Kotler on Marketing

Poor firms ignore their competitors; average firms copy their competitors; winning firms lead their competitors.

Assessment of Industry Competition

& Competitors

Potential Entrants Threat of New entrants

INDUSTRY COMPETITORS Bargaining power Suppliers of suppliers Rivalry Among Existing Firms Threat of substitute products or services Substitutes Five Forces Driving Industry Competition
Source : Michael E. Porter, Competitive advantage: Creating and sustaining superior performance

Bargaining power Buyers of buyers

Assessment of Industry Competition & Competitors In the strategic analysis of product-markets, four important questions are frequently posed: 1. Are there certain unique forces that drive competition in a product - market ? 2. How is competition defined & how are relevant competitors identified in a product - market ?

3. Do competitors in a product - market adopt specific competitive strategies ? 4. How can the activities performed by a firm & its competitors in the design, production, marketing, distribution and support of its product be used to establish a competitive advantage in the market place?

Insights into these questions has been found by

porter who has proposed the following :

a) A frame work to delineate competition in an industry. forces of

b) The concept of strategic groups to define relevant competitors. c) A set of generic competitors, and strategies pursued by

d) The value chain concept.

Existing firms in the Industry: Existing firms in an industry influence industry

profitability by using tactics that either reduce

the revenue potential for the industry product

(eg: through price competition) or increase the cost

of delivering the product to industry buyers

(eg : through higher advertising budgets, or increased

customer service or warranties)

The intensity of rivalry is moderated by a number

of structural factors. These factors include the

number and diversity of competitors, industry

growth, product differentiation, fixed and storage

costs and exit barriers.

FACTORS MODERATING RIVALRY AMONG EXISTING FIRMS Factor Number and Diversity of Competitors Hypothesized Impact on Industry Profits High concentration (industry domination by few firms) generates higher industry profits since the industry leader or leaders play a coordinative role through mechanisms such as price leadership.

Diversity among competitors (in terms of size, ownership, strategies, origins, etc) depresses industry profits because of their different circumstances and goals.

Factor
Industry Growth

Hypothesized Impact on Industry Profits

Slow industry growth depresses industry profits by increasing market share expansion rivalry among firms and by demanding more financial and managerial resources. High fixed or storage costs tend to depress industry profits since firms often resort to price-cutting to increase capacity utilization.

Fixed or Storage Costs

Factor Product Differentiation

Hypothesized Impact on Industry Profits Low perceived differentiation (i.e, commodity or near commodity products) reduces prices (since choice by the buyer is based on price) and depresses industry profits. High exit barriers (such as specialized assets, fixed costs including labor agreements and resettlement costs, emotional barriers, government and social restrictions, and sharing of facilities, markets, etc. by business units) depress industry profits since marginal firms do not leave the industry.

Exit Barriers

Potential Entrants to the Industry :

New entrants represent a second possible threat to existing firms in an industry. - In an effort to establish themselves in the industry, new entrants may use tactics that adversely affect

the industry profit potential

- These tactics may include setting a lower price for the industry product or ensuring a lower product cost if these entrants bring new technology or capacity to the industry.

Threat of entry can be moderated by industry barriers

to entry and possible retaliation from existing firms. Barriers to entry arise from six major sources: a. Economies of scale b. Product differentiation c. Capital requirements d. Buyer switching costs

e. Distribution channels
f. Absolute cost advantage and

FACTORS CREATING BARRIERS TO ENTRY Factors Hypothesized Impact on Industry Profits

Economies of Scale.

Scale

economies

(whether

present

in

manufacturing, purchasing, research and development, marketing, service network, sales force utilization, or distribution) deter potential entrants because of cost advantage.

This minimizes the impact of potential

entrants on industry profits.

Factors
Product Differentiation.

Hypothesized Impact on Industry Profits

Product differentiation deters entry since

existing

firms

may

have

brand

identification and customer loyalty. This has a positive impact on industry profits.

Capital Requirements.

The large capital requirements deter potential entrants and have a positive impact on industry profits.

Factors Switching Costs.

Hypothesized Impact on Industry Profits The high switching cost to the buyers

(one-time cost of switching from one

supplier's product to the other supplier's product) deters new entrants and has a positive impact on industry profits.

Factors Distribution Channels.

Hypothesized Impact on Industry Profits The lack of access to distribution channels deters potential entrants and has a positive impact on industry profits. Cost advantages (whether because of proprietary technology, favorable access to location or new materials, government subsidies, etc.) deter potential entrants and have a positive impact on industry profits.

Absolute Cost Advantage.

Suppliers to the Industry :

Suppliers

to

an

industry

affect

industry

profitability through the price they charge for supplied goods. The intensity of their impact on

profitability depends on their bargaining power

over industry participants.

Bargaining power is moderated by several structural factors including

a. The number of suppliers b. The competitors to the suppliers produced by substitute products sold by the industry. c. The volume sold

d. The differentiation products and

among

the

suppliers

e. The threat of forward integration into the industry from suppliers.

Supplier bargaining power is at its zenith when : 1. The buyer group is more fragmented than the supplier group. 2. There are no substitutes for the product offered by the supplier group to the buyer group. 3. The buyer group is not a major customer of the supplier group.

4. The product offered by the supplier group is an

important input into the product offered by the

buyer group.

5. The supplier groups products are differentiated so

that the buyer group cannot play one supplier

group against another and.

6. The supplier group can integrate forward into the buyer group.

FACTORS MODERATING SUPPLIERS' BARGAINING POWER Factor. Number of Suppliers. Hypothesized Impact on Industry Profits. A supplier group depresses industry profits if it is more concentrated (dominated by few companies) than the industry it sells to, since it can influence the prices, quality, and terms it offers to the industry. Substitute Products. A supplier group depresses industry profits if the product it sells to the industry does not compete with substitutes or is an important input to the industry.

Factor.
Volume Sold

Hypothesized Impact on Industry Profits. A supplier group depresses industry

profits if the industry is not an important customer of the supplier group.

Product Differentiation

A supplier group depresses industry profits if the group's products are differentiated

since the industry cannot play one supplier

against another. Forward Integration A supplier group depresses industry profits if it poses a credible threat of forward integration into the industry.

Buyers of the Industry Products :

Buyers of an industry product can influence industry profitability by demanding lower prices, higher quality and more and better services. 1. The number of buyers and the volume purchased by them from the industry. 2. The product differentiation offered by the

industry to buyers.
3. The profitability potential of the buyer

4. The threat of backward integration into the

industry from buyers.

5. The importance of industry product to the

buyers and
6. The influence of buyers (eg : intermediaries) on the ultimate consumer who buy the industry product from the buyer.

The bargaining power of a buyer group is magnified

when: 1. There are more sellers than buyers. 2. The buyer group purchases a significant volume of the product sold by the sellers. 3. The product sold is standard or undifferentiated.

4. The buyer group operates at a lower profit

margin and attempts to improve its profitability by lowering the purchasing cost of the product it buys from the seller group. 5. The product sold by the seller group is not an important input into the product offered by the buyer group and

6. The buyer group can influence the end users of

the seller groups product.

Product Substitutes : Industries producing substitute products can influence industry profit ability by limiting the prices industry participants can command for their product. - The intensity of influence is moderated by the functional similarity between the industry product and the substitutes price / performance trade - off 's offered by the substitutes, and profit margins provided by substitute products - tend to depress industry profits.

FACTORS MODERATING THE IMPACT OF SUBSTITUTE PRODUCTS

Factor Functional Similarity.

Hypothesized Impact on Industry Profits High functional similarity (products that can perform the same function as the product of the industry) depresses industry profits.

Price Performance Trade Off. Profitability Of Substitute Products.

Substitute products that provide better priceperformance than the industry product depress industry profits.
Substitute products produced by industries earning higher profits depress industry profits.

Strategic Groups :
Although the five competitive forces collectively determine

the industry profitability, the profit performance of individual

firms depend upon the nature and execution of competitive strategies in the industry. Acc to Porter, "The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defined itself against these competitive forces or can influence them in its favour".

Formation of Strategic Groups :

A firms competitive strategy can be defined using several dimensions that differentiate it from other firms in the industry, which in turn should contribute to its relative performance in the industry.
These dimensions consist of two sets of activities . 1. Business scope commitments & 2. Business resource commitments Business scope commitments include : a. b. c. The target market segments of the business The types of products and services offered in the target markets The geographic reach of the product - market strategy

 Resource commitments include the allocation of resources to those functional areas considered central to achieving and retaining a competitive advantage in targeted product - markets. When a set of firms compete within an industry on the basis of similar combinations of scope and resource commitments they are considered participants in a strategic group. Most importantly, strategic groups are sensitive to the particular dimensions used and the number of dimensions employed. Different dimensions can produce different strategic groups and result in a situation in which group membership changes. Eg : Advertising expenditure as a percentage of sales could be used as a resource commitment.

 The percentage of business volume sales sold through a specific distribution channel could be another dimension of the scope commitment.

Alternative or multiple dimensions could produce very different strategic group formations. Decisions concerning which product - markets to retain, delete or add to firm's portfolio need to be further assessed in terms of the particular strategic group the product - market belongs to.
The nature and intensity of entry barriers and the scope of retaliation from current competitors will differ for different strategic groups.

The strategic group analysis provides the following means of assessment : 1. The strategic group the firm should consider entering. 2. The type and level of entry barriers the firm will face when penetrating the chosen strategic group. 3. The number & type of competitors the firm will encounter 4. The strategic dimensions that will make the firm similar to its strategic group members and different from members of other strategic groups and

5. The relative effect of the five forces of competition on its

relative profitability.

 As strategic groups define "sub industries" within an industry, the decision to enter a new product market may also involve

moving from one strategic group to another within the same

industry. In such situations, a firm will face "mobility" barriers which will affect its move from one group to another group in the same

industry.