DEALING WITH COMPETITION Competitive forces Michael porter has identified five forces that determine the long run attractiveness of a market or market segment: industry competitors, potential entrants, substitutes, buyers and suppliers. Each of these pose threats as follows 1.
Threat of intense segment rivalry A segment is unattractive if it already contains numerous, strong or aggressive competitors. - It is even more unattractive if it is stable or declining - If plant capacity additions are done in large increments - If fixed costs are high - If exit barriers are high - If competitors have high stake staying in the segment
These conditions lead to frequent price wars, advertising battles and new product introductions, which make it expensive to compete. 2.
Threat of new entrants A segments attractiveness varies with the height of its entry and exit barriers. - The most attractive segment is one which entry barriers are high and exit barriers are low. Few new firms can enter the industry and poor performing firms can easily exit. - when both entry and exit barriers are high, profit potential is high, but firms face more risk because poorer performing firms stay in and fight it out. - when both barriers are low, firms easily enter and leave the industry and the returns are stable and low. - worst case is when entry barriers are low and exit are high. This results in chronic overcapacity and depressed earnings for all.
3.
Threat of substitute products A segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and on profits. If technology advances or competition increases in these substitute industries, prices and profits are likely to fall.
4.
Threat of buyers’ growing bargaining power A segment is unattractive if buyers possess strong or growing bargaining power. Buyers bargaining power grows - when they become more concentrated and organized - when the product is undifferentiated - when buyers switching costs are low
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- when the product presents a significant fraction of the buyers costs - when the buyers are price sensitive because of low profits - when the buyers can integrate upstream To protect themselves, sellers might select buyers who have the least power to negotiate or switch suppliers. A better defense consists of developing superior offers that strong buyers cannot refuse. 5. Threat of suppliers growing bargaining power A segment is unattractive if the company’s suppliers are able to raise prices or reduce the quantities supplied. Suppliers tend to be powerful - when they are concentrated or organized - when there are few substitutes - when the supplied product is an important input - when the cost of switching suppliers are high - when suppliers can integrate downstream The best defenses are to build win-win relations with suppliers or use multiple supply sources. Threat of growing suppliers bargaining power
Threat of New Entrants
Degree of Segment Rivalry
Threat of Substitutes
Threat of growing buyers bargaining power
IDENTIFYING COMPETITORS A company is more likely to be hurt by emerging competitors or new technologies than by current competitors. Many businesses failed to look at the Internet as a
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formidable competitor. Eg web sites versus printed material; physical bookstores versus online stores. INDUSTRY CONCEPT OF COMPETITION An industry is a group of firms that offer a product or class of products that are close substitutes for one another. Industries are classified according to number of sellers, degree of differentiation, presence or absence of entry, mobility and exit barriers; cost structure; degree of vertical integration; and degree of globalization. Number of sellers and degree of differentiation 1. Pure monopoly Only one firm provides a certain product or service in a certain area. 2. Oligopoly a. A small number of large firms produce products that range from highly differentiated to standardized. Pure oligopoly consists of a few companies producing essentially the same commodity. The only way to gain a competitive advantage is through lower costs. Differentiated oligopoly consists of a few companies producing products partially differentiated on the lines of quality, features, styling or services. 3. Monopolistic competition – Many competitors are able to differentiate their offers in whole or in part. Competitors focus on market segments where they can meet customer needs in a superior way and command a price premium 4. Pure competition a. Many competitors offer the same product or service eg commodity market. Because there is no basis for differentiation, competitors prices will be the same. Entry, Mobility And Exit Barriers Industries differ greatly in ease of entry. Major entry barriers include high capital requirements, economies of scale, patents and licensing requirements, scarce locations, raw materials, distributors and reputation requirements. Mobility barriers are faced when a firm tries to enter into more attractive segments Exit barriers include legal and moral obligations to customers, creditors, employees, government restrictions, low asset salvage value, lack of alternative opportunities, high vertical integration and emotional barriers. Cost Structure Each industry has a certain cost burden that shapes its strategic conduct. Eg Toy manufacturing involves heavy distribution and marketing costs. Firms strive to reduce their largest costs.
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Degree of Vertical Integration Vertical integration lowers costs and the company gains a larger share of the value added stream. They can manipulate prices and costs in different parts of the value chain to earn profits. The disadvantage is high costs in some parts of the value chain and a lack of flexibility. Degree of Globalization Some industries are highly local eg lawn care and others global eg oil. Companies in global industries need to compete on global basis if they are to achieve economies of scale and keep up with the latest advances in technology. MARKET CONCEPT OF COMPETITION Using the market approach, competitors are companies that satisfy the same customers need. This reveals a broader set of actual and potential competitors. A company can profile its direct and indirect competitors by mapping the buyers steps in obtaining and using the product. ANALYZING COMPETITORS A firm needs identify its primary competitors, their strategies, objectives, strengths and weaknesses. Strategies – A group of firms following the same strategy in a given target market is called a strategic group. The height of entry barriers differs for each group. If the firm successfully enters a group, the members of that group become its key competitors. Objectives – what the competitors are seeking in the market place? Possible objectives may be maximise current profits, market share growth, cash flow, technological leadership or service leadership. Need to monitor competitors expansion plans Strengths and weaknesses – helps identify where competitor is weak and can be attacked. Eg if competitor is poor in technical assistance, then the firm can attack the market by offering very good technical assistance. Analyse three variables when analyzing competitors - share of market – the competitors share of target market - share of mind – how easily the competitor is remembered by customers - share of heart – customers preference of competitors product/service Companies that make steady gains in mind and heart share inevitably make gains in market share and profitability.
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To improve competitive performance, companies bench their most successful competitors. Benchmarking is the art of learning from companies that perform certain tasks better than other companies. There can be a large difference between the quality, speed and cost performance f a world class company and an average company. The aim of benchmarking is to copy or improve on best practices either within an industry or across industries. SELECTING COMPETITORS A firm can examine competitors and focus its attacks on classes of competitors. Strong versus weak – weak competitors are easy targets because this requires fewer resources per share point gained. Even strong competitors have weaknesses that can be attacked. Close versus distant – most firms compete with others who resemble them the most, yet companies should recognize distant competitors Good versus bad – a firm should support good competitors and attack bad competitors. Good competitors play by the industry rules, set realistic prices, limit themselves to a portion of the market segment, motivate others to lower costs. Bad competitors try to buy share rather than earn it, take large risks and upset industrial equilibrium. COMPETITIVE STRATEGIES Having identified and evaluated its major competitors, the company must now design broad competitive marketing strategies that will best position its offer against competitors offers and gives the company the strongest possible competitive advantage. Each company must determine what makes sense given its position in the industry, its objectives, opportunities and resources. Basic Competitive Strategies Michael Porter suggested four basic strategies that companies might follow. a) Overall cost leadership – firm works to achieve the lowest cost of production and distribution so that it can price lower than its competitors and win a large market share. b) Differentiation – Firm concentrates on creating a highly differentiated product line so that it comes across as the class leader in the industry. c) Focus – Firm focuses its efforts in serving a few market segments rather than going after the whole market. Firms that pursue a clear strategy – one of the above are likely to perform well and make profits. But firms that do not pursue a clear strategy - middle of the Page 5 of 9
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road- do the worst. They try to be good in everything then end up not being good at anything. COMPETITIVE POSITIONS Market leader - the firm which has the largest market share in the relevant product market and usually leads the other firms in price changes, new product introductions, distribution coverage and promotional intensity. Market challenger – a runner up firm in an industry that is fighting hard to increase its market share. Market follower – a firm that is willing to maintain its market share and not rock the boat Market Nichers – firms that serve small market segments not being served by larger firms COMPETITIVE STRATEGIES FOR MARKET LEADERS To remain the leader a firm must - find ways to expand total market demand - protect its current market share through good defensive and offensive actions - try to increase its market share even if the market size remains constant Expanding the Total Market The market leader usually gains when the total market expands. Attracting new customers (get non users to try the product), new uses (discover and promote new uses), getting more usage – (increase the level or frequency of consumption) Defending / Protect market share While trying to expand total market sizes, the dominant firm must continuously defend its current business. This can be done by continous innovation. The leader leads the industry in developing new product and customer services, distribution effectiveness and cost cutting. It keeps increasing competitive strength and value to customers. The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening areas and lessen their intensity. A dominant firm can use six defense strategies: a) Position defense – involves occupying the most desirable market space in the minds of the consumers. Fortifying its current position. b) Flank defense – need to protect the weak front from attack by the competition.
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c) Pre emptive defense – attack before the enemy starts its offense. Preannouncements of new products or services – these signal to other competitors that they will have to fight to gain market share. d) Counter offensive defense – when attacked, most market leaders will invade the attackers territory so that the attacker has to pull back to defend the territory. e) Mobile defense- the leader stretches their domain over new territories that can serve as future centres for defense and offense through market broadening (shifting focus from the current product to the underlying need) and market diversification (shifting into unrelated industries). f) Contraction defense (strategic withdrawal) – giving up weaker territories and reassigning resources to stronger territories. Expand the Market share Market leaders can grow by increasing their market shares further. In many markets, small market share increases mean very large sales increases. Profitability rises with increasing market share. Profitability increases as business gains share relative to competitors in its served market. Higher shares tend to produce higher profitability only when the unit costs fall with increased market share, or, when the company offers a superior quality product and charges a premium price that more than covers the cost of offering higher quality. MARKET CHALLENGER STRATEGIES Firms that are second, third or lower in an industry can sometimes be quite large. They can challenger the leader and other competitors in an aggressive bid for more market share (market challengers). Or they can play along with competitors and not rock the boat (market followers). Competitive strategies for market challengers 1. Defining the strategic objective and the competitor A challenger must first define its strategic objective. Most seek to increase their profitability by increasing the market shares. The strategic objective chosen depends on the competitor the firm has chosen to challenge. a) Challenger can attack the market leader – this is a high risk but potentially high gain strategy that makes good sense if the leader is not serving the market well. To succeed, the challenger must have some sustainable competitive advantage over the leader eg cost advantage leading to lower prices, or ability to provide better value at premium price. The objective of attacking a market leader may be to take over market leadership or to gain a larger market share. b) Challenger can avoid the leader and attack other firms of its own size or smaller firms. These may be underfinanced firms or not serving their Page 7 of 9
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customers well. If challenger goes after a small company, the objective may be to put it out of business. The challenger must choose its opponents carefully and have clearly defined and attainable objective. CHOOSING AN ATTACK STRATEGY A challenger can use five possible attack strategies: a) Frontal attack - Challenger matches the competitors product, advertising, price and distribution efforts. It attacks the competitors strengths rather than its weaknesses. The outcome depends on who has the greater strength and endurance. b) Flanking attack – challenger concentrates its strengths against the competitors weaker flanks(sides) or gaps (weaknesses) in the competitors market offer. This means finding an unserved market segment and filling the void. Flank attacks make good sense when the challenger has fewer resources than the competitor c) Encirclement attack – challenger attacks from front, sides and rear all at once. This strategy makes sense when the challenger has superior resources and believes it can break the competitors hold on the market quickly. d) Bypass attack – challenger bypasses the competitor and targets easier markets. It might diversify into unrelated products, move into new geographic markets or leapfrog into new technologies or replace existing products. In technological leapfrogging, instead of copying the competitors product, the challenger bypasses the competitor with the next technology. e) Guerilla attacks – These are small periodic attacks to harass and demoralize the competitor, with the goal of eventually establishing permanent foot holds. Strategy usually used by smaller or poorly financed challengers. The challenger might use selective price cuts, executive raids, increase promotional outbursts or assorted legal actions. MARKET FOLLOWER STRATEGIES A follower can gain many advantages. The leader often bears the huge costs of developing new products and markets, expanding distribution and educating the market. The follower can learn from the leaders experience and copy or improve the leader’s products and programs, usually with less investment. Although the follower will not overtake the leader, it often can be very profitable. The follower has to define a growth path, but one that does not create competitive retaliation. Follower must know how to hold current customers and win a fair share of new ones. Each follower tries to bring distinctive advantages to its target market – location, services, financing. Followers are often major targets of market challengers. Follower must therefore keep its manufacturing costs low and its product quality and services high. It must also enter new markets as they open up. Page 8 of 9
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MARKET NICHER STRATEGIES Nichers are often firms with limited resources that target subsegments or niches instead of pursuing the whole market. They may be smaller divisions of larger firms. Firms with low market shares of the total market can be highly profitable through smart niching. These firms offer high value, charging a premium price and having strong corporate cultures and vision. Niching is profitable because the market nicher ends up knowing the target group so well that it meets their needs better than other firms that casually sell to this niche. Nichers can hence charge a substantial markup over costs because of the added value. Whereas the mass marketer achieves high volume, the nicher achieves high margins. The key idea in niching is specialization. This can be along any of several market, customer, product or marketing mix lines. Eg a type of end user, few specific customers, a customer size group – all who are neglected by the major players. Niching has risks – the niche could dry up, or could grow to a point that is attracts the larger players. Hence many companies practice multiple niching to increase its survival chances.
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