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Strategic Management and Business Policy Unit 11

Sikkim Manipal University Page No. 279

Unit 11 Industry and Competition Analysis

Structure

11.1 Introduction

11.2 Caselet

Objectives

11.3 Definition of Industry

11.4 Industry Types and Structure

11.5 Industry Structure and Competitive Strategy

11.6 How to Conduct Industry Analysis11.7 Identifying Competitors

11.8 Models of Competition

11.9 Porters Competitive Threat Model

11.10 Competitive Advantage Analysis

11.11 Case Study

11.12 Summary

11.13 Glossary

11.14 Terminal Questions

11.15 Answers

11.16 References

11.1 Introduction

Selection of corporate strategy by an organization should be guided by three

sets of factors: organizational mission, objectives or goals (discussed in Unit5), internal competences and resources and the external environment factors.Given the mission, objectives or goals based on organizational philosophy orpriorities, the choice of strategy should depend, among other things, on companycompetences or capabilities (that is, strengths and weaknesses) and the

environmental factors; or, more correctly, on compatibility or balancing betweenthe two which is attempted through SWOT analysis. The final selection ofstrategy, however, depends on some additional selection criteria including

benchmarking and best practices. These are discussed in the next chapter.

One of the most important components of the environment is competition

or competitors. This would be analysed here. As we talk of competition, we also

imply the industry to which the company belongs. Analysis of industry and

competition leads to the determination of competitive advantage or competitive

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disadvantage of an organization. So, industry, competition and competitive

advantage (or disadvantage) become three interrelated fields of analysis in an

interactive cycle or circle as shown in Figure 11.1. These analyses will be

undertaken in this unit.

Figure 11.1 Industry, Competition and Competitive Advantage

11.2 Caselet

There are numerous well-documented reasons why the Japaneseautomobile firms were able to penetrate the US market successfully,

especially during the 1970s. One important reason, however, is that they

were much better than U.S. firms at doing competitor analysis. David

Halberstam, in his account of the automobile industry, graphically described

the Japanese efforts at competitor analysis in the 1960s. They came in

groups. . . . They measured, they photographed, they sketched, and they

tape-recorded everything they could. Their questions were precise. They

were surprised how open the Americans were.

The goal of competition analysis is insight that influences the development

of successful business strategies. The analysis should focus on theidentification of threats, opportunities, or strategic uncertainties created by

emerging or potential competitor moves, weaknesses, or strengths.

Competitor analysis starts with identifying current and potential

competitors.This is an exercise that was successfully done by the Japanese

automobile firrms.

Source:D Halberstam, The Reckoning(New York: William Morrow, 1986), 310.

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Objectives

After studying this unit, you should be able to:

Discuss the different industry types and structures

Analyse industry structure and competitive strategy

Show how to conduct industry analysis

Identify and analyse competitors existing and potential

Conduct competitive advantage analysis

11.3 Definition of Industry

An industry can be broadly defined as the group of firms producing products

that are close substitutes for each other.1There is, however, a great deal of

controversy over an appropriate definition of industry. The debate or controversy

mostly centers around how close substitutability needs to be in terms of product,

process or geographic market boundaries.2For example, if we take computers,

desktop computers may be an industry; similarly laptop computers may be

another industry. But, because there is a good deal of substitutability between

desktop and laptop computers, an appropriate industry definition may be

personal computer which includes both.An important point in the debate or controversy over industry definition is

about overlooking latent sources of competition which may affect a company.

Any definition of an industry is essentially a matter of choice about where to

draw the line between established competitors and substitute products, between

existing companies in the industry and potential entrants and, between existing

manufacturers of the product(s) and suppliers of inputs and buyers. Drawing

these lines may, many times, be a matter of degree, but, it has implications for

choice of strategy by a company.

Definition of an industry should not be thought to be same as definition of

the business in which a company wants to compete. Industry may be broadlydefined or narrowly defined. If industry is broadly defined, it does not follow that

business should also be broadly defined without focus. If we take the example

of personal computer industry again, some companies like Compaq were

focussing their operations more on the desktop computers; companies like HP

(Compaq merged with HP in 2002) and Dell computer focus on both desktop

and laptop computers; others like Toshiba, Sony, IBM, concentrate more on the

laptop segment. Industry in all such cases sets the product boundaries. Business

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of a company focusses on a specif ied product or a product category based on

its technology, resources and capabilities, and accordingly, the company

formulates its competitive strategy.

Self-Assessment Questions

1. The group of firms producing products that are close substitutes for each

other are known as_________.

2. Definition of an industryshould not be thought to be same as definition of

the ________in which a company wants to compete.

11.4 Industry Types and Structure

Industries can be of various typeseach major product group constitutes an

industry (subject to the definition above). Industries can also be classified in

terms of size of the constituent units or companies, state or pace of development

of the industry, spread of the market, etc. These are important ways of looking

at the structure of an industry. Based on such factors, various industries can be

broadly classified into five categories according to Porter:

1. Fragmented industry2. Emerging industry

3. Mature industry

4. Declining industry

5. Global industry

Fragmented industry

Asfragmented industryis characterized by the existence of a large number of

small and medium units, and, no single company has any significant market

share, and, none of these units can individually affect the market or industry

outcome. The uniqueness of a fragmented industry is the absence of any marketleader, and, typically, the market share of the largest unit does not exceed 10

per cent.

Fragmented industries are common in certain sectors of the economy

including services, retailing, distribution and agricultural products. Fragmented

industries in some of these sectors are characterized by product differentiation,

whereas undifferentiated products more commonly exist in fragmented industries

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in other sectors. For example, computer software, television network/programme

and fast food industries are characterized by products or services which are

differentiated; but, agricultural produce, ATMs, dry cleaning, etc., essentially

involve undifferentiated products. Fragmented industries also vary widely in

technological sophistication ranging from high technology operations like solar

heating to non-technological activities like retailing and distribution.

Emerging industry

An emerging industryis a developing or newly formed industry in which market

for products initially exists in latent form, and, becomes visible later. An emerging

industry may be created by technological innovations, new consumers orindustrial needs for economic or sociological changes which create the

environment or potential market for a new product or service. Emerging industries

are being created all the time; or, to put it in other words, most of the existing

industries today were emerging industries at some point of time or the other.

Examples are word processors, photocopiers, computers, VCR/VCP, CTV, etc.

Different emerging industries may have different structuresstructural

details always vary. But, most of the emerging industries exhibit some common

structural characteristics.

Mature industry

A mature industryis one which has passed through transition from period of

fast growth to more modest or stable growth. Maturity is an important or critical

phase in the industry life cycle. During this period, fundamental changes often

take place in the competitive environment, and, companies are usually faced

with difficult strategic decisions for survival and growth because competition

becomes very intense. Industry maturity, in some cases, may be delayed or

postponed because of innovations or other events or developments including

environmental changes. This would mean prolonging the industry growth cycle

or the transition to maturity.

Transition to maturity is associated with important changes in the industry

structure and competitive environment. Industry maturity is characterized bynew trends or tendencies for change. Porter (1980) has identified and analysed

nine such trends or tendencies.

Declining industry

A declining industryis one with negative growth, that is, an industry which has

registered absolute decline in sales over a sustained period of time. Such decline

in sales is not because of business cycles or any other short-term factors like

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strike, lockouts or material shortages. Therefore, a declining industry does not

represent a short-term discontinuity, but, a trend expressed in falling industry

output, sales, profitability and dwindling number of competitors. In industry life

cycle, decline follows maturity. Decline sets in generally because of product

obsolescence or emergence of a strong substitute product. For example, demand

for oil-based laundry soaps for cloth washing declined fast because of

introduction of synthetic washing materials.

In-depth study of a wide cross-section of declining industries shows that

industry reactions and the nature of competition during decline vary markedly.

Some industries age gracefully; these industries have avoided losses by exiting

either before the decline or in time during the decline. Many other industries insimilar situations have got involved in bitter marketing warfare, prolonged excess

capacity and heavy operating losses.3

Global industry

In global industry, the strategic position of companies in different countries or

national markets are governed by their overall global positions. For example,

IBMs strategic position in competing for computer sales in France and Germany

has improved significantly because of technology and marketing skills developed

in other countries, and a worldwide manufacturing system which is well

coordinated. To be called a global industry, an industrys economics and

competitors in different national markets should be considered jointly rather

than individually.4

Distinction should be made between an international industry and a global

industry. An industry in a country may be international if it comprises a number

of multinational companies. But, industries with multinational competitors are

not necessarily global industries. To be a global industry, as explained above

about IBM, an industry should have multi-locational manufacturing facilities,

and, compete worldwide to secure global synergy or competitive advantage.


3. The existence of a large number of small and medium units is found in

(a) Mature industry

(b) Declining industry

(c) fragmented industry

(d) Emerging industry

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4. An industry that has passed through transition from period of fast growth

to more modest or stable growth is known as

(a) mature industry

(b) declining industry

(c) Emerging industry

(d) None of the above

11.5 Industry Structure and Competitive Strategy

We have analysed above five types of industries: fragmented, emerging, mature,

declining and global. Each of these industries has its own structure in terms of

companies or competitors and the nature of competition. Let us discuss the

competitive strategy in each type of industry.

11.5.1 Competitive Strategy in Fragmented Industries

Porter has suggested a framework or steps for formulating competitive strategies

in fragmented industries. This is a five-step framework. The steps actually consist

of finding answers to five vital questions relating to strategy formulation in

fragmented industries. Table 11.1 shows the framework or steps for formulating

competitive strategies in fragmented industries.Table 11.1 Framework or Steps for Formulating Competitive Strategies

in Fragmented Industries

Step 1 : What is the structure of the industry and position of competitors?

Step 2 : Why is the industry fragmented?

Step 3 : Can fragmentation be overcome? How?

Step 4 : Is overcoming fragmentation profitable? Where should the firm be

positioned to do so?

Step 5 : If fragmentation is inevitable, what is the best alternative for coping with

it?5

The five steps or the answers to the five questions indicate a logical process

for formulation of competitive strategy in fragmented industry. Step 1consists

of undertaking a thorough industry and competitor analysis to identify sources

of competitive forces in the industry and positions of important competitors.

Step 2 is to identify cause or sources of fragmentation. Once the causes of

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fragmentation are ascertained, it may be possible to find out if fragmentation

can be overcome. This is analysed in Step 3. Step 3 consists of analysing, in

detail, each of the causes of fragmentation, and, finding out if fragmentation

can be overcome through strategic moves. Less fragmented a market is, more

organized it is, and it becomes easier to analyse various competitive forces.

The objective in Step 4is to ascertain if fragmentation is profitable, and, if so,

when and/or how a particular company should position itself to take advantage

of industry consolidation or restructuring. If chances of overcoming fragmentation

are remote based on analysis in Step 3, a particular company should select and

adopt the best strategy from among the alternatives available to cope with

fragmentation. This should be done in Step 5,and this should be commensuratewith the companys resources and capabilities.

11.5.2 Competitive Strategy in Emerging Industries

Due to the structural characteristics of uncertainty and associated risk,

formulation of strategy in emerging industries becomes a very difficult task. As

Porter puts it: The rules of the competitive game are largely undefined, the

structure of the industry unsettled and probably changing and competitors hard

to diagnose.6

But, these also imply the other side of the emerging industries: lot of

freedom, flexibility and leverage exist for companies in these industries for choiceof strategy because the industry is in the formative stage. And, entrepreneurial

and aggressive companies can exploit these leverages to formulate competitive

strategies for improved operations which can lead to more efficient performance

and better results. The entrepreneurial pioneer can, in fact, design the structural

form, build the structure of the industry in terms of product policy, marketing

approach (pricing in particular) and competition strategy in such a way that it

can secure the strongest position in the long run. This is what companies like

Xerox did when it emerged in the photocopier industry.

The pioneering leader, however, will face problems as the industry

develops, competitors emerge and the course of competition becomesunpredictable. A common problem in emerging industries is that the pioneer

may spend excessive resources in defending high market share as Xerox did.

It may be generally appropriate to respond to competitors aggressively in the

emerging phase, but, a company should concentrate more on building its own

strength and consolidating its position. In practice, as experiences show, it may

not be feasible to defend a monopoly market share for long because competitors

will emerge and some of them may be very strong like Canon in the photocopier

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market. In such situations, the pioneer leader should be prepared for shifts in

strategy orientation including redefinition of roles of linkage agents like suppliers

and distributors or distribution channels.

Companies which enter emerging industries during the course of their

development also have a choice to make about which industries to enter. Here,

again, they often have a choice between alternative emerging industries. The

choice in such cases would depend on current returns or profitability and likely

future growth of the industry. The best alternative is one which promises highest

long-term growth and profitability.

11.5.3 Competitive Strategy in Mature Industries

Compared to emerging industries, mature industries pose almost the opposite

problem, i.e., of competitive overcrowding and its impact on formulation of

strategy. During transition to maturity there is volatility in the industry in terms of

emerging participants and competitive levels. But, at maturity, the industry is

already overcrowded and competition is intense. In such an environment,

competitive strategies of companies have to adjust to changing priorities.

Focus has to shift to factors which directly contribute to efficiency and

help securing competitive advantage in a low-margin market. Cost reduction,

true marketing (as opposed to pure selling) in terms of product-price offerings

and better customer service should receive the highest attention. Redefining orrepositioning old products/brands rather than introducing new products is the

recommended strategy. Less attention to creativity and more attention to

improving the existing value chain is required for edging out competitors. For

achieving this, to any significant extent, organizational change cultural change

in particularmay also be required. There may be resistance to change, but,

this has to be overcome.

This raises a number of issues which companies in a mature industry

have to cope with. Some of these issues relate to business performance; others

relate to organizational change. Three issues or factors which should be

particularly highlighted are: business growth, financial performance andprofitability, and organizational discipline and recentralization.

11.5.4 Competitive Strategy in Declining Industry

In terms of strategic choice in declining industries, companies are confronted

with the decision about whether to continue in the industry or harvest or divest.

There are implications of both in terms of strategic details and their impacts on

organizations.

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Porter has given a perspective on competitive strategies in declining

industries which should be mentioned here. He has suggested four possible

alternative strategies: leadership, niche, harvesting and divesting quickly

(Table 11.2).

Table 11.2 Alternative Strategies in Declining Industries

Leadership Niche Harvest Divest quickly

Seek a leadership Create or defend a Manage a controlled Liquidate the

position in terms of strong position in a disinvestment using business or

market share particular segment strengths investment as early

as possible

Source:M E Porter, Competitive Strategy(1980), 267 (Figure 12.1).

The leadership strategy may work out as below. In a declining industry,

many unprofitable or loss-making units divest and exit. One of the remaining

companieswho are not many in number may have the potential to achieve

above-average profitability, and leadership position is possible for such a

company. The company strives to be the only one or one of the few competitors

remaining in the industry. Porter suggests a number of strategic steps for

executing the leadership strategy:

Investment in aggressive competitive actions in marketing (focus

on pricing) and other areas to increase market share;

Purchasingmarket share by acquiring competitors or competitors

business;

Purchasingand retiring competitors production capacity. This also

reduces exit barriers;

Reducingcompetitors exit barriers in different ways to induce or

force them to exit;

Demonstrating superior strengths through competitive moves in the

market;

Demonstrating a strong commitment to continue in the businessthrough public statements or pronouncements.7

In niche strategy, it may be possible for a company to identify a segment

or a sub-segment in a declining industry which will not only sustain stable demand

but, may also allow high returns or margins. The company then invests to

consolidate its position in this segment or sub-segment. For this, a company

may also adopt some of the leadership strategies mentioned before. The primary

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objective of these strategies is to reduce exit barriers or induce exit of competitors.

The company is then secure in the niche for sometime.

Ultimately, however, companies adopting a leadership strategy or a niche

strategy may have to switch over to a harvesting strategy or divesting strategy.

11.5.5 Competitive Strategy in Global Industries

Competition in global industries poses a different kind of challenge because it

cuts across national boundaries and, international or global forces come into

play. These forces create, among others, two distinctive pressures: cost pressure

because of global competition and, pressure for local responsiveness, that is,

adaptation to local needs or values and consumer tastes and preferences. For

some products, cost pressure may be more: for some others, the need for local

adaptation is more. Guided by these two factors and product type or structure,

companies, which wish to compete globally, generally adopt one of the four

strategies:

International strategy, multi-domestic strategy, global strategy, and

transnational strategy (Figure 11.2).

Figure 11.2 Four Basic Global Competitive Strategies

International strategy can be adopted for those products and services

which are not available in some countries and can be transferred from other

countries. These are standard products with little or no differentiation.International strategies are not very common or popular. Some examples are:

Kelloggs, Indian software, and Indian handicrafts.

Multidomestic strategy is almost opposite of international strategy.

Multidomestic strategy involves high degree of local responsiveness or local

content. Products are highly customized to suit local requirements or conditions.

Because of high customization, cost pressure is less; cost effectiveness may

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be also difficult to achieve because of lack of scale economies. Examples :

Asian Paints (paints in general), Indian garments.

Global strategy suits companies which make highly standardized

sophisticated products, and, are in a position to reap benefits of economies of

scale and experience effects. These also include high technology products which

have universal applicability and hardly require any local adaptation. Examples

are: Intel, Motorola, Microsoft, Texas Instruments. Global retail chains like

Walmart and Marks & Spencer also come under this category.

Transnational strategy is the most difficult strategy to follow because this

is based on a combination of two apparently contradictory factors, i.e., cost

effectiveness and local adaptation. But, this may be a true global strategy

because, in global business, there is always a price pressure or cost pressure;

and, also the need to make the product as close to a particular countrys

expectation as possible to maximize value offerings. In fact, many, including

Bartlett and Ghoshal (1989), feel that the transnational strategy is the only viable

competitive strategy in global business. Many companies are adopting this

approach to become successful. Some good examples are : Caterpillar (taking

on Komatsu and Hitachi), McDonalds, Coca-Cola, Pepsi and Dominos Pizza.

Many multinational FMCG companies like Unilever and Procter & Gamble follow

transnational strategies through their fully owned subsidiaries in different

countries.


5. In ________ industry, the pioneering leader faces problems as the industry

develops, competitors emerge and the course of competition becomes

unpredictable.

6. In ________ industries, the problem faced is that of competitive

overcrowding and its impact on formulation of strategy.

7. Global strategy suits companies that make highly standardized

sophisticated products. (True/False)

8. Transnational strategyis quite an easy strategy to follow. (True/F alse)

11.6 How to Conduct Industry Analysis

Understanding industry structure and formulating competitive strategies imply

industry analysis. But, conducting a proper industry analysis is a very big task.

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To conduct such an analysis, the industry analyst has to find answers to many

important questions:

What should be the starting point?

Which types of data one looks for?

Should one look for only published or secondary data?

Or, should one also generate primary data from industry observers

(participants)?

What are the analytical techniques to be used for data processing and

analysis?

Answers to these questions would make possible an appropriate industry

analysis. This is about complete or comprehensive industry analysis. If, however,

one is interested in a particular aspect of an industry, say, only industry growth,

one can also conduct a partial industry analysis with respect to the particular

object. In that case, data requirements would be less, and data processing and

analysis also would be much easier.

Porter (1980) has suggested some detailed guidelines for conducting

industry analysis. These are contained in How to Conduct an Industry Analysis

(Appendix B) in Competitive Strategy (1980). Porter discusses sources of

published or secondary data, generation or collection of primary data, various

categories of data, scheme of data processing and strategy for industry analysis.

He has also suggested a broad framework for industry analysis in terms of

categories of data and competition. The framework is shown in Box 11.1

Industry analysis should follow a number of logical or strategic steps.

These are shown below:

Step 1 : Determine or specify the objective or objectives so that there

is no lack of focus.

Step 2 : Collect and scan through available published or secondary data.

Step 3 : Identify data or information gaps for generation of primary data.

Step 4 : Generate primary data (through survey, interviews, meetings,etc.,) to fill the data information gap.

Step5 : Process/tabulate various data as mentioned in Box 11.1

Step 6 : Prepare a general overview of the industry using the processed/

tabulated data/information.

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Step 7 : Prepare specific sectoral analysistechnology, product,

marketing pattern, competition analysis .

Step 8 : Draw inferences or conclusions to complete the analysis.

Box 11.1: A Broad Framework for Industry Analysis

Data Categories Compilation

Product lines By company

Buyers and their behaviour By year

Complementary products By functional area

Substitute products

Growth

Rate

Pattern (seasonal, cyclical)

Determinants

Technology of production and distribution

Cost structure

Economies of scale

Value added

Logistics

Labour

Marketing and Selling

Market segmentation

Marketing practices

Suppliers

Distribution channels (if indirect)Innovation

Types

Sources

Rate

Economies of scale

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Competitorsstrategy, goals, strengths and

weaknesses, assumptions

Social, political, legal environment

Macroeconomic environment

Source:M E Porter, Competitive Strategy (1980), 370 (Figure B-1)

The real significance of competition or competitor analysis has been shown

by the Japanese companies. There are many reasons why Japanese automobile

companies were able to penetrate the US market successfully in the 1970s.

But, one of the most important reasons is that they were much better at doingcompetitor analysis than US companies. The Japanese conducted a careful

and detailed analysis of the US auto matket (See Caselet). They similarly studied

the European market, particularly the design and engineering of the automobile

manufacturers. In contrast, the Americans were late even at recognizing the

competitive threat from Japan and were never so good in analysing the

competitive environment they were going to face.

Competition analysis can be divided into two main parts: one, identifying

the existing and potential competitors, and two, understanding and evaluating

competitors. To properly structure competitor analysis, one can start with a set

of questions on identifying competitors and understanding and evaluating them.

A series of exploratory questions are posed below. The analysis below would

be generally based on answers to these questions and related issues.

Identifying Competitors

Who do we usually compete against? Who are our most intense

competitors? Who are less intense, but, still serious competitors? Who

are makers of substitute products?

Can various competitors be divided into strategic groups on the basis of

their assets, skills or strategies?

Who are the potential competitors or potential entrants? Is there anything

that can be done to discourage them early?8

Understanding and Evaluating Competitors

What are competitors objectives and strategies? What are their levels of

commitment and seriousness?

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What is competitors cost structure? Do they have a cost advantage or

disadvantage or cost neutrality?

What is their image and positioning strategy?

Who are the most successful competitors? Who are the unsuccessful

ones? Why?

What are the strengths and weaknesses of each competitor or competitor

groups?

What are the leverages competitors have over us (our strategic

weaknesses, customer problems, etc.,) which they can exploit to enter

the market or become stronger competitors?

What are competitors special assets and skills that can be used against

us?

Activity 1

Choose an electronic goods industry (colour TV, cell phone, desktop or

laptop computers) and carry out an industry analysis in terms of the steps

and guidelines given in the text.


9. Competition analysis can be divided into two main parts: (1) identifying

the existing and potential competitors, and (2) __________.

10. Japanese automobile companies were able to penetrate the US market

successfully in the 1970s as they were much better at doing _______

than US companies.

11.7 Identifying Competitors

There are two different ways of identifying existing competitors: customer-basedapproach and strategic group approach. The customer-based approach analyses

thoughts (likes, dislikes, preferences, etc.,) of customers who make their choices

among competing suppliers of products. This gives a basis for grouping

competitors to the extent they compete for customers choice. The strategic

approach for competitor identification attempts to classify competitors into

strategic groups on the basis of their competitive strategies.

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11.7.1 Customer-based Approach

Primary competitors, i.e., competitors in the same product category and, not in

substitute product category, are clearly visible and more easily identifiable. For

example, if one takes the Indian soft drinks market, Coca-Cola and Pepsi are

the most immediate competitors followed by Thums Up, Sprite, Fanta, Limca,

etc. Whenever consumers think of a soft drink, they will first think of one of

these brands. But, secondary competitors, i.e., competitors in substitute product

categories are not so easily visible, and, are more difficult to identify. For example,

lemon soda, canned and packaged fruit drinks (like Frooti), slush, etc., also

compete with soft drinks. Customers have a choice, and, many times, they ask

for these products/brands in place of soft drinks, and secondary competitors

compete with primary competitors.

The above examples illustrate an important point. In most industries,

competitors can be usefully identified in terms of how intensely they compete

for the business or product which attracts or induces customers. There are

several very direct competitors; others who compete less directly; and, still others

who compete indirectly, but, are still relevant. A knowledge of this pattern can

lead to a proper understanding of the market structure and the competitive

situation.

11.7.2 Strategic Group Approach

Strategic group approach provides an alternative way of identifying competitors

in an industry or market. A strategic group generally exhibits the following

features:

Possess similar characteristics, (e.g., size, competences, resource base,

etc.)

Possess similar assets and skills, (e.g., cost efficiency, quality, image,

etc.)

Pursue similar competitive strategies, (e.g., use of same or similar sales

promotion and advertising methods, aggressive or offensive approach,etc.)

In many industries or markets, there are a large number of competitors

(like in monopolistic competition) and, it is difficult to analyse each of them

individually. It may be possible to track the leader or one or two large competitors,

but, it may not be very feasible, even cost-wise, to analyse individually, say, 30

or 40 competitors. Reducing such large numbers to small strategic groups makes

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the analysis easy and more usable from strategy formulation point of view. Let

us take the Indian detergents market. In this market, Surf (with brand extensions)

and Ariel may be placed in one strategic group; Tide, Rin, Wheel, Sunlight and

Nirma may be classified into a second strategic group; Ghadi and similar regional

brands can be in a third group; and, many local brands can be put together in

the fourth group. Each of these groups will show some distinct features or

characteristics like resource base, ability to compete, marketing skills, etc., and,

such grouping will give a company a clear strategic perspective to analyse

competition.

11.7.3 Potential CompetitorsExisting competitors are the most immediate threats to a company. But, there

are also potential competitors who are potential threats. Companies generally

remain busy with formulating strategies or counter-strategies to meet threat

from existing competitors, and, they tend to ignore potential competitors or

entrants. But, this is a very short-term or short-sighted approach, because, in

due course, potential competitors can become stronger than some of the existing

competitors as Titan has shown to HMT.

Aaker (1995) has mentioned six different types of potential competitors

or potential competing situations.

(a) Market expansion: Any company planning market expansion, thatis, planning to enter into a new market, is a potential competitor for

all those already operating in that market. Walmart, for example,

has decided to enter into the Indian market through a JV with Bharti

Enterprise. This is a big potential threat to the entire Indian retailing

industry.

(b) Product expansion: Product expansion, like market expansion, is a

potential competitive threat. ITC diversified into hospitality business

and agri-business, and during the planning stage of diversification,

was a potential competitor for all those in agri-business and hospitality

business.(c) Backward integration: Present customers can be potential sources

of competition. General Motors bought many component

manufacturers during the initial years of its operation in a backward

integration move. Many can users like Campbell Soup have

integrated backward by making their own containers. Backward

integration is usually more common in business-to-business products.

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(d) Forward integration: Suppliers or vendors are also potential

competitors. AST, a major computer manufacturer in the US at one

time, started as a component (add-on-boards) manufacturer for IBM

computers. TVS Motors (earlier Lucas-TVS), traditionally a

manufacturer of electrical accessories for automobiles and

motorcycles/scooters, has integrated forward by entering into

manufacture of motorcycles. Like backward integration, forward

integration also is more typical in business-to-business markets.


11. While identifying competitors, the ________ approach analyses the

preferences of customers who make their choices among competing

suppliers of products.

12. The ________ approach for competitor identification attempts to classify

competitors into strategic groups on the basis of their competitive

strategies.

13. Primary competitors, i.e., competitors in the same product category and,

not in substitute product category, are clearly visible and more easily

identifiable. (True/ false)

14. Existing competitors are the most immediate threats to a company.

(True/False)

11.8 Models of Competition

In addition to analysing various factors which influence competitor actions, one

can also get insight into competitors or competition through different models of

competition. Competition takes various forms and can be of different intensities.

Different models of competition try to analyse this. We shall discuss three

important models of competition:

1. The Economic Model

2. The Life Model

3. The War Model

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11.8.1 The Economic Model

Industrial or business economists do not look at business strictly in terms of

market forms. They look at business in different ways. In a competitive

environment, businesses can be classified into four different categories:

specialized businesses, volume businesses, fragmented businesses and

stalemated businesses. Such classification is based on two factors; first, the

potential size of advantage a company can derive from a particular business,

and, second, the number of ways such advantage can be secured. In terms of

these two factors, four business categories are shown in Figure 11.3.9

Figure 11.3 Classification of Business Based on Competitive Environment

As shown in the figure, businesses in which potential size of the advantage

is large and approaches to achieve this are many, may be called specializedbusinesses. Most consumer products fall under this category. In such businesses,

few large players dominate the market. The dominant players (national-level

products/brands) control about 80 per cent of market share and the balance is

shared by a number of small playersregional and local. Take the market for

detergents. National brands like Surf, Ariel, Nirma, Rin, Tide and Wheel dominate

the market. But there are also many regional and local detergents (branded

and even non-branded) which exist in the market.

Volume businessconsists of industrial products. Products like basic

chemicals (e.g., caustic soda) and industrial raw materials which are consumed

in large quantities, fall under such business. In these businesses, bigger the

market share, larger is the profitability. Hence, size gives the greatest competitiveadvantage and the competition is mostly cost based cost efficiency through

economies of scale and other factors.

Businesses which have many small players, with the largest ones having

less than 10 per cent market share, are fragmented businesses. In these

businesses, size does not offer any great advantage. These apply primarily to

service products. Hotels and restaurants (except 5-star hotels), studios

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(photographers), dry cleaning, courier services, etc., are good examples.

Competition in these businesses is based on product-price packages.

Stalemated businessesare those which are sort of chokedpotential

size of advantage is small and the number of ways to secure competitive

advantage are also limited. These are businesses which are on the decline

either because of technological obsolescence or changes in consumer tastes

and preferences. Examples of products in the category are radio, music records

(HMV and others) black and white TV, etc.

11.8.2 The Life Model

The life model or the product life cycle (PLC) approach analyses competitive

intensities during different phases of life cycles of a product. Although some

management and marketing academics have raised doubts about the validity

of PLC in real world, it is, nevertheless, a useful tool for analysing competition

and determining appropriate strategies for competitive survival and growth during

different stages of PLC: introduction, growth, maturity and decline.

Figure 11.4 Product Life Cycle (PLC): Sales and Profit

At the introduction stage, that is, when a new product enters the market,

it starts as a monopoly and competition is nil. As the product moves to the

growth stage, competitors start entering the market and competition begins. As

the product matures, competition intensifies and competitive rivalry reaches its

peak. Sales and profit also peak during this period. In the decline phase,

competitive pressure decreases because sales and profit start declining, and

many companies withdraw from the market or close down. Between introduction

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and growth, and, in the decline phase, competitive pressures are low, but,

mortality rates of products or businesses are high (Figure 11.4).

The lifespan of a product, and also speed or steepness in growth, maturity

and decline vary according to its nature or category. (This is what explains the

relative flatness (Figure 11.5) and relative steepness [of different PLC curves.)

Most electronic products have a shorter lifespan and also a steep PLC compared

to electrical or mechanical appliances. During the PLC, most markets witness

one market leader, one or a couple of market challengers and a number of

market followers. During the PLC, some niche players also develop in the market

who stay away from mainstream competition. In the toothpaste market, Colgate

is the leader, Pepsodent and Close-Up the challengers and Promise the follower.Some say Vicco and Neem are niche players, but, there may be difference of

opinion on this.

Different studies have hypothesized different market structures, particularly

during the maturity phase, in terms of market shares of different players. These

studies indicate different types and levels of competition. The first of these studies

is by the Strategic Planning Institute, Cambridge, Massachusatts, popularly

known as PIMS Study. The second study is by Kotler, and, the third by Boston

Consulting Group (BCG). Buzzel (1981) has done consolidation and a

comparative analysis of these studies. The study results for market structures

in mature industries are summarized in Table 11.3.Table 11.3 Market Structure in Mature Industries: Market Shares

Market Player Market Share (%)

PIMS Kotler BCG

Market leader 52.7 40.0 50.0

Market challengers 28.8 30.0 25.0

Market followers 11.6 20.0 15.0

Market nichers 6.9 10.0 10.0

Source:R D Buzzel, Are there Natural Market Structures? Journal of Marketing, 45(Winter, 1981).

11.8.3 The War Model

The war model of competition is based on close parallel between military

strategies for war and marketing strategies. Many marketing strategists have

found close similarities between the two. Most common forms of war strategies

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are defensive warfare, offensive warfare, flanking warfare and guerrilla warfare.

Ries and Trout (1986) are among the greatest exponents of marketing warfare

based on military strategies. Principles of marketing warfare enunciated by them

are given in the following:

Principles of Defensive Warfare

1. Only the market leader should adopt a defensive strategy

2. The best defensive strategy is the courage to attack yourself

3. Strong competitive moves should always be blocked

Principles of Offensive Warfare

1. The strength of the leader is the most important consideration for mounting

an offensive attack

2. Find the leaders weakness and attack it

3. Launch the attack on as narrow a front as possible

Principles of Flanking Warfare

1. A good flanking move is made into an uncontrolled area of the opposition

2. Tactical surprise should be an important element of the strategy

3. The pursuit is as crucial as the attack itselfPrinciples of Guerrilla Warfare

1. Find a small segment for intermittent attack; avoid confrontation

2. However successful you may be, never act like the leader

3. Be prepared to quit/exit at very short notice

Offensive and defensive strategies signify different competitive moves

and are of almost universal application in strategic business management today.


15. According to classical economic theory, markets begin as _________,

move towards ______, then to monopolistic competition and ultimately

towards pure or perfect competition.

16. In a competitive environment, businesses can be classified into four

different categories: specialized businesses, volume businesses,

fragmented businesses and _______businesses.

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17. The Economic Model, Life Model and War Model are models of

(a) Competition

(b) Production

(c) Marketing

(d) Business strategy

18. Music records (HMV and others) black and white TV are examples of

(a) specialized businesses

(b) stalemated business

(c) volume businesses

(d) fragmented businesses

11.9 Porters Competitive Threat Model

A vital task of a strategist is to anticipate and/or recognize the nature of

competition and potential threat from competitors and to develop appropriate

response strategies. The most difficult task in this is to properly assess the

magnitude of existing competition and correctly foresee the threat from new

and emerging competitors. Porter (1980) in his pioneering work on competitive

strategy had identified five major types of competitive threats (Figure 11.5),

which are valid even today. These are:

Figure 11.5Porters Five Forces Model

Source:M E Porter, Competitive Strategy: Techniques for Analysing Industries and

Competitors(New York: The Free Press, 1980).

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1. Industry (existing) competitors

2. Threat of substitutes

3. Bargaining power of buyers

4. Bargaining power of suppliers

5. Threat of new entrants

Industry competitors: Various degrees or intensities of competitive rivalry

exist in the market for a product. This is the battle for market share and is the

most immediate concern of a company, particularly if it is a market leader or

challenger. Ongoing battles between Coca-Cola and Pepsi, Surf and Ariel,

Colgate and Pepsodent are good examples. Competitive intensity or rivalry

depends, to a large extent, on the stage of the product life cycle. Competition is

practically non-existent at the introduction stage, then starts growing steadily

and becomes significant till the product enters the decline stage.

Threat of substitutes: Substitute products reduce demand for a particular

product or a category of products because some customers switch over to the

alternatives. Substitution depends on whether an alternative product offers higher

perceived value to the customers. Substitution may take three different forms:

product-for-product substitution, substitution of need and generic substitution,

Product-for-productsubstitution or substitution for the sameuse are same; for

example, e-mail substituting for postal service or mobile phones substituting forlandlines. Substitution of need means that a new product or service makes an

existing product or service redundant. For example, IT has provided e-Commerce

as a tool which has generally made secretarial services or printing redundant to a

large extent. Generic substitution takes place when different products or services

compete for a share in the same family income or household income: for example,

air conditioner manufacturers competing with colour televisions or music systems

or home theatres for snatching a share in fixed household income.

Bargaining power of buyers: Buyers are generally in a better bargaining

position. But, they can become stronger bargainers or create competition among

suppliers under certain specific conditions. Some of these conditions are: i. thebuyer purchases a very significant proportion of total output of the supplier

can happen typically in industrial products; ii. the industry consists of a large

number of small operators so that buyers can easily create competition among

them; iii. cost of switching a supplier is low, i.e., substitutes are available or

there is no product differentiation, or, for industrial or service products, there is

no long-term contract; iv. backward integration into suppliers producta truck

or car manufacturer beginning to make components or accessories like Tata

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Motors or an air conditioner manufacturer also making compressors like Carrier

Aircon or a colour TV manufacturer also making picture tubes like Sony.

Bargaining power of suppliers: Suppliers, or sellers, generally in a weak

bargaining position, can be strong bargainers under certain conditions. Such

market conditions are : i. no close substitutes available for the product offered

by the supplier ; ii. the product(s) sold by the supplier(s) is an important or

critical input in the buyers product; for example, ICs and chips in electronic

products which can be bought only from few or selected suppliers; iii. high

switching cost of changing a suppliermay be because the supplier

manufactures a special product or the product is clearly differentiated; iv. forward

integration into buyers product; for example, a carbon black producer enteringinto tyre manufacturing and competing with tyre manufacturers or TVS (earlier

Lucas-TVS), traditionally a component or accessories maker, enters into

production of motor cycles (TVS-Suzuki).

Threat of new entrants: Many times, new entrants pose a major threat to

the existing market players. Examples of entry of Toyota and Honda in the US

car market (and also in the global market), Maruti Suzukis entry into the Indian

car market, Vimal fabrics in the Indian textile market and Titan in the Indian

watch market are well known. In fact, most of the established products and

brands in consumer and industrial markets today were new entrants at some

point of time. Forecasting the emergence of new entrants is very important forexisting competitors and it is also one of the most difficult jobs. But, companies

which fail to foresee the new entrants or ignore them may even face disastrous

results. We have the examples of Padmini (earlier Fiat) cars, HMT watches,

Weston TV, etc.

Activity 2

Choose any FMCG or consumer durable product or brand.and analyse the

competition for this product in terms of Porters five forces model.


19. Ongoing battles between Coca-Cola and Pepsi is a good example of

_____ competitors.

20. Air conditioner manufacturers competing with colour televisions or music

systems or home theatres for snatching a share in fixed household income

is an example of ________ substitution.

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11.10 Competitive Advantage Analysis

Competitive advantage, also called strategic advantage, is essentially a position

of superiority of an organization in relation to its competitors. A more formal

definition of competitive advantage is:

Competitive advantage exists when there is a match between the

distinctive competences of a firm and the factors critical for success

within its industry that permits the firms to outperform competitors.10

The definition shows that superiority of a company over its competitors

exists because the company has developed some unique competencecorecompetence or distinctive competencewhich matches the environmental

factors or success factors in the industry in a better way than the capabilities of

competitors. South (1981) has given a definition of competitive advantage which

also gives a good perspective:

The process of strategic management is coming to be defined, in fact,

as the management of competitive advantage, that is, a process of

identifying, developing and taking advantage of enclaves in which a

tangible and preservable business advantage can be achieved.11

11.10.1 Developing Competitive Advantage

Competitive advantage can be secured through two primary routes: productmanufacturing and marketing route. The product manufacturing route reflects

core competences, special capabilities, superior product design, etc. The

marketing route reflects marketing mix application, positioning, offering a bundle

of benefits or value to the customer, etc. The product-making route and the

marketing route are obviously not exclusive to each other; they are, in fact,

complementary to or supporting or reinforcing each other (Figure 11.6).

Figure 11.6 Competitive Advantage: Product and Marketing

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A corporate strategy can consist of various individual strategies like product

strategy, pricing strategy, promotion strategy, distribution strategy, competition

strategy, etc. Many forms of competition exist. But these strategies or the way

a company competes is not the only key to, or the complete course for success.

There are at least three other strategic factors which are essential for creation

of a competitive advantage which can be sustained over time. These three

factors are: how to compete (basics), i.e., business assets and skills, where to

compete, i.e., productmarket selection, and whom to compete against, i.e.,

competitor position (Figure 11.8).

Figure 11.7 Factors Contributing to Competitive Advantage (CA)

For securing competitive advantage, corporate strategy should be based

on appropriate assets, skills and capabilities. Important business assets are

customer base, quality reputation, good management or company image, proper

engineering or skilled staff, etc. For example, a product strategy for an industrial

good without proper design, manufacturing and quality control capabilities will

not deliver the results or any sustainability to the product or quality.

Special assets and skills of a company can also be termed as core

competence or distinctive competence of the company. According to Hamel

and Prahalad (1990), advantages of companies and businesses are based on

core competence of these companies, and therefore, developing and managing

core competence are the keys to strategic success. Core competences, however,

are not the only sources of competitive advantage. We shall see this later.

The next important factor is the choice of the target product-market. A

well-planned strategy duly supported by assets and skills may not succeed

because it does not work in a particular market. Procter and Gambles Pringle

potato chips had many assets like consistent quality, long shelf life and national

distribution. But, these assets adversely affected the taste perception which

was considered to be the most important factor in the market.

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The third important factor for competitive advantage is competitor position.

The objective or goal here is to employ a strategy to thwart competitors who

may lack strength in relevant assets and skills or is weak in some other strategic

applications. For example, flight safety is important to airline passengers: so, if

an airline is perceived to be strong on safety, then a competitive advantage can

exist in terms of provision of flight safety or better flight security.


21. A position of superiority of an organization in relation to its competitors is

called __________.

22. Various individual strategies like product strategy, pricing strategy,

promotion strategy, distribution strategy, competition strategy make up

the ________. strategy

23. According to Hamel and Prahalad (1990), advantages of companies and

businesses are based on core competence of these companies.

(True/False)

24. While securing competitive advantage, the product-making route and the

marketing route are exclusive to each other. (True/ False)

11.11 Case Study

Coca-Cola and Pepsi: Is Coke falling behind in competitive rivalry?

Coca-Cola and Pepsi are intense rivals in the global beverages market. In

some countries, Coca-Cola is the market leader with Pepsi the challenger

(No. 2); in some other markets, it is the opposite. But, competition continues

with fluctuating fortunes.

For quite sometime, Coca-Cola was the best-known brand in the world.

But, since 1998, the company has undergone a number of unsettling

developments which affected its performance and brand image. Theseincluded management mistakes; and also change in the top management.

After unsuccessful, and also controversial, tenures of a couple of CEOs,

Neville Isdell was called out of retirement to become Cokes CEO in 2004.

During 200005, 13 highest-level executives left their jobs indicating chaos

at the top of the comapny.*

Coca-Cola was going flat**. In the first quarter of 2005, Coke reported a

decline of 11 per cent in profits because of continuing poor sales in the US

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and Europe. In contrast, Pepsico registered a 13 per cent increase in profit.

Pepsico attributed the increase to aggressive investments in North American

beverages, international business operations and its plan to increase these

investments in future. This may mean further trouble for Coca-Cola. Both

companies are heavily dependent on their beverages businesses. The

increase in Pepsicos business in North American and international markets

has, at least partly, been due to Cokes declining performance, image and

losses.***

Neville Isdell is fully seized with the challenges that his company is facing.

He, however, claims that the system isnt broken; but, some analysts may

not agree with him. One analyst pointed out that Coca-Cola has not produced

a successful new soda since 1982. Consultant Tim Pirko has suggested

that the company should invest heavily in developing new brands. He feels

that the company needs to take some new risks, if necessary, to ensure

that the consumers again become excited about Coke products.****

The company is also aware of it. Coca-Cola has been investing heavily to

rejuvenate the companys stronger brands, and also in new products/drinks.

During 2005, the company invested in the growing non-calorie soda market

with Coca-Cola Zero; it acquired a stake from Danone in bottled water joint

venture; it bought a majority stake in a milk drink company; it started

distributing the Rockstar energy drink. In response to all this, Pepsi gave a

big push to its new products through Pepsi One, Pepsi Lime and Propel

fitness water.

In this scenario, will Coca-Cola be able to recover lost grounds and fully

rehabilitate itself?* The Coca-Cola company announces changes to senior management and operating

structure,www.2.coca-cola.com, March 2005.

** D Faust, Gone Flat, Business Week, December 20, 2004.

***B Morris, Coca-Cola: The Real Story, Fortune, May 17, 2004.

****B Morris (2004).

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11.12 Summary

Let us recapitulate the important concepts discussed in this unit:

Competition is one of the most important components of business

environment.

Industries can be of various typesalmost each major product group

constitutes an industry. Industries can also be classified in terms of size

of the constituent units or companies, state or pace of development of the

industry, spread of the market, etc.

Various industries can be classified into five categories fragmentedindustry, emerging industry, mature industry, declining industry and global

industry.

Competition can be understood better by analysing competitor actions.

More important factors which govern competitive action are objectives or

goals, size and growth, organizational culture, strengths and weaknesses,

cost structure, profitability, image and positioning, and current and past

strategies.

Various models of competition are mentioned in strategic marketing

literature. Competition takes various forms and can be of different

intensities. Different models of competition try to analyse this. Threeimportant models of competition are: the economic model, the life model

and the war model.

Porters competitive threat model (Five Forces Model) analyses five major

types of competitive threats a company can face in the marketplace. These

are: industry (existing) competitors, threat of substitutes, bargaining power

of buyers (backward integration), bargaining power of suppliers (forward

integration) and threat of new entrants.

11.13 Glossary

Competitive advantage:A position of superiority of an organization in

relation to its competitors

Industry:A group of firms producing products that are close substitutes

for each other

Monopoly: A condition in which there is single seller with no close

substitute product

Oligopoly:A condition in which there are few sellers

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11.14 Terminal Questions

1. Describe briefly the various types of industries classified by Porter.

2. What is a fragmented industry? Analyse the main features of competitive

strategy in a fragmented industry.

3. Distinguish the major characteristics of emerging industries and mature

industries. Also discuss the contrasts of competitive strategies in these

two types of industries.

4. What is a global industry? Explain with examples, international strategy,

multi-domestic strategy, global strategy and transnational strategy.

5. Distinguish and analyse the economic model, the life model and the war

model of competition. Are there any similarities among the three models?

6. Explain Porters competitive threat model (Five Forces Model). Also explain

forward and backward integration.

11.15 Answers

Answers to Self-Assessment Questions

1. Industry

2. Business

3. (c) fragmented industry

4. (d) mature industry

5. Emerging

6. Mature

7. True

8. False

9. understanding and evaluating competitors

10. competitor analysis

11. customer-based

12. strategic

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13. True

14. True

15. Monopolies, oligopoly

16. Stalemated

17. (a) Competition

18. (b) stalemated business

19. Industry

20. Generic

21. Competitive advantage

22. Corporate

23. True

24. False

Answers to Terminal Questions

1. Porter broadly classified various industries into five categories. Refer to

Section 11.4 for further details.

2. Porter has suggested a framework or steps for formulating competitivestrategies in fragmented industries. Refer to Section 11.5.1 for further

details.

3. Formulation of strategy in emerging industries is very difficult task due to

structural characteristics of uncertainty and associated risk. In contrast,

mature industries pose almost the opposite problem, i.e., of competitive

overcrowding. Refer to Section 11.5.2 and 11.5.3 for further details.

4. In global industry, the strategic position of companies in different countries

or national markets are governed by their overall global positions. Refer

to Section 11.5.5 for further details.

5. There are three important models of competition Economic Model, Life

Model and the War Model. Refer to Section 11.8 for further details.

6. Porter identified five major types of competitive threats. Refer to Section

11.9 for further details.

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11.16 References

1. Aaker, D A, 1995. Strategic Market Management. 4th ed. New York: John

Wiley & Sons.

2. Day, G S. 1984. Strategic Market Planning: The Pursuit of Competitive

Advantage. St. Paul, Minnesota: West Publishing Co.

3. Day, G S. 1990. Market Driven Strategy. New York: The Free Press.

4. Porter, M E. 1990. Competitive Strategy: Techniques for Analysing

Industries and Competitors. New York:The Free Press.

5. Porter, M E. 1990. The Competitive Advantage of Nations. New York: The

Free Press.

6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and

Executing Strategy: The Quest for Competitive Advantage. New Delhi:

Tata McGraw Hill Publishing Co.

Endnotes

1 M E Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors(New York: The Free Press 1980). 5.

2 M E Porter, Competitive Strategy (1980), 53

M E Porter, Competitive Strategy(1980), 255.4 M E Porter, Competitive Strategy(1980), 275.5 M E Porter, Competitive Strategy(1980), 213.6 M E Porter, Competitive Strategy(1980), 229307 M E Porter, Competitive Strategy(1980), 2688 A Aaker, Strategic Market Management, 4th ed. (New York: John Wiley & Sons, 1995),

65.9 M J Xavier, Strategic Marketing: A Guide for Developing Sustainable Competitive

Advantage(New Delhi: Response Books, 1999), 21314.10 P D Bennett, ed., Dictionary of Marketing Terms, (Chicago: American Marketing

Association, 1988), 35.11 S E South, Competitive Advantage: The Art of Strategic Thinking, The Journal of Business

Strategy, 4 (Spring 1981).

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