from eighteen to sixty five years old In Vietnam, this ratio is calculated among men only because the number of women smokers is too small to measure) [Euromonitor, tobacco industry, 2005] According to General Consumer Survey carried out by AC Nielson, this smoking incidence is higher than 60% The market volume grows at 3% annually for the past five years, according to statistics from Retail Audit in tobacco market However, rising income and higher health awareness among Vietnamese people, together with government control and pressure from social organizations will change this current increasing trend into a downtrend future

Last but not least, competition in tobacco market in Vietnam is becoming fiercer Because tobacco markets in developed countries are declining, international tobacco companies must seek growth from developing countries markets like in Vietnam Currently, there are four foreign tobacco companies and one local tobacco corporation operating in Vietnam market Illegally imported products are one participant in the market as well It is not to mention that new entrants could find their way into the market All are trying to enlarge their pieces in this market, making the industry more competitive

All these above mentioned reasons necessitate a study on tobacco industry in Vietnam and recommend the appropriate competitive strategy for British American Tobacco Vietnam

2 THE OBJECTIVES AND AIM

This thesis aims at:

 Analyzing the external macro environment of tobacco industry in Vietnam

 Analyzing the impact of Vietnam tobacco industry structure on British American Tobacco Vietnam (BATV)

 Analyzing BATV competitive advantages in Vietnam market

 Recommending competitive strategy for BATV

The study will revise the theoretical foundation of external macro environment analysis, industry structural analysis and competitive strategy, thus applying into Vietnam tobacco industry and the competitive advantages of British American

Tobacco Vietnam From that, the study could recommend on how the company could enhance and build its competitive strategy effectively

3 RESEARCH QUESTIONS

The research has the following questions to answer:

 How are the factors of the external macro environment in Vietnam tobacco industry and their influence on BATV?

 How are the impacts of tobacco industry structure on BATV?

 What are the current competitive advantages of British American Tobacco Vietnam in Vietnam tobacco market?

 How to better define BATV competitive strategy in Vietnam tobacco market?

4 SCOPE OF WORK

The thesis studies tobacco industry in Vietnam in the past three years, including analyzing external macro environment of the industry at present, industry structural impact on the company, Vietnam tobacco market trends and the competitive advantages of BATV Michael E Porter‟s Five Forces and the Generic Competitive Strategy are theoretical foundations for the study

5 DATA SOURCES AND PROCESSING

This thesis focuses on using secondary data to analyze the tobacco industry in Vietnam based on theoretical foundation Data and information on Vietnam tobacco market could be found in General Consumer Survey in tobacco market and retail audit by AC Nielson in 2005

Besides, other international tobacco sources of information are referred to forecast the trend of tobacco industry in Vietnam These sources are Tobacco reports website; social organizations‟ reports on tobacco industry, Euromonitor report on tobacco industry in the world

Other inputs are from consulting with people working in the tobacco industry and non-profit organizations

6 METHODS/ APPROACHES

The method used in this thesis is empirical, using theoretical foundation of External Macro Environment analysis, Industry Structure analysis and Generic Competitive Strategy to apply in Vietnam tobacco industry and British American Tobacco Vietnam analysis

7 SIGNIFICANCE

This study benefits the company (British American Tobacco Vietnam) in reviewing and better understanding the impact of external environment factors and industry

structure on the company, its competitive advantages, thus paving the way for its sharpening of competitive strategy

In addition, this thesis could serve as reference to the theory on external environment analysis, industry structural analysis and competitive strategy theory with theoretical application on a specific industry and a specific company in Vietnam market

8 LIMITATIONS

Due to the distinctive characteristic of tobacco product, data and information about this industry is hard to get for better illustrating the analysis The thesis focuses on the case of BATV only but could not analyze its competitors with detailed information and data since information on competitors is either hard to get or has low level of accuracy

9 EXPECTED FINDINGS

From the pre-determined problem and objectives of this study, it is expected to effectively apply theoretical foundations into analyzing external environment, industry structural impact on BATV, together with the company competitive advantages, from then to properly recommend BATV competitive strategy

10 SHORT INTRODUCTION

The introduction provides an overview of the thesis, its background, necessity, purpose and contributions

Chapter one reviews the theory of external macro environment analysis, Michael E Porter‟s industry structural analysis, company‟s competitive advantages and three generic competitive strategies

Chapter two analyzes external macro environment of tobacco industry in Vietnam and Vietnam tobacco industry structure on BATV

Chapter three analyzes the market trends of tobacco market in Vietnam, SWOT analysis and competitive advantages of British American Tobacco Vietnam

The last chapter gives out conclusions of the above findings and recommendations

on BAT Vietnam‟s competitive strategy

CHAPTER 1 THEORETICAL FOUNDATION

To analyze the external macro environment, the PEST (Political, Economic, Social and Technology) model is applied as it covers all the external factors impact on the industry To analyze the industry and competitive advantages, from then to build competitive strategy, Michael Porter theory is reviewed and applied These models are most comprehensive and applicable in meeting this thesis‟ objectives and aims

External macro environment analysis

Company's competitive advantages analysis

utilize resource

Strategy formulation Choose one of three generic strategies

Figure 1.1 Strategy formulation process

1.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS

In order to analyze the external macro environment around the company, the PEST analysis, covering the Political, Economic, Social and Technology factors which affect the firm is applied Such factors are usually beyond the company control, which are sometimes opportunities for the company to take advantage of, sometimes are threats that the company needs to address

The number of external factors is actually unlimited and ever-changing The company should prioritize and monitor factors which have the most impact on it and accept a certain level of accuracy in forecasting

Political factors

Social factors

Economic factors

Environmental factors

Figure 1.2 External macro environment factors affecting companies

Table 1.1 External macro environment factors with examples

Factors Examples of factors

Political factors

Political stability Employment laws Environmental regulations Trade restrictions, tariff and taxation Pricing regulations

Industrial safety regulations

Economic factors

Economic growth Interest rates Exchange rates Inflation rate Labor cost Discretionary income

Social factors

Demographics Population growth rate Class structure

Culture (social perception, gender roles…) Attitudes (health, environmental consciousness Leisure interest

Technological

factors

Research and Development activity Technology impact on product offering Technology incentives

Rate of technology change

1.1.1 Political factors

Political factors include government regulations and legal issues under which the company is operating These factors could be tax policy, employment laws, environmental regulations, trade restrictions and tariffs, political stability

1.1.2 Economic factors

Economic factors affect the purchasing power of potential customers and the firm‟s cost of capital Some examples of economic factors are economic growth, interest

1.1.3 Social factors

Social factors include the demographic and cultural aspects of the external environment, which impact customer needs and the size of potential markets These factors could be health consciousness, population growth rate, age distribution, career attitudes, and emphasis on safety

macro-1.1.4 Technological factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions Some technological factors include Research and Development activity, automation, technology incentives, rate

of technology change

1.2 INDUSTRY STRUCTURAL DETERMINANTS

“The essence of formulating competitive strategy is relating a company to its environment” [Michael E.Porter (1998), "Competitive advantage - Creating and sustaining superior performance"] Its environment here could be understood as economic, political, social surroundings as well as competitions and substitute products However, with the aim of formulating competitive strategy, environment does not necessarily mean the total environment for the firm but focus on the industry it operates in Because other forces outside the industry exert their impacts

to all firms while industry factors strongly influence the competitive game among firms in that industry

Industry structure is not merely competitors‟ structure, whether competition is concentrated or fragmented but involves the underlying economic structures which

Figure 1.3 The Five Competitive forces that determine Industry profitability

(Source: Michael E Porter, "Competitive Advantage - Creating and sustaining superior performance", 1998, p.5)

The collective impact of their five forces results in the profitability available to firms in the industry Very apparently, different industries get different returns on investment The reason lies in the industry structure with collective strengths of the five forces Intense industries like industrial products (tires, paper) get small return

The goal of a firm is to find a position in the industry where that firm could best defend against the industry‟s competitive forces or can influence them in its favor Analyzing the sources of these five forces will help the firm evaluate strengths and weaknesses of the firm itself, thus better understand its position in the industry From this clear picture of the industry and its position, the company could identify the areas to build its strategy so that its efforts could generate the greatest payoff In one industry, different companies enjoy different return on investment

The very first step of analyzing structural five forces of industry is to define what is covered in “industry” By definition, “industry is a group of firms producing products that are close substitutes for each other” The substitutes in this definition have caused some controversies over the boundary of an industry How close a product to the other is defined as “substitute product”? The five forces will better define the industry boundary as substitute products is also one of the five forces

As mentioned earlier, competition in an industry will gradually drive down the average rate of return in the whole industry The limitation of this rate of return is

“the competitive floor rate” which is the adjusted free market return (yield on long term government securities adjusted upward by the risk of capital loss) Investors will not accept return below this rate in the long-term since they always have alternative option to invest in low risk government securities Industries with return rate higher than this competitive floor rate will attract capital flow through new entry or additional investment in existing players In this sense, substitute could also lead to lower profitability, creating a harder time for the company to gain its market share Bargaining power of suppliers, power of buyers is of no exception They all eat up in the firm profitability Therefore, this five forces analysis provides a broader sense of rivalry than the mere competition among direct competitors All the five competitive forces determine the intensity of industry competition and

There is no evidence for which force is stronger than the other The power of each force depends on the industry and the company situation For instance, a very strong company without direct rivalry could still faces the potential threat of a superior substitute product Or an industry without clear substitute product, entry is blocked

by strict regulation could still earn low profit ratio due to intense rivalry from current competitors

1.2.1 Threat of entry

An attractive industry with rate of return higher than the competitive floor rate and without any restriction on new entrants will bring in new players to the field New entrants bring in new resources: capital, human resources and others to create more products This will certainly impact the industry in the long term: price might be driven down; price of input factors may be inflated All results in profitability reduction of the existing firms In fact, new entrants are as “dangerous” to the company as current powerful competitors The new ones often start with a strong desire to gain market share

New entrants are not necessarily totally new firms An acquisition could be seen as new entrant although no new unit is created The acquisition will probably turn the existing firm into a more competitive one than the old company Even if it takes time, new blood in existing company often means new player

To assess possibility of new entrants, barriers to entry should be analyzed Together with retaliation – the possible reaction from existing companies in the industry, barriers to entry make the potential new entrant to evaluate the case before it make

up its mind to join the battlefield

According to M.E Porter, there are six major sources of barriers to entry:

(1) Economies of Scale “refer to declines in unit costs of a product (or operation or

function that goes into producing a product) as the absolute volume per period increases”

Obviously, reduction in cost per unit is a result of a large scale production This serves as an entry barrier since it requires new entrants to come up with large volume production in order to be competitive They may have to invest in modern equipment but are not certain of their success in penetrating the market yet The decision to invest in large scale production put new firms in a considerable risk This case is most relevant when existing firms are competing by cost New entrants could hardly invest in a big volume, unless they could come up with something different to charge consumers higher than the very competitive price of competitors This situation will be discussed in more details in the Generic Strategies part

Scale economies could be achieved in various functions such as manufacturing, marketing, procurement, distribution It depends on industry that scale economies in which function play a more vital role than in other functions For example, in mainframe computer industry, scale economies in production are more crucial than

in other functions

Multi-business companies could create economies of scale by sharing the cost among various business units Diversification in one corporation composed of various related businesses could overcome the volume constraints of one specific industry size Since the demand of one product line is limited and competition sometimes requires firms to come up with more cost saving thank to a bigger-than-

Another case of cost saving is joint cost An example of air passenger services and air cargo could better illustrate joint cost The technological constraints allow a fixed certain space for passenger Air craft designer could not exchange cargo space for passenger space although the revenue from passenger is higher, obviously With the many cost in the airline industry, companies who have both services of passenger and cargo are much more competitive than firms providing only one service thank to the joint cost of two services Another example is when joint cost

is shared to build and maintain an umbrella brand for several products In this case, business units share intangible assets and achieve scale economies by joint cost

Vertical integration also brings about scale economies Entrants could hardly penetrate and survive in an industry in which established competitors are integrated They buy input factors in-house and/or sell products to in-house customers It is common sense that entrants could not get input price at the same price as existing competitors sell to other business units in their companies Entrants must choose to integrate or compete in a cost disadvantage position They sometimes have to face the foreclosure situation when they could not get inputs for its products since no companies in the industry would like to have more competitors

(2) Product differentiation “means that established firms have brand identification

and customer loyalties, which stem from past advertising, customer service, product differences, or simply being first into the industry” [Michael E.Porter (1998),

"Competitive advantage - Creating and sustaining superior performance"]

To overcome brand identification and customer loyalties is a tough and challenging job for new comers They have to spend quite a lot of investment and time to persuade customers Spending money in brand building is a risk to consider since if

investment or in case they fail to build their brand, there is no salvage value to collect back

Product differentiation shows its significance in industries where customers trust is crucial such as cosmetics, over the counter drugs

(3) Capital requirement This point is partly raised in the economies of scale and

product differentiation To overcome these two barriers, new companies must have sufficient capital and cash flow, especially when these investments are unrecoverable like brand building budget as mentioned above

For instance, when a new entrant attempts to build product differentiation, it must spend some up-front investment in R&D to come up with a differentiated product

A lot of companies have gone bankrupt because of cash flow issues They do not have enough cash to maintain inventories, to cover start up losses, to provide customer credit

An interesting example of Xerox is well suitable for this capital requirement entry barrier Xerox chose to rent copiers rather than selling them, which is more pleasant

to their customers while building a substantial barrier to entry Since this company has already had a firm foothold and strong working capital, it could implement that program New entry must rethink to enter this industry when thinking of how to manage their working capital to rent copiers like Xerox

Or to compete with Ikea furniture and accessories store chain, potential entrants must plan for a strong financial backup to compete with a range of mega malls which sell nearly everything in a house of Ikea, from bed, kitchen to small

(4) Switching cost Customers are always the center of every business; so many

companies did come up with various ways to create a strong engagement with customers One of these options is to create switching cost – which is “one time cost facing the buyer of switching from one supplier‟s product to another

If new competitors would like to attract customers from existing companies, they must have something else to offset that switching cost, like lower price or outstanding differences in product

An illustration is in household gas industry, the new gas provider must be willing to provide consumers with their new tank If not, consumers will not change to the new provider and have to buy a new tank on their own

(5) Access to distribution channel Distribution channel is very important to fast

moving consumer goods Looking at the case of Unilever or P&G, they nearly block all shelves in supermarkets in Vietnam and their distribution network is so intense that very few new comers could get to consumers successfully

(6) Cost Disadvantages Independent of Scale Cost advantages might stem from

other reason other than scale Some established firms could possess cost advantages irrelevant to their size The most critical sources of these cost advantages are proprietary product technology, favorable access to raw materials, favorable locations, government subsidies, learning or experience curve

Proprietary product technology is product know-how or design pattern that are protected through patent, license This case usually happens in pharmaceutical industry where one firm could hold the patent for a particular drug over a certain

R&D to come up with the new formula of drug, this formula could be produced by other companies During the time of protection, the firm holding the proprietary rights should make the most use of that barrier before entry coming in

Favorable access to raw materials could be seen easily as an outstanding benefit to the firm In mining or oil industry, when one firm has gained control over a mineral mine or oil deposits for a long period of time, it could ensure its inputs supply and price Although the price in the market may fluctuate or increase, that firm still could be sure about its performance

Favorable locations are important to business, especially in travel, hotel and retail business Established companies could well cover the strategic locations before new companies enter and bid up the prices higher Mc Donald, KFC, Seven Eleven are real example of locking favorable location in fast food and retail industry

It is quite easy to understand how government subsidies could be a favorable condition for existing firms and a huge barrier for new companies All businesses are under government supervision and control Getting government subsidies is not prominent but once firm gets it, it could well rest and do not have to worry much about new entrants

In some industry, there is an observed tendency for unit cost to decline as the firm gains more cumulative experience in producing a product Cost reduced thank to the fact that workers could cumulate their skills and experience and could handle the works better In hand made jewelry industry, for example, well skilled craft man could create finer products at less time than new employees Experience can lower cost not only in production but also in marketing, distribution, logistics and so on

experience Economies of scale are dependent on volume per period, not on cumulative volume Often these two could occur together and are hard to separate sometimes

However, when these advantages from experience could be kept proprietary by established firms, then their effect could lead to entry barriers If experience advantage is purely from people, new entrants could simply hunt these people from established firms to get the competitive advantage of the existing ones

Government policy is also a barrier to entry Government could limit or foreclose entry in some industries such as tobacco, liquor, mining, and hydropower and strictly control them Other ways that government could exert its impact on industry

is to limit on access to raw materials (like minerals mine, oil mine) or apply environmental protection standards such as air and water pollution level, product safety and others For instance, in the case of air pollution limitation, these regulations create barrier to entry by requiring new firms to invest a certain a mount

of money to process waste water

Expected reaction from existing companies

Before entering an industry, new entrants always have to consider the reaction of existing players In order to do that, potential competitors will look at the current performance, financial situation, the connection of established firms with their parent companies and so on to have a picture of how the battle in this industry will

be Certainly, expected retaliation from existing firms must be a factor deterring new firms‟ intention to join the industry Conditions that signal the likelihood of retaliation are as follows:

History tells about fierce reaction from existing firms toward new penetration

Resources of existing firms, especially in terms of cash flow, financial power, production capacity, distribution breadth and depth could signal how the old ones will do to the new ones

The exit barrier of existing firms is also necessary to be considered If their equipment is hard to liquidate, their commitment to the industry must be high, resulting in a stronger will to fight against the new firms that intend to take some parts of their pie

Industry growth shows how the pie could be divided If the growth is slow or stagnant, new entrants mean smaller part of the same or nearly same pie So, existing companies are likely to react strong toward the new comers

Change of entry barriers

Entry barriers are not tangible like rigid barriers in the race field but can and do change as the conditions change Moreover, these barriers sometimes depends on entrants perceptions and entrants risk averseness level

In other cases, entry barriers change because of the established firms‟ strategic decisions When these firms decide to integrate vertically into their input business, new entrants will surely be impacted and need to reconsider their decisions to join that industry or not

Moreover, some existing advantages could help new entrants to overcome entry barriers easier than others For instance, a company with wide and firm distribution network in toiletries will find itself easier than other companies to launch a new cosmetic range because it could leverage its advantage in distribution Of course, this company must consider other factors of production, financial capability etc but when comparing to other firms which start from scratch, it has a certain privilege

1.2.2 Intensity of rivalry among existing competitors

Rivalry occurs because no firm wants to stand still in its position in the industry It has the pressure or has the ambition to change its position in a better move One firm move creates a domino effect on other firms Most of the time, other competitors will react to one firm‟s move; it could be a tough retaliation or a counter action toward the move

In every day TV commercials, people see a new advertisement on promotion or a lucky draw of one detergent brand Few weeks later, people will see another lucky draw with bigger prize or a new Free of charge scheme from its competition brand etc This pattern of action followed by reaction may lead the players to a better position or not Sometimes, a price war is so cruel that all firms in the industry suffer and be worse off Consumers benefit from the low price but it is not the case for these firms Price cut by one firm is quickly and easily matched by other firms, resulting in profitability reduction Advertising battle, on the other hand, if handled effectively might enhance consumers‟ demand, which benefit the whole industry

Intensity of rivalry among competitors in one industry is determined by a number of factors:

(1) Competition structure When there are numerous and equally balanced

competitors, some firms may have intention to take the moves and think that they will not be noticed and retaliation would not happen Or firms could realize that they could fight the equally strong competitors to become market leader On the contrary, in a highly concentrated industry, dominated by one or a few firms, these leaders could impose the game rules and fight is less likely to occur

(2) Slow industry growth, again, exerts the same impact on rivalry among existing

competitors than on potential new entrants Firms in a slow growth industry must seek expansion by gaining market share from their current competitors

(3) High fixed or storage costs create strong pressure for firms to push volume to

the market, resulting in more competition Agricultural products are a common example of high storage cost This type of product, once produced, is quite costly to store Therefore, firms will be more tempted to reduce price in order to push sales out to the market, rather than keeping the goods and bear storage costs

(4) Lack of differentiation or switching cost Choice to buy which product in the

industry will depend largely on price and service when this product is perceived as a commodity or near commodity, lack of differentiation Price and service become the main product choice drivers, creating pressures for price or service competition In this case, some firms could build up switching cost to offset this high volatility in losing customers

(5) Capacity augmented in large increments in an industry could disrupt industry

supply and demand balance Economies of scale dictate that firms could reduce their unit cost by adding large capacity; and firms are striving to push their

augmented capacity to the market, resulting periods of over supply Rivalry must be more intense to in time of over capacity

(6) Competitors diversion in strategies, origins, personalities and relationships to

their parent companies means different competitive goals and strategies Competitive strategy analysis could help them better understand the other competitors but they will certainly find a hard time in reading accurately their rivals‟ strategies Industry must take some times to shape its rules of the game

(7) High strategic stakes sometimes distort the competition game in an industry

Quite often, a diversified firm must gain successful rooting in one market just to build its global prestige or technological credibility It may even sacrifice profitability to penetrate and gain market share This case certainly brings existing competitors a tough time to deal with Examples could be seen in the cases of non-

US firms like Bosch or Philips which desired to establish a solid position in the US market to build its international prestige and expansion

(8) High Exit barriers could be economic, strategic or even emotional factors

Industry could be seen as a garden with entry barriers and exit barriers, in which companies entering must satisfy a certain factors and similarly for companies exiting The major sources of exit barriers could be: (1) specialized assets which is very particular to a business or a location, thus, is difficult to liquidate at satisfactory value; (2) fixed cost of exit may encompasses labor agreements, resettlement costs; (3) strategic interrelationships of the firm as a business unit in the whole corporation in terms of shared resources and others also play a part in the firm decision to quit the industry; (4) emotional barriers is sometimes quite a big challenge for the owners or managers to admit their failure; (5) government and

social restrictions, again, with concern for job loss or relevant economic effects, impose some restriction to discourage firms‟ exit

High exit barriers mean more difficulties for a firm to quit the playground even when it is weak already This situation may result in unhealthy competition and tactics which in turn affects the profitability of that industry

Entry and exit barriers

The joint level of exit and entry barriers is an important factor to consider in the analysis of an industry They are in fact closely interrelated A firm following economies of scale will invest in fixed cost assets, or specialized assets or proprietary technology, which create the exit barriers for that firm It is the relationship between input and output of an investment in business

The figure 1.4 below illustrates the simplified cases in which exit and entry barriers are either high or low High entry deters entrants while low entry implies new players could join the industry High exit means unsuccessful firms might stay and fight in the industry, creating risks for the established ones Low exit allow these

„losers‟ to divest, leaving a healthy competitive industry

Low, stable returns Low, risky returns

High, stable returns High, risky returns

Figure 1.4 Barriers and Profitability

From the industry‟s viewpoint, the best case is when entry is high and exit is low Unsuccessful companies will leave the industry and new entrants are deterred, leading to the case of high profitability and stable returns

When barriers are high, profitability is also high thanked to fewer new penetrations but competition may be distorted by weak companies which do not leave the industry because of high exit barriers

The worst case of low entry, high exit is when profitability is low and high risk The other case of low entry, low exit is not very interesting for a business, or an industry

Shifting rivalry

These above mentioned factors, in this ever-changing environment could and actually do change A conventional example could be seen in the industry maturity When the industry is new, the pie is there for all to take their parts The pie will grow to create more rooms for competition until the maturity phase, growth rate declines, new entrants may still have temptation to enter Existing firms will face a more intense rivalry, resulting in declined profitability, event to some necessary exits

In the boom of information technology, so many new IT companies were established; many of them become blue chips in the stock exchange Then, many of these blue chips lost their price due to profitability erosion

Change could be brought about by a new comer from an acquisition with different

„personality‟, different strategy and different resources

Although a company operates in one industry and needs to live with the rivalry intensity of that industry, it still could create more cushions to improve its competitiveness, which is “strategic shifts” It depends on which type of motivations behind the industry rivalry that a company should choose its appropriate strategic shifts Examples of strategic shifts are cases in which a company provides engineering assistance and intensive training to customers such

as Caterpillar with a wide and committed dealer network to create big switching cost; or a company could raise product differentiation through marketing innovation, added services and so on To avoid confrontation with a competitor with high exit barrier is a preemptive calculation not to face bitter price war with

that company Or a company could simply focus it efforts on the fast growing segment within an industry to sidestep involvement in intense rivalry

1.2.3 Pressure from substitute products

All firms in an industry must be competing with substitute products Substitutes, in

a broad sense, are other products that perform the same function as the products of the industry

Substitute product place a ceiling price on the product firms in this industry could charge When consumers have an alternative option of substitutes, the competition game in this industry becomes more complicated

For example, there are several ways for individual investors to invest their money: insurance policies, real estate, saving account etc In Vietnam, when the securities market emerged and developed in the last 5 years, securities become a substitute for other traditional ways of investment And demand for investment in real estate or putting in saving account in banks decreased significantly

Firms must pay the most attention to the substitute products which (1) “are subject

to trends improving their price-performance tradeoff with the industry products or (2) are produced by industries earning high profits”

The former case is quite straightforward since when substitute products of one product have better price – performance tradeoff, this product will automatically become less competitive

In the latter case, industry with high profit is obviously so attractive that competition in this „substitute industry‟ become intense rapidly, resulting in price reduction and product improvement, which in turn create unfavorable conditions to firms in the industry

The strategic decision on how to confront substitute is quite different from rivalry within industry The solutions could be to directly fight against substitute or to live together with it

Example could better illustrate this In the security guard service, there emerges the electronic alarm system as substitute to men guards While labor guard is increasing

in price and need continuous management, alarm system gradually enhances product through technology improvement and reduces cost The effective solution for companies in security guard firms is to design packages of guards together with electronic alarm system They definitely should not confront and fight against the new technology trend of electronic system because it will end up worse off for them By becoming distributors for electronic alarm system, they are much better off by gaining margin from the electronic system distribution and maintain their security guards services

1.2.4 Bargaining power of buyers

Buyers, being the source of revenue and profit for firms, also „compete‟ with firms for profitability in an industry by demanding for better quality and service at a lower price The presence of various competitors and substitute products create favorable conditions for buyers to implement their bargaining power, which impact the industry profitability

The power of buyer group depends on a variety of factors They could become powerful in bargaining under the following circumstances:

(1) It is concentrated or purchases large volume relative to seller sales When

buyers are concentrated, their total purchase volume is big, thus creating the same effect as one buyer purchases large volume

(2) The products it purchases from the industry represent a significant fraction

of the buyer’s costs or purchases Gaining a favorable price for this product will

help that buyer dramatically reduces its product‟s costs Therefore, it will buy more selectively and try harder to bargain

(3) The product it purchases from the industry is standard or undifferentiated

Buyers could source for a wide range of suppliers for a standard product and it is itself a bargaining fact for buyer

(4) It faces few switching cost Without an additional cost to change supplier, a

buyer could simply look for other alternative If the product does not possess many differences, seller should build up switching cost for buyer to lower buyer‟s bargaining power

(5) It earns low profits A not so good profit does not allow a buyer to purchase

without making sure that the price is very competitive already Suppliers of Chrysler often complain that they are squeezed for lower price and better delivery

(6) Buyers pose a credible threat of backward integration This case could be

illustrated by the case of General Motors It produces some parts of its components

needs and purchases the rest from outside It is called “tapered integration” With this, General Motor could not only use the threat of self manufacture or backward integration as a bargaining leverage but also could understand much more about costing of its components which certainly help in negotiation In some cases, seller could use the threat of forward integration as leverage to gain a more neutralized position

(7) The industry’s product is not important to the quality of the buyers’ products or services Buyers are less price-sensitive for the inputs which do not

contribute much to its end products

(8) Buyer has full information In negotiation, information always plays a vital

role When buyer has full information about the industry, its seller‟s cost, market demand and others, it could have a better position in bargaining

(9) Buyers, being retailers, could influence consumers’ purchasing decisions The

final sources of revenue and profit for firms in an industry are from consumers Therefore, if retailers are a credible source of purchasing advice for consumers, they can gain significant bargaining power with the manufacturers Products such as jewelry, cosmetics, and sport equipment are areas where retailers could practice this power

Altering buyers‟ power

As many others, these above mentioned factors could and do change, making buyer power change In ready to wear mainstream clothing industry, big buyers are now department store chain, clothing store chain which are more concentrated and could

about much differentiation or build any substantial switching cost The result is that this industry suffers a falling margin

A company could use the strategy of selecting its buyers so that it could influence the buyers or the buyers could not impose power on it

1.2.5 Bargaining power of suppliers

Suppliers could impact firms in an industry through price and quality of products or services they provide These factors will impact these firms‟ profitability

Supplier power is a mirror of buyer power The conditions that make suppliers powerful are as follows:

(1) Supplier group is dominated by a few companies and is more concentrated

than the industry it sells to A concentrated group is often easier to reach consensus and exercise higher bargaining power Also, fragmented buyers are easier to be influenced than concentrated buyers

The OPEC (Organization of the Petroleum Exporting Countries) was established to strengthen the crude oil suppliers group and pose greater bargaining power over the buyers

(2) It is not obliged to contend with other substitute products for sale to the

industry Substitute product is a competitive force in the supplier‟s industry structure Not having to compete with substitute is a power of supplier