Chapter-12 Dealing with Competition
CHAPTER – 12. DEALING WITH COMPETITION:
To be successful, a firm needs to: o Understand customer & satisfy them profitably. o Deal with competition. To understand competition, starting point could be Porter’s 5-Forces Model determining segment structural attractiveness.
Competitive Forces: - Michael Porter has identified 5 forces that determines intrinsic/ long run profit attractiveness of a market/segment. - Forces are Industry competition. Potential entrants. Potential Entrants Substitutes. (Mobility Threat) Buyers. Suppliers.
Suppliers (Supplier Power)
Industry Competitor (Segment Rivalry)
Buyers (Buyer Power)
Substitutes (Threat of Substitutes)
Each force pose varying attracts to a firm that could be:-
Threats of Intense Segment Rivalry: - Segment is unattractive if: o Segment contains numerous / strong / aggressive competitors. o It is stable / declining. o Fixed costs are high. o Exit bearers are high. Above may lead to: o Price wars. o More advertising cost. o Multiple new product introductions which may be expensive.
Chapter-12 Dealing with Competition Threat of New Entrants: - Depends on size of entry/ exit/ barriers.
Low Low Low, Stable Returns Entry Barrier High
High Low, Risky Returns
High, Stable Returns
High, Risky Returns
Threat of Substitute Product: - If actual/ potential substitute cost, then there is a limitation on price/ profit. Hence, segment may not be attractive. - Impact of technology change / competition is more in substitutes. Industry need to be monitored. Threat of Buyers Growing Bargaining Power: - If buyers have strong/growing bargaining power, then segment may be unattractive - This may happen when: Buyers get organised. Products you are selling is a significant purchase of buyers cost (intermediate products). Product is undifferentiated, hence buyers can switch. Buyers are price sensitive. Buyers may integrate. Hence firms need to develop offers with superior C.D.V.
Threat of Suppliers Growing Bargaining Power: - May be manifest through suppliers: Increasing price Reducing quality. Happens when situation similar \ reverse of buyer’s threat occurs. Firm needs to : Develop multiple supply sources. Develop win-win relationship with suppliers.
Chapter-12 Dealing with Competition Identifying Competitors: - Competition could be identified from two view points: Industry point of view. Market point of view. Industry Concept of Competition: - Industry is a group of firms that offer a product class of products that are close substituted for one another. - Industries may be classified based on: Number of sellers. Degree of vertical integration Degree of globalization. Number of Sellers + degree of Product Differentiation: o Four industry structure type emerge based on this. o Pure Monopoly: Only one form provides a certain product in a certain territory/ region. May change high price & provide low value. Regulated monopolist may be required to provide more service from public interest point of view. - Example: Indian Railways. o Oligopoly: Small member of firm provide product (Standard/ Differentiated). Types could be: - Pure Oligopoly: o Standard products/ commodities. o Example: cement/steel. - Differentiated Oligopoly: o Differentiated products (quality/ feature/ style). o Example: Automobile. o Monopolistic Competition: Many companies are able to differentiate their product in part or in whole. - Example: Restaurants/ Beauty Parlours. Competition focus on market segments where they can meet customer needs in a superior way & may command price premium. o Pure Competition: Many companies offer same product/ service. Products are not differentiated. Prices are similar/ same. - Example: Stock Market brokers/ commodities. Advertising may create psychological differentiation in which case industry may become monopoly competition. Industry’s competitive structure may change over time.
Chapter-12 Dealing with Competition Entry/ Mobility/ Exit Barriers: o Industries differ in terms of the barriers they may present for entry/ mobility within the industry to enter specific/ more attractive segments. o Entry Barriers Include: High capital requirements. Economies of scale. Patent/ License requirements. Scarce location/ raw material/ distribution. Reputation/ track record requirements. Mobility barriers present a firm from moving across segments within an industry. o Exit Barriers Include: Legal/ Moral obligation to customers/ Creditors/ Employer. Government restrictions. Low asset salvage value due to over specialization/ obsolescence. Lack of alternative opportunity. High vertical integration. Emotional Barriers. o Firms may stay in an industry as long as variable costs are covered to some/ all part of fixed costs. However, this may dampen profits for every player in the industry. o Even if some firms do not wish to exit an industry, they may decrease their size. Cost Structure: o Each industry has a certain cost structure in terms of % of cost of MRP sheet on: Raw material. Production/ Plant & equipment. Marketing. Distribution. After Sales Service. Manpower. o Different firms may have varying competencies in each above. Degree of Vertical Integration: o Some industries may provide advantages if firms are vertically integrated. Integration could be forward/ backward. o However, some other industries may provide cost/ profit advantages if outsourcing is done to specialist firms. Degree of Globalisation: o Some industries are local/ global/ regional. o Firms need to understand their industry type & be competitive accordingly.
Chapter-12 Dealing with Competition Market Concept of Competition: - In addition to the industry concept, competition may be identified from the market point of view. - Market concept of competition: o Competitors are companies that satisfy the same competitor need. - This may reveal a broader set of actual/ potential competitors. - A firm may need to profit: o Actual/ direct competition. o Potential/ indirect competition. - This may be done by mapping buyer’s steps/ stages in obtaining/ using products. - This analysis highlights both challenges/ opportunities that a firm may face. Analysing Competition: - Once a company identifies its primary competition, it needs to analyse/ understand their characteristic in terms of: o Strategies. o Objectives. o Strength/ Weakness. o Reaction Patterns. - Strategies: o A group of firms following the same/ similar strategy in a given market is called strategic group. o A company should identify strategic groups that exist in order to: Understand entry/ exit barriers for each strategic group. Pinpoint its competition & monitor their strategies. Objectives: o Company should try to understand the objective of each competitor individually. o Issues for analysis could be: What is each competitor seeking from the market place? What drives competitor behaviour? Is competitor looking for: - Current profitability. - Higher market share. - Cash flows. - Technical leadership. - Service leadership. - A mix of above. What are competitor expansion plans? (Check for mobility barriers). Understand size/ history/ current management & financial situation of competition. Strength & Weakness: o Company needs to gather information on each competitor’s strength & weakness. o As per Aurthur D’Little, a company would occupy one of six competitive positions in the target market.
Chapter-12 Dealing with Competition o These are Dominant: - Leader: o Controls behaviour of other competitor. o Has wide choice of strategies. Strong: - Can take independent action without putting long term positions in danger. Favourable: - Firm has exploitable strength. - Can improve positions. Tenable: - Just satisfactory to continue in business. - Less opportunity to improve. Weak: - Unsatisfied performance. Firm must change or exit. - Opportunity to improve exists. Non-viable: - Unsatisfactory performance. - No opportunity to improve. o Another way of analyzing strength & weakness of competition could be: Market Share : Sales. Mind Share : Top of mind recall. Heart Share : Top of mind preference to buy product from. o Mind/ Heart share increase help to increase market share & profitability in long term. Reaction Patterns: o Companies react differently to competitive actions. o Some may respond slowly/ others quickly. o Some may respond only to price change. o Each industry is likely to have a competitive equilibrium. o This needs to be understood by firms/ companies. o Equilibrium could be stable/ unstable. o If differentiators are clear, equilibrium may be stable, else price reduction may lead to price wars.
Designing Competitive Intelligence System (CIS): - To formulate strategy, a good CIS needs to be designed. - For this, steps could be: o System Set up. Need to Identify: - Types of information needed. - Sources of information. - Manpower required. o Data Collection (Including Primary/ Secondary). o Data Evaluation/ Analysis. o Disseminate Information/ Responding.
Chapter-12 Dealing with Competition Customer Value Analysis (CVA): - Competition needs to be analysed using CVA. - Customer Value = Customer Benefit – Customer Costs. - Customer Value = Customer Benefit / Customer Costs. - For competitive situations: o Customer benefits include: Product benefit. Service benefit. Personal benefit. Image benefit. o Customer costs include: Purchase price. Acquisition costs. Usage costs. Maintenance costs. Ownership costs. Disposal costs. Analysis to be done for own/ competitor product. For this: o Identify major attribute valued by customers. o Assess relative importance of each attribute. o Assess company/ competition performance on each attribute. o Evaluate own performance with/ against competitor individually, attribute by attribute check CDV status. o Monitor customer values over time.
Design Competitive Strategies: - A market with competition may typically be occupied by: o o o o Market leader (40%). Market Challengers (30%). Market Follower (20%). Market Nichers (20%).
Figures % are for Typical Market Share.
Competitor strategies are different for each.
Market Leader Strategies: - Market leader strategies could be: Expand total market demand. Protect total market share. Increase market share.
Chapter-12 Dealing with Competition Expanding Total Market: o In order to do this, market leader should look for: o New Users: May be found in three ways. - Market penetration strategy. o Those who may use, but do not. - New market segment strategy. o Those who have never used. - Geographical expansion strategy. o New Uses: Expand market by discovering/ promoting new product uses. Example: Jute : Sacks to fashion Items. o More Usage: Convince people to use more product per use occasion. Example: Shampoo. Protect/ Defend Market Share: o While trying to expand, market leader needs to continuously defend its current business/ market share. o No major flank should be exposed. o Defense strategies could be (Six) : Position Defense: - Involves building superior brand power. Flank Defense: - Involves fortifying leading products with one another products for protection. - Example: Lux. Pre-Emptive Defense: - Involves attacking before competitor starts its offence. - Example: Nokia handsets (many new products). Counter Offensive Defense: - Involves responding to an attack with a counter attack. May be manifest through: o Invading attacker’s territory. o Price cutting. o Initiating political action to weaken competition. Mobile Defense: - Involves switching domain over new markets. - Market broadening: o Move towards satisfying underlying genuine needs. - Market diversification: o Into unrelated areas. Contraction Defense: - Involves planned contraction/ strategic withdrawal to reassign resources to stronger products/ market. Manifest through line pruning.
Chapter-12 Dealing with Competition Different strategies shown diagrammatically as: (2) Flank. Attacker (3) Pre-Emptive. (4) Counter Offensive. (1) Position Defender (5) Mobile Expanding Market Share: o Market leaders can improve their profitability by increased market share. o As per a study by Strategic Planning Institute (SPI) called PIMS, a company’s profitability rises with its relative market share of served market shown as: P R O F I T A B I L I T Y 30
20 30 Market Share
o This has led to many companies pursuing market share expansion/ leadership as their objective. o However, cost of buying higher market share may exceed its revenue value, i.e., it may not lead to higher profitability at times. Hence, a company needs to consider following factors while trying for higher market share. Possibility of providing legal/ anti trust action. Economic cost of more market share. Marketing mix strategy: - May not be a good idea to increase market share through price reduction alone. o Typically, companies that gain/ increase market share outperform competitor in 3-Areas: New Product Development. Relative Product quality. Marketing Expenditure.
Chapter-12 Dealing with Competition Market Challenger Strategies: - Market Challenger are non market leader who attack the leader/ other competitor to increase market share. - Market challengers may follow the following process: o Define Strategies, objectives & opponents. o Choose a general attack strategy. o Choose a specific attack strategy. Defining Strategies, Objectives & Opponents: o Market challenger’s strategic objective could be to increase market share. o Opponents could be (for attacking): Market Leader (High risk/ high pay-off strategy). Firms of own size that are under performing/ under financed. Small local/ regional firms. Choosing a General Attack Strategy: o Given clear opponents & objectives. Attack strategies could be as per diagram. Bypass Flank Attacker Frontal Encirclement Guerilla o Frontal Attack: Attacker matches opponents marketing mix, i.e., product/ price/ place/ promotion. Side with greater resources (better P's) is likely to win. Modified frontal: - Price reduces. - Example: Tide attacked Surf (market leader). o Flank Attack: Concentrates on opponents weakness. Could be directed on two dimensions. - Geographic. - Segmental (Create New Segments). o Encirclement Attack: Capture wide share of opponents market by attacking on several fronts. Makes sense only when market challenger has superior resources. o Bypass Attack: Indirect attack involves bypassing opponent & attacking easier market to broaden one’s resource base. Technology may play a role in bypassing. Defender
Chapter-12 Dealing with Competition o Guerilla Warfare: Involves waging small/ intermittent attacks to demoralize opponent & eventually secure markets. May include: - Selective price cuts. - Interim promotion blitzes. - Occasional legal actions. Normally practiced by smaller firms against larger firms. May need to be followed up with other attack strategies for long term gains (may be experimental in nature). - Example: Paras pharmaceuticals: Krack cream, Moov, Set-Wet, Livon. Choosing a Specific Attack Strategy: o Market challenger needs to go beyond 5-broad strategies & develop more specific strategy. o These could be: Price discount. Offer average product at much lower cost. Prestige goods : High quality product at high price. Product Proliferation : Offer high product variety. Product Innovation : Offer product improvements. Improved services. Innovative distribution. Manufacturing cost reduction through: - Purchasing efficiency. - Lower labour cost. - Modern production equipment. Intensive promotion/ advertising. o Market challenger success depends on combining several strategies to improve its position over time.
Market Follower Strategies: - As per Theodre Levitt, for a company, product imitation (mine-too) may be as profitable a strategy as product innovation. This is called Innovative Imitation. - Innovator bears cost of: o New product development. o Distributing new product. o Informing/ educating market. As a result, innovator may become market leader. - However, another firm may copy/ improve new product. This firm may be (more?) profitable because it may not have borne innovation expenses. It may prefer to follow & not challenge leader. Such a firm is a market follower. - Follower must offer some distinct advantage to its target market to hold current customer & wins a shape of a new customer. This advantage could be: Location. Services. Financing. Low manufacturing cost. High product quality. - Follower tries to grow without inviting competitive retaliation.
Chapter-12 Dealing with Competition Strategies could be: o Counter-Feiter: Duplicates leaders product/ package & sells it through black market/ disreputable dealers. o Cloner: Emulate leader with some variation/ low price. o Imitator: Copies some points of leader. But maintains differentiators through packaging/ advertising/ pricing/ location. Can service as long as it does not attack leader strongly. - Example: Britannia Tiger Chap Biscuits. o Adaptor: Takes leader products & adopts/ improves them. May sell to different markets. Overtime, may grow into market challenger. - Example: Most of the Japanese firms.
Market Nicher Strategy: - As alternatives to being a follower in a large market is to be a leader in a small market/ sub-market/ Niche. - Nicher may be highly profitable even though its sales volume/ market share are relatively low in the small market. - Key to success is specialization. Specialist roles for a Nicher could be: o End User Specialist: Firm specializes in serving one type of end users. o Vertical Level Specialist: Firm specializes at some vertical level of production-distribution value chain. o Customer Size Specialist: Firm concentrates on selling to small/ medium size customer who are neglected by major companies. o Specific Customer Specialist: Firm sells only to one & few customer. May be vendors to large companies. o Geographical Specialist: Firm sells only in a certain locality/ area/ region. o Product/ Product line Specialist: Firm carries/ produces only one product/ product line. o Product Feature Specialist: Firm specializes in producing/ selling only a certain product type/ product feature. o Job Shop Specialist: Firm customizes products for individual customers. o Quality Price Specialist: Firm operates at either: - Highest end of market (High price & quality). - Lowest end of market (Low price & quality). o Service Specialist: Offer one/ more services not available from another firm. o Channel Specialist: Offers products to only one channel of distribution.
Chapter-12 Dealing with Competition Service niches may weaken over time; firm may stick to “Nichine” as strategy but not necessarily to a single niche. Hence, multiple niching is preferable to single niching. This increases survival chances. Small firms entering a market may prefer to aim at a niche initially rather than whole market.
Customer Orientation Verses Competitor Orientation: - It is important for companies to position itself competitively as a market Leader/ Challenger/ Follower/ Nicher. However, a firm may not spend all its time focusing on competition. - Focus on competition may develop a fighter orientation and make a firm alert. - However, this may make a firm reactive rather thn proactive vis-à-vis its customers. - A customer centered company focuses more on customer development in strategy formulation. This may be better in the long run. - Hence, a firm needs to balance between the two. - Balanced strategy may involve: o Focus on customers need satisfaction (Current + Emerging). o Watch over competition to learn from them & copy good things to extent possible. As a result, try to continuously increase CDV to customers.