lecture 6 dealing with the competition

Lecture 6: Dealing with the Competition; Prepared by Zaved Mannan 1 | P a g e

Lecture 6

Dealing with the Competition

Objectives

At the completion of this lecture, you should be able to:

• Distinguish the difference between an industry and market concept of

competition;

• Identify competitor’s strategies;

• Determine competitor’s objectives and estimate competitor’s reaction

patterns;

• Select competitors to attack or avoid; and

• Appreciate what is means to balance a customer and competitor orientation.

Commentary

Introduction

A vital skill for any marketer is the capacity to understand the nature of the

competitive environment surrounding the organization and how these evolve over

time. This lecture examines the forces that shape the competitive environment,

then discusses how organizations go about monitoring competition and finally, how

organizations select which markets to compete in and which markets to avoid.

Essential Reading

Textbook: Kotler et al. (2009), Chapter 9

Reading 6.1: Porter, M. E. (1980). The structural analysis of industries. In

Competitive Strategy (pp. 3-33). New Your: The Free Press.


Kotler et al. (2009, pp. 227-228) make the point that intuitively one would think it

simple to identify a company’s actual or potential competitors, citing clear examples

such as Coca Cola/Pepsi rivalry. However, probably the most significant threat is

that from emerging competitors or new technologies. The music recording industry

badly underestimated the threat posed by the peer-to-peer music sharing networks

and the popularity of the MP3 format that collectively resulted in a 25% decline in

world-wide sales of music CDs since 1999.

Industry Structure

• Industry analysis refers to the assessment of attractiveness of an industry

based on its economic structure.

• Comparative analysis assesses how each firm in an industry is likely to

perform within the structure of the industry.

We can examine competition from both an industry and a market point of view.

Industry Concept of Competition

According to Kotler et al., “an industry is a group of firms that offer a product or

class of products that are close substitutes for each other” (2009, p. 228).

Marketers classify industries according to number of sellers; degree of product


differentiation; presence or absence of entry; mobility; and exit barriers; cost

structure; degree of vertical integration; and degree of globalization.

Market Concept of Competition

The market concept of competition focuses on the needs of the customer, and sees

competition in the form of those organizations that satisfy the same need. This

rather broader view is more ‘latent’ in its approach, and alerts companies to

possible unheard or un-thought of competitors. Thus for Kodak the competition was

not Fuji but the rise of digital cameras.

Competitive Forces

The famous business guru, Michael Porter argues that there are five forces

determining the structural attractiveness of an industry or market segment.

1. Potential new entrants: A segment’s attractiveness is determined by the

nature of entry and exit barriers. A segment with high entry barriers and low

exit barriers is more attractive that one with low entry barriers and high exit

barriers.

Most attractive segments:

a. High entry barriers & low exit barriers.

b. Few companies can enter & poor performing companies exit easily.

c. High entry barriers and high exit barriers- high profit potential.

Companies face high risk.

d. Low entry and exit barriers – returns low but stable.

e. Low entry barriers & high exit barriers – depressed earning for all.

2. Buyers: segments with concentrated, powerful buyers are unattractive as

their economic power may force prices down and demand even greater levels

of support. Major retailers throughout the world use this power against their

suppliers – e.g. in Australia, both Coles Myer and Woolworths exert strong

price pressure on their suppliers.

Unattractive segments:

a. Buyers possess strong bargaining power.

b. Dominating buyer (Agora/Shopno/Meenabazar)

Buyer’s bargaining power grows:

c. Whey they become more concentrated

d. When product is undifferentiated

e. When product represents a significant fraction of the buyer’s costs.

f. When buyers switching costs are low


3. Substitutes: Where substitutes are available of sufficient quality, this tends to

exert a downward pressure on the price that suppliers can obtain.

A segment is unattractive:

a. Actual or potential substitutes

b. Substitute places a limit on prices & profits

c. If technology advances or competition increases, prices & profits fall.

d. Camera film/digital camera.

4. Suppliers: A segment is unattractive if it has concentrated, organized

suppliers, few substitutes, the product is important and the cost of switching

supplier is high.

A segment is unattractive:

a. Suppliers are able to raise prices or reduce the quantity.

b. Example: Mobile, BP, Shell or OPEC

Suppliers are concentrated

c. When they are concentrated or organized

d. Few substitutes

e. Supplied product is important product.

f. Costs of switching supplier is high

g. Build win-win relationships with suppliers or use multiple supply

sources.

5. Segment rivalry: A segment may be unattractive if there are a number of

strong competitors, require large capital expenditure, declining market size

and aggressive competitors. This leads to price wars, advertising battles and

frequent new-product introductions.

A segment may be unattractive

a. A number of strong competitors,

b. Require large capital expenditure,

c. aggressive competitors

A segment may be more unattractive

d. declining market size

e. If fixed costs or exit barriers are high

f. If competitors have high stakes in the segments.

This leads to price wars, advertising battles and frequent new-product

introductions.


Example: Mobile operator in BD & ISPs (689, march 2005) in Aust.

Aggressive marketing.

Figure 6.1: Porter’s five forces analysis. Source: Internet.

Porter’s model is very useful as it applies sound economic theory to the dynamic of

business.

READ

Reading 6.1: Porter, M. E. (1980). The structural analysis of industries. In Competitive Strategy (pp. 3-

33). New York: The Free Press.

This is opening chapter to Porter’s seminal book, and is definitely worth reading.


Competitor Analysis

In this section, let us briefly examine the main theories regarding the analysis of

competitors.

Identifying Competitors

Companies that either make the same product or make products that satisfy the

same needs can be considered as a competitor. Remember that the main threat

may be from latent competitors, rather than current competitors.

• It’s not simple to identify a company’s actual or potential competitors.

• Coca Cola/Pepsi rivalry. Eastern Bank/HSBC Bank rivalry. Or,

Biman/Emirates rivalry or Biman/Malaysia.

• The most significant threat is that from emerging competitors or new

technologies. Example: music recording industry has been loosing huge

market share because of the emergence of MP3 technology.

• ‘Emerging Giants’ from developing countries by exploiting knowledge of local

factors of production. Example: Indian software companies. (Infosys, Wipro,

Satayam Computer) or Inventec: Taiwan based notebook, PC & servers

manufactures.

Once a company identifies its primary competitors, it must analyse their

• Strategies

• Objectives

• Strengths & Weaknesses

• Selecting Competitors to Attack and Avoid

• Estimating Competitors’ Reaction Patterns

Determining Competitors’ Strategies

Organizations need to monitor constantly the strategies of their competitors, and

attempt either to outperform them using the same type of strategy, or develop an

opposing strategy that is more in ‘tune’ with consumer needs.

– A group of companies following the same strategy in a given target

market is a strategic group.

– Kotler identifies four groups (2009, fig 11.3).


– The height of the entry barriers differs for each group.

– If the company successfully enters a group, the members of that

group become its key competitors.

Determining Competitors’ Objectives

Determining the objectives of competitors is useful because it gives one an insight

into how competitors may respond to differing types of competition. Kotler et al.

(2009, p. 319) cites the often heard argument that Western type organizations are

more concerned with short-term profits compared to their Japanese counterparts

who focus on the long-term, especially increasing market share.

• Objectives:

– What is each competitor seek in market?

– What drives competitor’s behavior?

– Short-run or long-run profit?

• Objective mix:

– Current profitability

– Market share growth

– Cash flow

– Technological leadership

– Service leadership

• What is competitor’s expansion plan?

Assessing Competitors’ Strengths and Weaknesses

The above heading is basically a prerequisite in any competitive situation, be that in

business, politics or in the sporting arena. It is through the constant gathering of

market intelligence that companies are able to analyse the strengths and

weaknesses of their competitors, and also the values and assumptions of their

competitors. Note that kotler et al. (2009, P. 320) argue that there are three

important variables: share of market, share of mind, share of heart. In summary,

“Companies that make steady gains in mind share and heart share will inevitably

make gains in market share and profitability”. Figure: SWOT analysis

• Strengths & Weaknesses:


– Rate the competitor according to – Customer awareness, product

quality, product availability, technical assistance & selling staff.

– SWOT analysis is the best tool.

– You need to do SWOT analysis for each competitor including your

company (Google offers).

• Company should also monitor 3 variables:

– Share of market

– Share of mind: “Name the first company that comes to mind in this

industry.”

– Share of heart: “Name the company from which you would prefer to

buy the product.”

• “Companies that make steady gains in mind share and heart share will

inevitably make gains in market share and profitability.”

Selecting Competitors to Attack and Avoid

One of the most effective ways to position your company against its competitors is

to undertake a customer value analysis. Essentially, this involves the following.

1. Discover what customer value.

2. Determine how your company and your competitors measure up on such

attributes.

3. Constantly monitor the above.

After the company has conducted customer value analysis, company should focus

its attack on one of the following classes of competitors:

Strong versus Weak: Most companies aim their shots at weak competitors,

because this requires fewer resources. Yet, the firm should also compete with

strong competitors to keep up with the best. Even strong competitors have

some weaknesses.

Close versus Distant: Most companies compete with the competitors that

resemble them the most. Banglalink complete with GrameenPhone, not with

Varati airtel. Coca-Cola recognizes that its number-one competitor is tap

water, not Pepsi. Bangladesh Museums now worry about theme parks (such

as wonderlands).

Good versus Bad: Every industry contains good and bad competitors. Good

competitors play by the industry’s rules; they set prices in reasonable

relationship to costs; and they favour a healthy industry. Bad competitors try


to buy share rather than earn it; they take large risks; they invest in

overcapacity; and they upset industrial equilibrium. A company may find it

necessary to attack its bad competitors to reduce or end their dysfunctional

practices.

Estimating Competitors’ Reaction Patterns

If an organization is considering making an important strategic move, it is vital that

it understands the possible reactions of competitors and likely scenarios from such

reactions. For example, Qantas and Virgin Blue currently are very quick to react to

each other’s marketing strategies, matching and responding very quickly to

changes in each other’s prices. Grameen Phone and Banglelink currently are very

quick to react to each other’s marketing strategies, matching and responding very

quickly to changes in each other’s prices.

Selecting Customers

At this stage, company must evaluate its customer base and think about which

customers it’s willing to lose and which it wants to retain. One way to divide up the

customer base is in terms of whether a customer is valuable and vulnerable,

creating a grid of four segments as a result, see table 6.1 (Kotler, p. 232).

Vulnerable Not vulnerable

Valuable These customers are

profitable but not completely happy with the company. Find out and

address their sources of vulnerability to retain

them.

These customers are loyal

and profitable. Don’t take them for granted but maintain margins and

reap the benefits of their satisfaction.

Not valuable These customers are likely

to defect. Let them go or even encourage their departure.

These unprofitable

customers are happy. Try to make them valuable or vulnerable.

Table 6.1: Customer selection grid (Kotler et al. (2009), p. 232)

Balancing Customer and Competitor Orientations

The main point here is that despite all of the previous discussion being concerned

with focusing on competitors, there is a danger that this can lead the company to

ignore its customers. Moreover, a constant focus on competitors, without a balance,

can lead to the organization reacting to competitor moves as opposed to being


innovative and making its own decisions. Kotler et al (2009) explain in detail a

comparative analysis of competitor-centred companies and customer-centred

companies in page 245-246.

• Only focusing on competitors can lead the company to ignore its customers.

• Competitor Centred Companies

– Positive side: Develop fighter orientation

– Negative side: Determines it’s moves based on competitor’s moves.

• Customer Centred Companies

– Better position to identify new opportunities

– Better monitor customer’s needs.

READ

Textbook: Kotler et al. (2009), Chapter 11, pp. 233-244

This section classifies firms based on their market share into market leaders, market challengers,

market followers and niche players. Certain strategies are more appropriate based on a firm’s

strategic position, level of resources, capabilities and cash position. Kotler et al. provide an extended

discussion on the type of strategies suitable for each market share position.


Conclusion

Companies must gather information on competitors to understand their strengths,

weaknesses, strategies, objectives and reaction patterns. While it is important to

focus on your closest competitors, you cannot ignore latent competitors. It is

essential that companies identify competitors using both an industry and market-

based analyses. Finally, it is important t identify the attributes that customers value

as it provides a basis for determining whether it is possible to steal your

competitor’s customers.

Prepared by

Zaved Mannan Adjunct Faculty Member

University of Liberal Arts Bangladesh (ULAB)

lecture 6 dealing with the competition

Business

market concept of competition

competition objectives

music recording industry

competitors objectives

potential competitors

competitors strategies

emerging competitors

g e lecture