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Applying Michael Porter’s extended rivalry model to the robotics industry

Harold Hopkins

Temple University, Philadelphia, Pennsylvania, USA

Abstract Purpose – This paper aims to analyse the robotics industry using Michael Porter’s extended rivalry model. His model assesses the relative strength of buyers, suppliers, potential entrants, substitutes, and rivals for an industry. Such an assessment helps firms determine if a particular industry is attractive and possible ways to successfully compete within the industry. Design/methodology/approach – The robotics industry is used as a case study in the use of the extended rivalry model. Findings – Findings suggest that the robotics industry is only a moderately attractive industry and one possible strategy is for a robotics firm to focus on non-automotive buyers. Research limitations/implications – Implications are that the extended rivalry model is a useful tool for understanding any industry. Practical implications – Practical implications are that the extended rivalry model indicates several possible competitive strategies for firms in the robotics industry. Originality/value – This paper is original. Its value is that it provides an example of how to use Porter’s extended rivalry model.

Keywords Robotics, Competitive analysis, Manufacturing industries

Paper type General review

The extended rivalry model developed by Porter (1980) in his

book, Competitive Strategy, can be applied to any industry. Use

of the model allows an analyst to determine how attractive an

industry is. The more attractive an industry is the greater is

the potential for profit. Second, by determining the strength

of individual forces it is possible to determine the best strategy

to counteract the strongest industry forces. The five forces of the model are the buyers, suppliers, rivals,

potential entrants, and substitutes. Porter provides a list of

structural determinants associated with each force that can be

used to determine the strength of the force. Structural

determinants are durable economic characteristics which help

describe the industry. Normally, when using the extended rivalry model the analyst

is using it with a particular company or type of company in

mind, in the present case, for the purposes of this example, let us

say we are a systems integrator with two lines of products. The

first line consists of systems designed to help the automobile

industry with welding, assembly, and painting. The second

line consists of systems designed to help non-automotive

customers insert items into packages and inspect the final

product. For example, one of our customers is a major candy

company that uses our systems to place individual candy pieces

in the correct position in a candy box.When all the pieces are in

place a system developed by our company with vision capability

checks to make sure everything is exactly where it’s supposed to

be.We also have customerswho sell cosmetics,medical devices,

and food products. We can call our company the XYZ Robot

Company.With Porter’s model rivals would be defined as other

similar companies. Companies like XYZ. Buyers would be the

automobile companies andnon-automotive firms like the candy

company. Suppliers would be the companies that sell the rivals

components and those who provide labor, mainly engineers.

Potential entrantswould be any companies or peoplewhomight

enter the industry. Substitutes would be products or services

fulfilling the same functions as our industry’s products but not

being produced by firms in our industry. To determine the competitive intensity among rivals the

following structural determinants would need to be assessed

according to Porter: number of rivals, potential for product

differentiation, industry growth, exit barriers, existence of

high-fixed costs, balance between rivals, diversity of the rivals,

and the commitment of the rivals to the industry. According to the RIA directory there are approximately

50 systems integrators. Economists classify industries partly

on the number of rivals. A monopoly has only one rival.

Duopoly has two. Oligopoly is an industry where there are a

“handful” of rivals. Perfect or pure competition is where there

is a very high number where each is so small that their actions

have little effect on the industry. The more rivals there are the

higher the competitive pressure coming from the industry

rivals. The robotics industry should probably be considered

an oligopoly. The potential for product differentiation is high.

Products differ in terms of size, power, features, quality,

service, and many other factors. The potential for

differentiation, all others things being equal, reduces the

The current issue and full text archive of this journal is available at

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Industrial Robot: An International Journal

35/5 (2008) 397–399

q Emerald Group Publishing Limited [ISSN 0143-991X]

[DOI 10.1108/01439910810893563]

397

competitive rivalry. A slow rate of growth increases

competitive rivalry since firms have a greater tendency to compete against their rivals and try to steal market share.

It could be said the fixed costs and exit barriers are high because of the large and specialized investments necessary to

be in the industry. If rivals are balanced in terms of size, market share, and resources rivalry is increased. There is little

balance in the industry. Comparing the leader, ABB, to some of the smaller players makes this clear. Rivals are diverse in

terms of their backgrounds and philosophies toward the industry. This makes it less likely they can agree on the “rules of the game.” Most firms are highly committed to the

industry. It does not represent a sideline or minor business for most of the current players. The less committed rivals exited

some years ago when the industry did not live up to its initial optimistic expectations. Taking all these factors into

consideration, you could say there is a moderate level of competitive intensity among the rivals. Certainly it is less than

an industry where there are hundreds or thousands of competitors and the product is a commodity with no potential

for differentiation. The competition, on the other hand, is greater than in an industry like ethical drugs where most competition is based on R&D and marketing. The extended rivalry model considers buyers to be those

who buy directly from the rivals. The structural determinants

for the buyers are: size, number, volume, ability to backward integrate, switching costs, the extent to which the buyer

represents a high percentage of the industry’s total sales, and the availability of substitutes. The auto firms are big, few in

number, buy in great volume, can backward integrate, can use manual labor as a substitute, and represent a large percentage

of total sales. Switching costs, however, may limit buying power through the use of contracts or other factors. In total,

these buyers are very strong. Recall that with Porter’s model the concern is with the power of individual buyers rather than the buyers as a collective. On the other hand, our non-automotive buyers are not as

powerful. These buyers are smaller, larger in number, buy in

smaller volume, and are less likely to backward integrate. In contrast to automotive buyers who are strong, these buyers

are moderate in power. The suppliers can be assessed by looking at a number of

structural determinants similar to those for the buyers. These include: size, number, ability to forward integrate, availability

of substitute products or materials, and the extent to which suppliers products are differentiated. According to the RIA

directory, there are about 150 component suppliers. Many of them are relatively small. Given their small size they are unlikely to forward integrate. In many cases there is no

substitute for what they provide. Some of them, however, do produce products which are highly differentiated. In total

then, they are weak except to the extent that a particular suppler has a differentiated product. Besides, the components

producers, there is also the management and engineering talent that might be in short supply. Looking at the potential entrants requires considering the

barriers to entry as well as those characteristics that are likely

to attract new competitors. Barriers would include economies of scale and scope, need to invest in differentiation,

government regulations, the experience or learning curve, switching costs, and investments required but independent of scale. Characteristics likely to attract newcomers include high

profit or sales growth. Given the spotty record of the industry

on growth and profits and the high barriers to entry, potential

entrants are a weak force. In assessing the threat from substitutes it is important to

examine how well they do the same jobs and their cost. The main substitute is manual labor. In many cases a robot can do a specific job better and faster. On the other hand, a laborer may be more flexible in being able to do a number of different

jobs if union rules permit. If a robot costs $50-100k not including maintenance and lasts 5-7 years and a laborer costs $30-60k per year, the laborer is more costly. However, the

choice between the two really depends on the specific task being considered. For some tasks, there is no robot that can do the job. For other tasks, the robot can do a vastly superior job. Finally, unions may be sensitive to the number of robots being

used in a plant. Taking all these factors into consideration, substitutes can be considered moderate in power. To summarize, our conclusion regarding each of Porter’s

five forces are stated below: 1 Buyers – strong for automotive buyers; moderate for non-

automotive buyers. 2 Rivals – moderate. 3 Suppliers – weak. 4 Potential entrants – weak. 5 Substitutes – moderate.

The most attractive industry would be one where all five forces

are weak. The least attractive would be one where all five forces are strong. The robotics industry, with one force which is either strong or moderate, two moderate forces, and two weak forces, falls in themiddle. It is amoderately attractive industry. Since, it

is moderately attractive it makes sense for us to continue to operate in it. The second major conclusion from this analysis is that automotive buyers are the strongest force. Porter argues

that it is best to avoid powerful buyers if possible. Thus, he would say the XYZRobot should try to emphasize sales to non- automotive buyers as far as possible. So far, the analysis is static. A worthwhile analysis would

have to take into consideration on-going trends in the industry and how these would change the industry forces.

Listed below are questions that need to be answered about possible trends.

Buyers

1 Are buyers becoming more concentrated or more fragmented?

2 Are buyers becoming more or less backward integrated? 3 Are buyers becoming more knowledgeable about the

technology and its costs? 4 Are their needs for the product becoming greater? 5 Are new channels of distribution emerging? 6 Are new means of coordinating with customers emerging? 7 Are there likely to be shifts in customer tastes? 8 Are buyers becoming more adversarial or less?

Suppliers

1 Are suppliers becoming more concentrated or more

fragmented? 2 Are suppliers becoming more or less backward integrated? 3 Are suppliers becoming more knowledgeable about the

technology and its costs? 4 Are new channels of distribution emerging? 5 Are new means of coordinating with suppliers emerging?

Applying Michael Porter’s extended rivalry model

Harold Hopkins

Industrial Robot: An International Journal

Volume 35 · Number 5 · 2008 · 397–399

398

6 Are suppliers becoming more adversarial or less? 7 Are supplier products becomingmore differentiated or less?

Substitutes

1 Are new substitutes emerging? 2 Is the relative price-performance of substitutes improving

or declining? 3 Are new production methods favoring the use of

substitutes?

Potential entrants

1 Are economies of scale and scope increasing or decreasing?

2 Is the market fragmenting into more niches or consolidating into fewer?

3 Will future sales and profits be attractive to outsiders? 4 Will there be more or fewer government regulations in

the future? 5 Will competitors be more concentrated or less

concentrated in the future? 6 Will competitors be more likely or less likely to retaliate

against new entrants? 7 Will new technological developments make it less

expensive to enter the industry? 8 Will the experience and learning of rivals make it more

difficult to enter? 9 Will the loyalty of buyers to current competitors be

more difficult to overcome? 10 Will any of the current competitors exit in the future?

Rivals

1 Will rivals consolidate? 2 Will some firms exit? 3 What will the growth rate be? 4 Will the mix of fixed and variable costs change? 5 Will there be new entrants? 6 Will the market fragment? 7 Will there be new technological developments? 8 Will any current rivals be acquired?

Porter says there are three ways to use the results of an

industry analysis. First, we can position ourselves within the

industry in a place where the competitive forces are weakest.

Second, we can anticipant changes in the industry forces

resulting from evolving trends. Third, we can try to change

the power of the forces by action we take. In the present case,

option number one probably makes the most sense since we

are a relatively small firm and we have yet to identify any

trends in the industry (and the future is unpredictable). Our analysis has identified the buyers as being the strongest

force. Therefore, we must figure out how to position ourselves

against the buyers. There are a number of options. First, we could try to concentrate on weaker buyers. Maybe

we should develop a strategy to focus on non-automotive

buyers. If we did this, we would lose volume but our profit

margins would increase. Second, we could try to build up

switching costs so that our buyers find it more difficult to

switch away from us. We could use long-term contracts,

better service, or provide them with services or products

designed specifically to their needs. We could become more

specialized and focus on certain types of tasks so that our

products benefit from that specialization both in terms of

product performance and reputation. Finally, we could

develop a lower cost structure or more differentiated

product to make it more difficult for buyers to switch from

us to our competitors. Choosing among these depends on the

specific skills and resources of our particular firm.

Reference

Porter, M. (1980), Competitive Strategy: Techniques for

Analyzing Industries and Competitors, The Free Press,

New York, NY.

Corresponding author

Harold Hopkins can be contacted at: dhopkings@temple.

edu

Applying Michael Porter’s extended rivalry model

Harold Hopkins

Industrial Robot: An International Journal

Volume 35 · Number 5 · 2008 · 397–399

399

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