Industry Based View

field of analysis for organizations to understand values and actors vying for environmental resources.

Finally, Helfat et al. (2007) state that the benefit that companies can obtain through dynamic capabilities depends not only on resources and management capacity, but also on the context in which the capabilities are being operated. So, it is necessary to understand the environment in which companies are inserted. Next, the second pillar of the strategic tripod will be discussed.

In this sense, companies must position themselves in order to adjust their strategy to the industry situation, which is characterized by the relative weight of the five competitive pressures described above. The way the customer sees the product in relation to the competition in terms of quality and price, can lead the company to compete based on low prices (cost competition) or, on the contrary, on higher prices through differentiation (competitive differentiation) – if the customer is willing to pay more for a product that he considers different and to which he attaches greater value. For a company that will enter a new market, the essential concern is how to overcome entry barriers – financial barriers (high initial costs), technical barriers (goods/services that require too much specific knowledge) and legal barriers (patents, licensing, government inspection). After, the other challenge will be how to create barriers to entry for additional competitors.

Figure 2 – Porter’s Five Forces of Competitive Analysis

Source: Own elaboration.

Threat of New Entrants

According to Porter, new companies entering an industry bring with them new production capacity, new technologies, a desire to gain market share, and often substantial resources for investment (Porter, 1979). As a result, prices may decrease or participant costs may increase, reducing consequently the profitability of the business. Companies from other markets (or

5 Forces Model Threat of

EntrantsNew

Threat of Subsitutes

Bargaining Power of

Buyers Bargaining

Power of Suppliers Intensity of Competitive

Rivalry

even from other industries), and that are diversifying through acquisitions in a certain industry, often use their resources to introduce changes, as a differentiating mechanism in relation to current participants. Moreover, the acquisition of an existing company in an industry, with the intention of building a position in the market, should also be seen as an entry, even though no entirely new company has been created.

Some of the main barriers to entry are economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, scale-independent cost disadvantages and government policies. Another factor that deserves to be highlighted is government policy. Through sectoral regulation, the presence of new entrants in a given industry can be curbed or boosted.

Threat of Substitutes

All companies in an industry are competing with companies in other industries that manufacture substitute products. Substitutes reduce an industry's potential returns by putting a ceiling on the prices that companies can profitably charge. Substitutes in an industry are products, services, or solutions, which would not be chosen naturally, but which end up being prioritized in the absence of meeting the quality or price requirements of the initially desired products, services, or solutions (Porter, 1979). According to this author, the substitute products that most demand attention are those that are subject to trends to improve their price-performance ratio vis-à-vis the industry's product or are produced by industries with high profits.

Bargaining Power of Buyers

Buyers can pressure the industry, forcing prices down, bargaining for better quality or more service, and playing competitors against each other, which can undermine the industry's profitability (Porter, 1979). The power of each major group of buyers depends on certain characteristics of the market situation and the relative importance of their purchases compared to their total business. Also, depending on the potential demand that a company has, in different market situations, its bargaining power can be used in order to ensure better conditions in price negotiations, quantity sold, special delivery conditions and even

preventing or limiting the supply of the product to other companies in the sector (Porter, 1979).

Bargaining Power of Suppliers

Suppliers play an important role in all industries. The success and failure of organizations are closely associated with the partnerships established with their suppliers. For this reason, quality concepts and standards increasingly treat suppliers as partners, who must be endorsed and monitored through a relationship that goes beyond the simple purchase and sale of products and services, moving on to the construction of partnership relationships with objectives of mutual gain (Porter, 1979).

Suppliers can exercise bargaining power over industry participants by threatening to raise prices or reduce the quality of the goods and services supplied, including reducing the availability of the good and changing delivery terms. According to Magretta (2012), it is possible to determine whether suppliers “have power”, when they can negotiate prices in their favor, and thus increase your company's profit. The bargaining power of suppliers can be exercised in three ways: increasing prices, decreasing quality, or reducing the availability of their products (Magretta, 2012).

When suppliers are powerful, they can suck the profitability out of an industry, unable to pass on cost increases at their own prices. Furthermore, a powerful supplier, operating in multiple markets, including offering substitute products, can restrict the development of an industry, as it will seek to maximize its total profitability, which may eventually be associated with substitute products. So, we can conclude that the bargaining power of the supplier in an industry affects the competitive environment and the potential benefits of buyers, and this will also consequently affect the internationalization of a company.

Intensity of Competitive Rivalry

According to the definition of Faulkner and Bowman (1995), competition corresponds to the situation of a market in which the different producers/sellers of a certain good (or service), act independently in order to achieve a goal for their business – profits, sales and/or market share – using different instruments, such as price, quality of products/services and

which encourages companies to invest and innovate with a view to maximizing their gains and making optimal use of the scarce resources available. A perfect competitive market is one (ideal case) whose functioning is in accordance with the free play of supply and demand, without State intervention. However, in fact, this does not happen because as new competing companies appear in the market, rivalry increases (Faulkner & Bowman, 1995).

The strength of rivalry intensity refers to the level of competition within the sector itself, which is shaped by competition between competitors, but also by the current regulatory framework. According to Porter (1979), competition tends to be more intense in a sector in which the number of companies is large, even making more, or less, disguised forms of collusion more difficult.

Also, rivalry between competitors can be beneficial or dangerous for a company. Rivalry can be the engine of innovation, creativity, and technological implementation, but it can also be highly destructive, especially if it translates into price battles and unfair attacks between competitors.

The use of tactics to persuade consumers and combat this rivalry more efficiently is a widely used practice. The use of tactics such as price competition, advertising, product introduction and increase in services or customer guarantees, among others, are seen as protection tools and as a barrier to entry.

All these competitive dimensions determine how strong are the competitive pressures that characterize a particular industry (Porter, 1979) as it shows how the economic value created by industry is divided, and that is why the intensity of the five forces that will also influence the company's internationalization decision (Porter, 1979). So, the internationalization strategy of a company and their performance are leveraged by the degree of competitiveness of the sector where this company works (Yamakawa, Peng, & Deeds, 2007). In fact, the heightened competition in the domestic industry can be a motivator for companies to consider embarking on the route of internationalization (Krull, Smith, & Ge, 2012) since the existence of a very competitive internal environment means that for a firm to continue to grow sustainably, it must look for new markets in addition to the one that is already inserted.

In order to better understand the cost leadership strategy as well as the consequent competitive advantage provided by it, it was still considered essential present Porter's (1998) Generic Strategies - Cost, Differentiation and Focus. This allows visualize quite accurately

the different ways in which competitive strategies create the competitive advantage (Porter, 1998).

Figure 3 - Porter's Generic Strategies

Source: Own elaboration based on Porter (1998).

The first Cost strategy is focused on the search for efficiency and maximization of production and volume of a company, in addition to the efficient control of the distribution of advertising income, research and technical assistance (Porter, 1998). In other words, it is when a company seeks to differentiate itself by the low price. Therefore, it needs to do more with less, since its profit is closely linked to its ability to reduce spending on activities that do not generate value. An organization that has total cost leadership offers standardized products with minimal quality standards (Porter, 1998).

The second strategy called Differentiation focuses on investment in image, distribution channels, research, technical training of employees, market research and technical assistance.

This strategy focuses a lot on the customer's perception of value about a product or service (Porter, 1998). Usually, companies that adopt this type of competitive strategy are able to increase their profits. With the added value, it is possible to charge a higher price for the product without losing market share (Porter, 1998).

As a way of improving and strengthening the previous ones even more, the Focus strategy centers actions on selecting a specific target - according to market segmentation and other characteristics - to offer an exclusive product or service to a certain consumer audience, because in this way will be able to achieve unique status by its consumer (Porter, 1998).

Segmentation can be done by geographic market, income group or age group. Companies that adopt the generic strategy approach typically have little global market share but are

Cost Leadership

Cost Focus

Differentiation

Differentiation Focus

Cost Differentiation

BroadNarrow

Source of Competitive Advantage

Scope

leaders in their market bracket. The generic focus strategy is linked to the two previous strategies, and, for that reason, it can be subdivided into (1) focus on cost and (2) focus on differentiation. Each of these subdivisions has the same characteristics mentioned above, however they are applied to a niche or segment (Porter, 1998).

Regardless of the strategy adopted, there are several risks involved, such as imitation by competitors and technological changes. In the cost strategy, companies must ensure that the competitor is not the leader, with innovations in terms of technology and differentiation, which will lead to a greater market share (Porter, 1998). As for the differentiation strategy, care must be taken with the pricing of products or services so as not to overvalue them. For the focus strategy, the company needs to be careful to previously analyze the chosen segment so as not to opt for a certain niche that does not offer an operating margin (Porter, 1998).