DEALING WITH COMPETITION

Competitive forces
Michael porter has identified five forces that determine the long run attractiveness of a market or market
segment: industry competitors, potential entrants, substitutes, buyers and suppliers. Each of these pose
threats as follows

1. Threat of intense segment rivalry

A segment is unattractive if it already contains numerous, strong or aggressive competitors.
- It is even more unattractive if it is stable or declining
- If plant capacity additions are done in large increments
- If fixed costs are high
- If exit barriers are high
- If competitors have high stake staying in the segment

These conditions lead to frequent price wars, advertising battles and new product introductions, which
make it expensive to compete.

2. Threat of new entrants

A segments attractiveness varies with the height of its entry and exit barriers.
- The most attractive segment is one which entry barriers are high and exit barriers are low. Few
new firms can enter the industry and poor performing firms can easily exit.
- when both entry and exit barriers are high, profit potential is high, but firms face more risk
because poorer performing firms stay in and fight it out.
- when both barriers are low, firms easily enter and leave the industry and the returns are stable and
low.
- worst case is when entry barriers are low and exit are high. This results in chronic overcapacity
and depressed earnings for all.

3. Threat of substitute products

A segment is unattractive when there are actual or potential substitutes for the product. Substitutes
place a limit on prices and on profits. If technology advances or competition increases in these
substitute industries, prices and profits are likely to fall.

4. Threat of buyers’ growing bargaining power

A segment is unattractive if buyers possess strong or growing bargaining power.
Buyers bargaining power grows
- when they become more concentrated and organized
- when the product is undifferentiated
- when buyers switching costs are low
- when the product presents a significant fraction of the buyers costs
- when the buyers are price sensitive because of low profits
- when the buyers can integrate upstream

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To protect themselves, sellers might select buyers who have the least power to negotiate or switch
suppliers. A better defense consists of developing superior offers that strong buyers cannot refuse.

5. Threat of suppliers growing bargaining power

A segment is unattractive if the company’s suppliers are able to raise prices or reduce the quantities
supplied.
Suppliers tend to be powerful
- when they are concentrated or organized
- when there are few substitutes
- when the supplied product is an important input
- when the cost of switching suppliers are high
- when suppliers can integrate downstream

The best defenses are to build win-win relations with suppliers or use multiple supply sources.

Threat of growing
suppliers
bargaining power

Threat of New Degree of Threat of

Entrants Segment Rivalry Substitutes

Threat of growing
buyers bargaining
power

IDENTIFYING COMPETITORS
A company is more likely to be hurt by emerging competitors or new technologies than by current
competitors. Many businesses failed to look at the Internet as a formidable competitor. Eg web sites
versus printed material; physical bookstores versus online stores.

INDUSTRY CONCEPT OF COMPETITION

An industry is a group of firms that offer a product or class of products that are close substitutes for one
another. Industries are classified according to number of sellers, degree of differentiation, presence or
absence of entry, mobility and exit barriers; cost structure; degree of vertical integration; and degree of
globalization.

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Number of sellers and degree of differentiation
1. Pure monopoly
Only one firm provides a certain product or service in a certain area.

2. Oligopoly
A small number of large firms produce products that range from highly differentiated to
standardized. Pure oligopoly consists of a few companies producing essentially the same
commodity. The only way to gain a competitive advantage is through lower costs.
Differentiated oligopoly consists of a few companies producing products partially
differentiated on the lines of quality, features, styling or services.

3. Monopolistic competition –
Many competitors are able to differentiate their offers in whole or in part. Competitors focus
on market segments where they can meet customer needs in a superior way and command a
price premium

4. Pure competition
Many competitors offer the same product or service eg commodity market. Because
there is no basis for differentiation, competitors prices will be the same.

Entry, Mobility And Exit Barriers

Industries differ greatly in ease of entry. Major entry barriers include high capital requirements,
economies of scale, patents and licensing requirements, scarce locations, raw materials, distributors and
reputation requirements. Mobility barriers are faced when a firm tries to enter into more attractive
segments

Exit barriers include legal and moral obligations to customers, creditors, employees, government
restrictions, low asset salvage value, lack of alternative opportunities, high vertical integration and
emotional barriers.

Cost Structure
Each industry has a certain cost burden that shapes its strategic conduct. Eg Toy manufacturing involves
heavy distribution and marketing costs. Firms strive to reduce their largest costs.

Degree of Vertical Integration

Vertical integration lowers costs and the company gains a larger share of the value added stream. They
can manipulate prices and costs in different parts of the value chain to earn profits. The disadvantage is
high costs in some parts of the value chain and a lack of flexibility.

Degree of Globalization
Some industries are highly local eg lawn care and others global eg oil. Companies in global industries
need to compete on global basis if they are to achieve economies of scale and keep up with the latest
advances in technology.

MARKET CONCEPT OF COMPETITION

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Using the market approach, competitors are companies that satisfy the same customers need. This
reveals a broader set of actual and potential competitors. A company can profile its direct and indirect
competitors by mapping the buyers steps in obtaining and using the product.

ANALYZING COMPETITORS

A firm needs identify its primary competitors, their strategies, objectives, strengths and weaknesses.

Strategies – A group of firms following the same strategy in a given target market is called a strategic
group. The height of entry barriers differs for each group. If the firm successfully enters a group, the
members of that group become its key competitors.

Objectives – what the competitors are seeking in the market place? Possible objectives may be
maximise current profits, market share growth, cash flow, technological leadership or service leadership.
Need to monitor competitors expansion plans

Strengths and weaknesses – helps identify where competitor is weak and can be attacked. Eg if
competitor is poor in technical assistance, then the firm can attack the market by offering very good
technical assistance.

Analyse three variables when analyzing competitors

- share of market – the competitors share of target market
- share of mind – how easily the competitor is remembered by customers
- share of heart – customers preference of competitors product/service
Companies that make steady gains in mind and heart share inevitably make gains in market share and
profitability.

To improve competitive performance, companies bench their most successful competitors.

Benchmarking is the art of learning from companies that perform certain tasks better than other
companies. There can be a large difference between the quality, speed and cost performance f a world
class company and an average company. The aim of benchmarking is to copy or improve on best
practices either within an industry or across industries.

SELECTING COMPETITORS
A firm can examine competitors and focus its attacks on classes of competitors.

Strong versus weak – weak competitors are easy targets because this requires fewer resources per share
point gained. Even strong competitors have weaknesses that can be attacked.

Close versus distant – most firms compete with others who resemble them the most, yet companies
should recognize distant competitors

Good versus bad – a firm should support good competitors and attack bad competitors. Good
competitors play by the industry rules, set realistic prices, limit themselves to a portion of the market

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segment, motivate others to lower costs. Bad competitors try to buy share rather than earn it, take large
risks and upset industrial equilibrium.

COMPETITIVE STRATEGIES

Having identified and evaluated its major competitors, the company must now design broad competitive
marketing strategies that will best position its offer against competitors offers and gives the company the
strongest possible competitive advantage.
Each company must determine what makes sense given its position in the industry, its objectives,
opportunities and resources.

Basic Competitive Strategies

Michael Porter suggested four basic strategies that companies might follow.
a) Overall cost leadership – firm works to achieve the lowest cost of production and distribution
so that it can price lower than its competitors and win a large market share.
b) Differentiation – Firm concentrates on creating a highly differentiated product line so that it
comes across as the class leader in the industry.
c) Focus – Firm focuses its efforts in serving a few market segments rather than going after the
whole market.

Firms that pursue a clear strategy – one of the above are likely to perform well and make profits.
But firms that do not pursue a clear strategy - middle of the road- do the worst. They try to be good
in everything then end up not being good at anything.

COMPETITIVE POSITIONS

Market leader - the firm which has the largest market share in the relevant product market and usually
leads the other firms in price changes, new product introductions, distribution coverage and promotional
intensity.
Market challenger – a runner up firm in an industry that is fighting hard to increase its market share.
Market follower – a firm that is willing to maintain its market share and not rock the boat
Market Nichers – firms that serve small market segments not being served by larger firms

COMPETITIVE STRATEGIES FOR MARKET LEADERS

To remain the leader a firm must

- find ways to expand total market demand
- protect its current market share through good defensive and offensive actions
- try to increase its market share even if the market size remains constant

Expanding the Total Market

The market leader usually gains when the total market expands. Attracting new customers (get non
users to try the product), new uses (discover and promote new uses), getting more usage – (increase the
level or frequency of consumption)

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Defending / Protect market share
While trying to expand total market sizes, the dominant firm must continuously defend its current
business. This can be done by continous innovation. The leader leads the industry in developing new
product and customer services, distribution effectiveness and cost cutting. It keeps increasing
competitive strength and value to customers.

The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening
areas and lessen their intensity.

A dominant firm can use six defense strategies:

a) Position defense – involves occupying the most desirable market space in the minds of the
consumers. Fortifying its current position.

b) Flank defense – need to protect the weak front from attack by the competition.
c) Pre emptive defense – attack before the enemy starts its offense. Preannouncements of new
products or services – these signal to other competitors that they will have to fight to gain market share.

d) Counter offensive defense – when attacked, most market leaders will invade the attackers
territory so that the attacker has to pull back to defend the territory.

e) Mobile defense- the leader stretches their domain over new territories that can serve as future
centres for defense and offense through market broadening (shifting focus from the current
product to the underlying need) and market diversification (shifting into unrelated
industries).

f) Contraction defense (strategic withdrawal) – giving up weaker territories and reassigning

resources to stronger territories.

Expand the Market share

In many markets, one share point in market share is worth tens of millions of dollars. However, gaining
increased market share in the served market does not automatically produce higher profits.
A) A company should consider four factors before pursuing increased market share:
1) The possibility of provoking antitrust action.
2) Economic cost.
3) Pursuing the wrong marketing-mix strategy.
4) The effect of increased market share on actual and perceived quality.

MARKET CHALLENGER STRATEGIES

Firms that are second, third or lower in an industry can sometimes be quite large. They can challenger
the leader and other competitors in an aggressive bid for more market share (market challengers). Or
they can play along with competitors and not rock the boat (market followers).

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Competitive strategies for market challengers

1. Defining the strategic objective and the competitor

A challenger must first define its strategic objective. Most seek to increase their profitability by
increasing the market shares. The strategic objective chosen depends on the competitor the firm has
chosen to challenge.

a) Challenger can attack the market leader – this is a high risk but potentially high gain strategy
that makes good sense if the leader is not serving the market well. To succeed, the challenger
must have some sustainable competitive advantage over the leader eg cost advantage leading to
lower prices, or ability to provide better value at premium price. The objective of attacking a
market leader may be to take over market leadership or to gain a larger market share.
b) Challenger can avoid the leader and attack other firms of its own size or smaller firms.
These may be underfinanced firms or not serving their customers well. If challenger goes after a
small company, the objective may be to put it out of business. The challenger must choose its
opponents carefully and have clearly defined and attainable objective.

CHOOSING AN ATTACK STRATEGY

A challenger can use five possible attack strategies:

a) Frontal attack - Challenger matches the competitors product, advertising, price and distribution
efforts. It attacks the competitors strengths rather than its weaknesses. The outcome depends on who
has the greater strength and endurance.
b) Flanking attack – challenger concentrates its strengths against the competitors weaker
flanks(sides) or gaps (weaknesses) in the competitors market offer. This means finding an unserved
market segment and filling the void. Flank attacks make good sense when the challenger has fewer
resources than the competitor
c) Encirclement attack – challenger attacks from front, sides and rear all at once. This strategy
makes sense when the challenger has superior resources and believes it can break the competitors hold
on the market quickly.
d) Bypass attack – challenger bypasses the competitor and targets easier markets. It might
diversify into unrelated products, move into new geographic markets or leapfrog into new technologies
or replace existing products. In technological leapfrogging, instead of copying the competitors product,
the challenger bypasses the competitor with the next technology.
e) Guerilla attacks – These are small periodic attacks to harass and demoralize the competitor,
with the goal of eventually establishing permanent foot holds. Strategy usually used by smaller or poorly
financed challengers. The challenger might use selective price cuts, executive raids, increase
promotional outbursts or assorted legal actions.

MARKET FOLLOWER STRATEGIES

A follower can gain many advantages. The leader often bears the huge costs of developing new
products and markets, expanding distribution and educating the market. The follower can learn from the
leaders experience and copy or improve the leader’s products and programs, usually with less
investment. Although the follower will not overtake the leader, it often can be very profitable.

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The follower has to define a growth path, but one that does not create competitive retaliation. Follower
must know how to hold current customers and win a fair share of new ones. Each follower tries to bring
distinctive advantages to its target market – location, services, financing. Followers are often major
targets of market challengers. Follower must therefore keep its manufacturing costs low and its product
quality and services high. It must also enter new markets as they open up.
o Many companies prefer to follow rather than challenge the market leader, but still need to
implement strategies:
 Counterfeiter: The counterfeiter duplicates the leader’s product and packages
and sells it on the black market or through disreputable dealers
 Cloner: The cloner emulates the leader’s products, name, and packaging, with
slight variations
 Imitator: The imitator copies some things from the leader but differentiates on
packaging, advertising, pricing, or location
 Adapter: The adapter takes the leader’s products and adapts or improves them.
The adapter may choose to sell to different markets, but often it grows into a
future challenger

MARKET NICHER STRATEGIES

Nichers are often firms with limited resources that target subsegments or niches instead of pursuing the
whole market. They may be smaller divisions of larger firms. Firms with low market shares of the total
market can be highly profitable through smart niching. These firms offer high value, charging a
premium price and having strong corporate cultures and vision.

Niching is profitable because the market nicher ends up knowing the target group so well that it meets
their needs better than other firms that casually sell to this niche. Nichers can hence charge a substantial
markup over costs because of the added value. Whereas the mass marketer achieves high volume, the
nicher achieves high margins.

The key idea in niching is specialization. This can be along any of several market, customer, product or
marketing mix lines. Eg a type of end user, few specific customers, a customer size group – all who are
neglected by the major players.

Niching has risks – the niche could dry up, or could grow to a point that is attracts the larger players.
Hence many companies practice multiple niching to increase its survival chances.

o Firms entering a market should initially aim at a niche rather than the whole market.
o Multiple niching is preferable to single niching: with strength in two or more niches,
the company increases its chances for survival.
o Types of roles:

End-User Specialist Product-Line Specialist

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 Vertical-Level Specialist Job-Shop Specialist
Customer-Size Specialist Quality-Price Specialist
Specific-Customer Specialist Service-Specialist
Geographic Specialist Channel Specialist

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