Chapter four
DEALING WITH COMPETITION
• A useful way to define competition is to differentiate between natural
and strategic competition.
• Natural competition refers to the survival of the fittest in a given
environment.
• It is an evolutionary process that weeds out the weaker of two rivals.
• it means that no two firms doing business across the board the same
way in the same market can coexist forever.
• To survive, each firm must have something uniquely superior to the
other.
• this type of competition occurs by trial and error.
• Strategic competition is the studied deployment of resources based on a high
degree of insight into the systematic cause and effect in the business ecological
system.
• It tries to leave nothing to chance.
Strategic competition requires:
(a) an adequate amount of information about the situation,
(b) development of a framework to understand the dynamic interactive system,
(c) postponement of current consumption to provide investment capital,
(d) commitment to invest major resources to an irreversible outcome, and
(e) an ability to predict the output consequences even with incomplete knowledge
of inputs.
Competition is the process of active rivalry between the sellers of a
particular product as they seek to win and retain buyer demand for
their offerings.
competitors are those which offer identical products or services to
the same customers.
However, substitute products and services highlight the nature of
indirect competition which must also be taken into account.
Five levels of competition have been suggested: direct competition,
close competition, products of a similar nature, substitute products
and indirect competition.
Strategists who are engaged in competitor analysis should answer the
following five questions.
• who are our competitors?
• What are their objectives?
• What strengths and weaknesses do they possess?
• How are they likely to behave and, in particular, how are they likely to
react offensive moves?
• What strategies are they pursuing and how successful are they?
Michael Porter five forces
1. Threat of new entrants it is very important to look-in to the future
and to try to enter the industry as a new competitor.
An industry’s attractiveness varies with the height of its entry and
exit barriers.
The most attractive segment is one in which entry barriers are high
and exist barriers are low.
Because few firms can enter the industry, and poor performance firm
can easily exit
2. Threat of substitute products
• Firms in one industry may be competing with firms in other industries
that produce substitute products.
• offerings produced by firms in another industry that satisfy similar
consumer needs but differ in specific characteristics.
• Substitutes can limit the prices that firms can charge.
• Hence, firms that operate in industries with few or no substitute are
more likely to be profitable
3. suppliers’ growing bargaining
power
• The stronger the power of the suppliers, the greater the threat of forward
integration by becoming their own customers”.
• the greater the threat of the suppliers entering the industry as an additional
competitor possibly with significant competitive advantage if they have direct
access to limited raw materials.
• An additional threat is that the more concentrated the supply aspect of the
industry then the greater the risk that one or more of these few firms
competing in the industry might decide to involve itself in backward
integration.
• Backward integration refers to going back into the supply source which feeds
the industry with raw materials and other supplies used in the production
process.
Suppliers tend to be powerful
• when they are concentrated or organized,
• when there are few substitutes,
• when the supplied product is an important input for the industry,
• when the costs of switching suppliers are high and
• when suppliers can integrate backward.
The best defenses are to build win-win relations with suppliers which
benefits both the supplier and the buying firm or use multiple supply
sources.
4. Buyers’ Growing Bargaining
Power
An industry is unattractive if the buyers possess strong or growing bargaining power.
They will try to force prices down, demand, more quality, or services, and set competitors
against each other, all at the expense of seller profitability.
Buyers bargaining power grows when:
• They become more concentrated or organized
• The product represents a significant fraction of the buyer’s costs
• The product is undifferentiated,
• The buyers’ switching costs are low
• Buyers are price sensitive.
• Buyers can integrate forward by becoming their own suppliers.
• Buyers have complete information
A better defense consists of developing superior offers that strong buyers cannot refuse.
5. rivalry among existing firms. An industry is unattractive if it already contains
numerous, strong, or aggressive competitors.
It is even more unattractive if:
the industry is stable and declining
the products/services are undifferentiated
fixed costs are high
exit barriers are high or
competitors are diverse in their origins, cultures, and strategies,
competitors have high stakes in staying in the industry
These situations will lead to frequent price wars, advertising battles, and new
product introductions and will make it expensive to compete.
Identifying competitors
• The industry perspective of competition: Here, an industry is seen to
consist of firms offering a product or class of products or services that
are close substitutes for one another;
• An example of this is a dairy product such as butter, where if the price
were to rise a proportion of consumers would switch to margarine.
• From this it can be seen that competitive dynamics are influenced
initially by conditions of supply and demand.
• These in turn determine the industry structure, which then influences
industry conduct and, subsequently, industry performance.
categorized an industry in terms of five types:
i. An absolute monopoly, in which, because of patents, licenses, scale
economics or some other factor, only one firm provides the product or
service
ii. A differentiated oligopoly, where a few firms produce products that are
partially differentiated
iii. A pure oligopoly, in which a few firms produce broadly the same
commodity
iv. Monopolistic competition, in which the industry has many firms offering a
differentiated product or service
v. Pure competition, in which numerous firms offer broadly the same product
or service.
other factors exist which can have equally dramatic implications for the
nature and bases of competition. These include:
• Changes within the distribution channels
• Changes in the supplier base
• Legislation
• The emergence of new technology.
The market perspective of competition: we can focus on companies that try to satisfy
the same customer needs or that serve the same customer groups.
Theodore Levitt has long been a strong advocate of this perspective, and it was this
that was at the heart of his classic article ‘Marketing myopia’ (Levitt, 1960).
In this article, pointed to a series of examples of organizations that had failed to
recognize how actual and potential customers viewed the product or service being
offered.
Thus in the case of railways, the railway companies concentrated on competing with
one another and in doing this failed to recognize that, because customers were looking
for transport, they compared the railways with airplanes, buses and cars.
The essence of the market perspective of competition therefore involves giving full
recognition to the broader range of products or services that are capable of satisfying
customers’ needs.
Identifying and evaluating
competitors’ strengths and
weaknesses
The marketing planner should as a first step therefore concentrate upon
collecting information under a number of headings as a prelude to a full
comparative assessment. These headings include:
Sales and Market share
Cost and profit levels, and how they appear to be changing over time
Cash flows and Return on investment
Investment patterns and Production processes
Levels of capacity utilization and Organizational culture
Products and the product portfolio
Product quality, The size and pattern
Analyzing Competitors
Understanding the competition involves:
Knowing the strength of each competitor’s position
Knowing the strength of each competitor’s offering
Knowing the strength of each competitor’s resources
Understanding each competitor’s strategy.
Against this background, the planner needs then to think about how
this information can best be used. In discussing this, Ohmae (1983)
argues for a focus upon four areas:
1.The market’s key factors for success
Identify the key factors for success for industry
Inject resources where you can gain a competitive advantage
2. Relative superiority
Exploit differences in competitive conditions between a company and
its rivals using technology and the sales network
3. Developing aggressive initiatives
• Challenge assumptions about the way of doing business
• Change the rules of the game
• Challenge the status quo
• Develop a fast-moving and unconventional strategy
4. Developing strategic degrees of freedom
• Be innovative
• Open up new markets or develop new products
• Exploit market areas untouched by competitors
• Search for ‘loose bricks’ in their position.
Analyzing Competitors Reaction
Patterns
Most competitors fall into one of four categories:
1.The laid-back competitor- a competitor that does not react quickly or
strongly to a rival’s move.
Reasons for slow response vary. Laid-back competitors may feel:
their customers are loyal;
they may be milking the business;
they may be slow in noticing the move;
they may lack the funds to react.
Rivals must try to assess the reasons for the behavior
2.The selective competitor- a competitor that reacts only to certain types of attacks.
It might respond to price cuts, but not to advertising expenditure increases.
Knowing, what a key competitor reacts gives its rivals a clue as to the most
feasible lines of attack.
3. The tiger competitor- a competitor that reacts swiftly and strongly to any assault.
4.The stochastic competitor- a competitor that does not exhibit a predictable
reaction pattern.
There is no way of predicting the competitor’s action on the basis of its economic
situation, history, or anything else.
Many small businesses are stochastic competitors, competing on miscellaneous
fronts when they can afford it.
Classifying Competitors to Attack
and Avoid
a) Strong or Weak Competitors: Most companies aim their shots at weak competitors,
because this requires fewer resources per share point gained.
The firm should also compete with strong competitors to keep up with the best.
Even strong competitors have some weaknesses, and the firm may prove to be a
worthy opponent.
b) Close or Distant Competitors: Most companies compete with competitors who
resemble them the most.
At the same time, the company should avoid trying to destroy the closest competitor.
c) “Good” or “Bad” Competitors: Every industry contains “good” and “bad” competitors.
A company should support its good competitors and attack its bad competitors.
Good competitors characteristics:
play by the industry’s rules
make realistic assumptions about the industry’s growth potential
set prices reasonable in relation to costs; they favor a healthy industry;
limit themselves to a portion or segment of the industry
motivate others to lower costs or improve differentiation; and
Accept the general level of their share and profits.
Bad competitors characteristics:
buy share rather than earn it
take large risks; they invest in overcapacity; and
upset industry equilibrium
Competitive Strategies
According to Michael Porter (1980) the basic or generic competitive strategies include the
following.
1. Cost -leadership - is gained by being the lowest-cost producer in the industry.
This provides the company flexibility in responding to competitive moves by always
being able to offer the lowest price to the consumer.
2. Differentiation - This strategy creates competitive advantage by offering products with
unique customer benefits or features not available from competitive offerings.
Here the company concentrates on creating a highly differentiated product line and
marketing program so that it comes across as the leader in the industry.
3. Focus - This strategy achieves competitive advantage by concentrating on a narrow
segment of a larger market.
Emphasis is often on quality or benefit in a tightly defined market sub-segments.
These firms might take four competitive strategies.
1. Market leader - the firms with the largest market share.
2. Market challenger - the runner-up firm which fights to overtake the
leader.
3. Market follower - the firm that also has a runner-up status but seeks
to maintain share and not challenge the leader.
4.Market nicher - the firm that serves small segments that the other
firms overlook or ignore.
1. Market Leader Strategies
It typically has the largest market share and, by virtue of its pricing,
advertising intensity, distribution coverage, technological advance and
rate of new product introductions, it determines the nature, pace and
bases of competition.
A distinction can therefore be made between market leadership
based not so much upon size, but upon innovation and different
patterns of thinking.
Because of their large volume sales, market leaders enjoy the
benefits of economies of scale and accumulated experience which
helps reduce costs and bolster profits
A market leader company may use the following strategies:
a.Expanding the Total Market Size: The dominant firm normally gains the most when the
total market expands. In order to expand the total market, the market leader should look
for:
New users - New users can be attracted from those who are still unaware of the
product.
Every product class has the potential of attracting buyers who are unaware of the
product or who are resisting it because of price or lack of certain features.
A company can search for new users among three groups:
those who might use it but do not (market-penetration strategy),
those who have never used it (new-market segment strategy), or
those who live elsewhere (geographical –expansion strategy)
New uses - New uses can be discovered and marketed to increase purchase.
More usage - More usage strategies aim at convincing buyer to use the
product more often and in greater amounts for each existing usage
occasions.
b. Protecting or Defending Market Share: While trying to expand the total
market size, the dominant firm must continuously defend its current business.
Coca Cola must constantly guard against Pepsi Cola.
c. expanding Market Share: Sometimes leaders can expand their relative
market share.
If this expansion comes in the served market, then even small increases in
share can lead to large increases in profitability.
2. Market Challenger Strategies
Firms that occupy second, third, and lower ranks in an industry are
often called runner-up, or trailing, firms.
These companies aspire to become market leaders, recognizing the
benefits of holding such an exalted position.
Challengers attack the leader and other competitors in order to try
and gain market share.
It is uncommon for market challengers to attack the leader directly.
They usually try to gain market share by attacking markets in which
the smaller and less efficient firms operate.
There are a variety of strategies that challengers can adopt.
• One strategy is to produce an enormous variety of types, styles and
sizes of products including both cheaper and more expensive models.
• This was a strategy adopted by the Japanese Seiko company when it
attacked the watch market.
• It accompanied this strategy with another which involved distributing
its watches through every possible channel.
• The wide variety of models it had available (over 2000) meant that it
could supply different types of channel with different models and
thereby avoid the adverse effects of channel conflict.
Choosing an Attack Strategy
• Frontal attack. Strong challengers sometimes match the market
leader's product, advertising, price, and distribution efforts. It attacks
strengths rather than weaknesses.
• Indirect attack. Attack competitive weaknesses or on gaps on
competitors market coverage.
• Diversify into unrelated products or leap frog into new technologies
to replace existing products.
3.Market- follower strategies
Market followers are able to copy what the leading firms produce and
save themselves the burden of massive investment costs.
• This means that they can operate very profitably at the going price in
a market.
• Such firms will obviously have to forget the market share which
comes from being first into the field.
• Providing they can stay cost efficient and obtain a reasonable share of
the market they can survive.
• They imitate or copy the product or service of the market leader
product or service.
4.Market niche strategies
Most industries include smaller firms that specialize in producing
products or in offering services to specific sectors of the market, i.e. in
specific segments.
In so doing they avoid the competitive thrusts of the larger firms for
whom specialization does not offer attractive economies of scale, that
is, the segments are too small to generate the kind of return on
investment that the larger firms require. This is a strategy called market
niching.
Market niching is a strategy that is not only of interest to small firms
but is also of interest to the small divisions of larger companies. The
latter firms seek some degree of specialization.
From a firm’s point of view, an ideal market niche is:
• Of sufficient size to be profitable to a firm serving it
• Capable of growth
• Of negligible interest to major competitors
• A good fit with the firm’s skills and resources.
Specialization is the corner-stone of market niching.
There is strong evidence to show that a strong brand in a niche
market earns a higher percentage return than a strong brand in a big
market.
