CHAPTER 4 COMPETITIVE ANALYSIS FOR STRUCTUAL ATTRACTIVENESS

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1 By Roshan pant MBM 2 nd semester CHAPTER 4 Nepal Commerce Campus COMPETITIVE ANALYSIS FOR STRUCTUAL ATTRACTIVENESS Concept of Competition: This is the age of competition. Marketers must carefully identify and analyze their competitors. Competition can be in terms of brand, product-class, generic and geographic. Competition is a threat to the firm. A competitor is a firm in the market selling a product which is perceived as substitutable by buyers. Competitor analysis describes the competitors, evaluates the competitors, and anticipates the future actions of competitors. Sources of competition can be: 1. Lack of entry barriers: There are no entry barriers. This allows many firms to enter the market and deal in products which are substitutable. 2. New technologies: Research and development makes new production processes and technologies possible. They lead to product innovations. New products compete with old products. 3. Information technology: This has facilitated direct marketing through e-commerce. Internet and websites have increased competition. 4. Customer needs and preferences: Changing customer needs and preferences facilitate competition. 5. Environment forces: Changing environmental forces encourage competition. They can be political, legal, economic, and socio-cultural forces.

2 Importance of Competitor analysis in marketing: Avoid surprises. It helps to identify opportunities of competitive advantage and avoid threats. Surprises are avoided. Better planning can be done. Gain competitive advantage. Competitive advantage can be gained over rivals by gaining knowledge of their strengths and weaknesses. Superior value can be provided to customers. Competition is the rivalry between companies selling similar products and services with the goal of achieving revenue, profit, and market-share growth. Companies strive to increase sales volume by utilizing the 4 components of the marketing mix, also referred to as the 4P's: product, place, promotion, and place. Some of the early steps in designing a successful marketing strategy include knowing and understanding your competition. Consequently, if you are not current on who the competition is, it becomes likely that another firm can provide a competitive advantage, such as product offerings at lower prices or value added benefits. Identifying your competition and staying current with their products and services and critical to remain competitive in tshe market. Types of Competitors Direct Competitors A direct competitor is another company that offers the same products and services aimed at the same target market and customer base, with the same goal of profit and market-share growth. A direct competitor is what typically comes to mind when you refer to the term 'competition,' and usually the type that draws the most focus from company's when designing strategies. Customers will shop for a variety of price points, locations, service levels, and product features when determining their purchase. In comparison, though, customers will not similarly choose the same mix of these options - and this is where competition becomes a factor. Recognizing where your competition is positioned is a key factor in understanding the potential your business solutions can fulfill. Indirect Competitors Indirect competitor is another company that offers the same products and services, much like direct competitors; however, the same end goals are different. These competitors are seeking to grow revenue with a different strategy. Nearly every company is involved with some form of indirect competition. General contractors face indirect competition from do-it-yourself promoters, such as The Home Depot. Both of these strategies are aimed at satisfying the customer's needs and desires utilizing a different marketing mix. By outlining all the potential ways the

3 customer's needs can be met and using the marketing mix to handle the competition you can generate an advantage for your products and services. Replacement Competitors A replacement competitor is something someone could do instead of choose your product, But they re using the same resources they could have committed to your product. These are the most challenging competitors to identify. However, we must remember that our customers define our competition. After all, the competition is simply the other choices they may choose to make. So we must interview customers, listen to their social media conversations, and understand macro trends to gain an understanding of what choices they are really making. Spacely Games Example: The Magic Tree House series of children s books is a replacement competitor for Spacely Games. Essentially, if children have a free hour in their day, they can either decide to download a game or to read a book. Of course, I m being a little idealistic assuming the average 8-year-old in 2012 is really considering reading a book instead of playing a mobile game, but that s my end point. You have to be a bit of an anthropologist and really study your customers to determine what they consider as replacement competition for your products and services. So does an 8-year-old consider a book as competition for a mobile game? I m guessing no. However, does a major influencer on that purchase decision (in this case, the parent) consider a book to be a replacement competitor? Well, this parent certainly does. What Creates Competitive advantage? Targeting Consumers Another way to use marketing to develop a competitive advantage is to target consumers more effectively than your competitors. For example, imagine there are two businesses with similar products and marketing budgets, each competing for same pool of customers. If one business performs customer research to determine which demographics are most likely to use its product, that business knows to target its marketing campaign at those specific customers. Meanwhile, the other business wastes advertising dollars targeting customers it has little hope of attaining. Consequently, a business that incorporates marketing research into its campaign secures a competitive advantage, even if its product in itself provides no distinct advantage. Pricing You also can establish a competitive advantage by marketing the fact that your products are available at lower prices than your competitors offer. This is a strategy often used by retail stores and other businesses that provide largely identical products or services. If it's possible to keep your prices low permanently, you can gain enough advantage to drive your competitors out of business. A modified approach is to lower your prices periodically -- for example, by announcing one-day sales. Other options are to announce that you will honor competitors' coupons or guarantee the lowest price on certain products. Both techniques help

4 neutralize the marketing campaigns of your competitors and prevent customers from drifting toward other businesses. Unique and Qualitative products: The goal of your marketing strategy should be to establish a competitive advantage, meaning your business draws more customers from the same pool than other businesses in your sector. A competitive advantage can derive from a unique product or service. For example, if your business produces high-quality products that competitors cannot imitate, you enjoy a competitive advantage. Or if your business has access to proprietary methods or materials -- such as patented processes or inventions -- competitors might find it difficult to find marketing strategies that can overwhelm your distinct advantage. Superior Marketing Campaigns Superior marketing campaigns also can create competitive advantages. For example, if a business can convince consumers that its product offers significant advantages compared to others -- even if it doesn't -- that business will draw more customers and retain them longer. In industries where differences between products aren't overwhelming, competitive marketing techniques are the major way businesses create and maintain competitive advantages. For instance, many soda manufacturers can produce sweet beverages, yet just a few manufacturers manage to retain their front-runner status, largely by highlighting their products appeal through expensive marketing campaigns. KEY COMPETITOR ANALYSIS Competitor analysis in marketing and is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats. Profiling coalesces all of the relevant sources of competitor analysis into one framework in the support of efficient and effective strategy formulation, implementation, monitoring and adjustment. Competitor analysis is an essential component of corporate strategy. It is argued that most firms do not conduct this type of analysis systematically enough. Instead, many enterprises operate on what is called informal impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager continually receives. As a result, traditional environmental scanning places many firms at risk of dangerous competitive blindspots due to a lack of robust competitor analysis In formulating business strategy, managers must consider the strategies of the firm's competitors. While in highly fragmented commodity industries the moves of any single competitor may be less important, in concentrated industries competitor analysis becomes a vital part of strategic planning. Competitor analysis has two primary activities, 1) obtaining information about important competitors, and 2) using that information to predict competitor behavior. The goal of competitor analysis is to understand:

5 with which competitors to compete, competitors' strategies and planned actions, how competitors might react to a firm's actions, how to influence competitor behavior to the firm's own advantage. Casual knowledge about competitors usually is insufficient in competitor analysis. Rather, competitors should be analyzed systematically, using organized competitor intelligencegathering to compile a wide array of information so that well informed strategy decisions can be made. KEY COMPETITOR ANALYSIS One common and useful technique is constructing a competitor array. The steps include: Define your industry - scope and nature of the industry Determine who your competitors are Determine who your customers are and what benefits they expect Determine what the key success factors are in your industry Rank the key success factors by giving each one a weighting - The sum of all the weightings must add up to one. Rate each competitor on each of the key success factors Multiply each cell in the matrix by the factor weighting. Key Competitors analysis includes: Competitor profiling The strategic rationale of competitor profiling is powerfully simple. Superior knowledge of rivals offers a legitimate source of competitive advantage. A competitor profiling is to create detailed profiles on each of your major competitors. These profiles give an in-depth description of the competitor's background, finances, products, markets, facilities, personnel, and strategies. This involves: Background o location of offices, plants, and online presences o history - key personalities, dates, events, and trends o ownership, corporate governance, and organizational structure Financials o P-E ratios, dividend policy, and profitability o various financial ratios, liquidity, and cash flow o profit growth profile; method of growth (organic or acquisitive) Products o products offered, depth and breadth of product line, and product portfolio balance o new products developed, new product success rate, and R&D strengths o brands, strength of brand portfolio, brand loyalty and brand awareness o patents and licenses o quality control conformance o reverse engineering or deformulation Marketing

6 o segments served, market shares, customer base, growth rate, and customer loyalty o promotional mix, promotional budgets, advertising themes, ad agency used, sales force success rate, online promotional strategy o distribution channels used (direct & indirect), exclusivity agreements, alliances, and geographical coverage o pricing, discounts, and allowances Facilities o plant capacity, capacity utilization rate, age of plant, plant efficiency, capital investment o location, shipping logistics, and product mix by plant Personnel o number of employees, key employees, and skill sets o strength of management, and management style o compensation, benefits, and employee morale & retention rates Corporate and marketing strategies o objectives, mission statement, growth plans, acquisitions, and divestitures o marketing strategies Media scanning Scanning competitor's ads can reveal much about what that competitor believes about marketing and their target market. Changes in a competitor's advertising message can reveal new product offerings, new production processes, a new branding strategy, a new positioning strategy, a new segmentation strategy, line extensions and contractions, problems with previous positions, insights from recent marketing or product research, a new strategic direction, a new source of sustainable competitive advantage, or value migrations within the industry. It might also indicate a new pricing strategy such as penetration, price discrimination, price skimming, product bundling, joint product pricing, discounts, or loss leaders. It may also indicate a new promotion strategy such as push, pull, balanced, short term sales generation, long term image creation, informational, comparative, affective, reminder, new creative objectives, new unique selling proposition, new creative concepts, appeals, tone, and themes, or a new advertising agency. It might also indicate a new distribution strategy, new distribution partners, more extensive distribution, more intensive distribution, a change in geographical focus, or exclusive distribution. Similar techniques can be used by observing a competitor's search engine optimization targets and practices. For example, by conducting keyword research, one may be able to determine a competitor's target market, keywords, or products. Other metrics allow for detection of a competitor's success. Little of this intelligence is definitive: additional information is needed before conclusions should be drawn. A competitor's media strategy reveals budget allocation, segmentation and targeting strategy, and selectivity and focus. From a tactical perspective, it can also be used to help a manager implement his own media plan. By knowing the competitor's media buy, media selection, frequency, reach, continuity, schedules, and flights, the manager can arrange his own media plan so that they do not coincide. Other sources of corporate intelligence include trade shows, patent filings, mutual customers, annual reports, and trade associations. Some firms hire competitor intelligence professionals to obtain this information. The Society of Competitive Intelligence Professionals maintains a listing of individuals who provide these services.

7 New competitors In addition to analysing current competitors, it is necessary to estimate future competitive threats. The most common sources of new competitors are: Companies competing in a related product/market Companies using related technologies Companies already targeting your prime market segment but with unrelated products Companies from other geographical areas and with similar products New start-up companies organized by former employees and/or managers of existing companies The entrance of new competitors is likely when: There are high profit margins in the industry There is unmet demand (insufficient supply) in the industry There are no major barriers to entry There is future growth potential Competitive rivalry is not intense Gaining a competitive advantage over existing firms is feasible Competitor Analysis Framework Of Michael Porter Michael Porter presented a framework for analyzing competitors. This framework is based on the following four key aspects of a competitor: Competitor's objectives Competitor's assumptions Competitor's strategy Competitor's capabilities Objectives and assumptions are what drive the competitor, and strategy and capabilities are what the competitor is doing or is capable of doing. These components can be depicted as shown in the following diagram:

8 Competitor Analysis Components What drives the competitor What the competitor is doing or is capable of doing Objectives Strategy Competitor Response Profile Assumptions Resources & Capabilities Adapted from Michael E. Porter, Competitive Strategy, 1980, p. 49. A competitor analysis should include the more important existing competitors as well as potential competitors such as those firms that might enter the industry, for example, by extending their present strategy or by vertically integrating. Competitor's Current Strategy The two main sources of information about a competitor's strategy is what the competitor says and what it does. What a competitor is saying about its strategy is revealed in: annual shareholder reports

9 10K reports interviews with analysts statements by managers press releases However, this stated strategy often differs from what the competitor actually is doing. What the competitor is doing is evident in where its cash flow is directed, such as in the following tangible actions: hiring activity R & D projects capital investments promotional campaigns strategic partnerships mergers and acquisitions Competitor's Objectives Knowledge of a competitor's objectives facilitates a better prediction of the competitor's reaction to different competitive moves. For example, a competitor that is focused on reaching short-term financial goals might not be willing to spend much money responding to a competitive attack. Rather, such a competitor might favor focusing on the products that hold positions that better can be defended. On the other hand, a company that has no short term profitability objectives might be willing to participate in destructive price competition in which neither firm earns a profit. Competitor objectives may be financial or other types. Some examples include growth rate, market share, and technology leadership. Goals may be associated with each hierarchical level of strategy - corporate, business unit, and functional level. The competitor's organizational structure provides clues as to which functions of the company are deemed to be the more important. For example, those functions that report directly to the chief executive officer are likely to be given priority over those that report to a senior vice president. Other aspects of the competitor that serve as indicators of its objectives include risk tolerance, management incentives, backgrounds of the executives, composition of the board of directors, legal or contractual restrictions, and any additional corporate-level goals that may influence the competing business unit. Whether the competitor is meeting its objectives provides an indication of how likely it is to change its strategy. Competitor's Assumptions The assumptions that a competitor's managers hold about their firm and their industry help to define the moves that they will consider. For example, if in the past the industry introduced a new type of product that failed, the industry executives may assume that there is no market for the product. Such assumptions are not always accurate and if incorrect may present opportunities. For example, new entrants may have the opportunity to introduce a product similar to a previously unsuccessful one without retaliation because incumbant firms may not take their threat seriously. Honda was able to enter the U.S. motorcycle market with a small

10 motorbike because U.S. manufacturers had assumed that there was no market for small bikes based on their past experience. A competitor's assumptions may be based on a number of factors, including any of the following: beliefs about its competitive position past experience with a product regional factors industry trends rules of thumb A thorough competitor analysis also would include assumptions that a competitor makes about its own competitors, and whether that assessment is accurate. Competitor's Resources and Capabilities Knowledge of the competitor's assumptions, objectives, and current strategy is useful in understanding how the competitor might want to respond to a competitive attack. However, its resources and capabilities determine its ability to respond effectively. A competitor's capabilities can be analyzed according to its strengths and weaknesses in various functional areas, as is done in a SWOT analysis. The competitor's strengths define its capabilities. The analysis can be taken further to evaluate the competitor's ability to increase its capabilities in certain areas. A financial analysis can be performed to reveal its sustainable growth rate. Finally, since the competitive environment is dynamic, the competitor's ability to react swiftly to change should be evaluated. Some firms have heavy momentum and may continue for many years in the same direction before adapting. Others are able to mobilize and adapt very quickly. Factors that slow a company down include low cash reserves, large investments in fixed assets, and an organizational structure that hinders quick action. Competitor Response Profile Information from an analysis of the competitor's objectives, assumptions, strategy, and capabilities can be compiled into a response profile of possible moves that might be made by the competitor. This profile includes both potential offensive and defensive moves. The specific moves and their expected strength can be estimated using information gleaned from the analysis. The result of the competitor analysis should be an improved ability to predict the competitor's behavior and even to influence that behavior to the firm's advantage.

11 ANALYZING AND CREATING COMPETITIVE ADVANTAGE(MICHAEL PORTER APPROACH) Michael Porter s five forces model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should based on an understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from Porter s Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. New Entrants Suppliers Industry competitors and extent of rivalry & advantage Substitutes Buyers Overview of Porter s Five Forces Porter s Forces model is an outside looking in business unit strategy tool that is used to make an analysis of the attractiveness or value of an industry structure. The Competitive Forces analysis is made by the identification of 5 fundamental competitive forces: The entry of competitors (how easy or difficult is it for new entrants to start to compete, which barriers do exist) The threat of substitutes (how easy can our product or service be substituted, especially cheaper) The bargaining power of buyers (how strong is the position of buyers, can they work together to order large volumes) The bargaining power of suppliers (how strong is the position of sellers, are there many or only few potential suppliers, is there a monopoly) The rivalry among the existing players (is there a strong competition between the existing players, is one player very dominant or all all equal in strength/size) The Original Porter s Five Factors for competitor advantage and competitive advantage: Michael Porter s Factor 1) Threat of New Entrants

12 The easier it is for new companies to enter the industry, the more cut-throat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include: Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources Government restrictions or legislation Entry protection (patents, rights, etc.) Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Absolute cost advantages Learning curve advantages Expected retaliation by incumbents Michael Porter s Factor 2) Power of Suppliers This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company s margins and volumes, then they hold substantial power. Here are a few reasons that suppliers might have power: There are very few suppliers of a particular product There are no substitutes The product is extremely important to the buyer, they cannot do without it The supplying industry has a higher profitability than the buying industry Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Presence of substitute inputs Supplier concentration to firm concentration ratio Threat of forward integration by suppliers relative to the threat of backward integration by firms Cost of inputs relative to selling price of the product Michael Porter s Factor 3) Power of Buyers/ Customers This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company s margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power Small number of buyers Purchases of large volumes Switching to another (competitive) product is simple The product is not extremely important to the buyer, they can do without it for a period of time. Customers are price sensitive Buyer concentration to firm concentration ratio Bargaining leverage Buyer volume Buyer switching costs relative to firm switching costs

13 Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Price of total purchase Michael Porter s Factor 4) Availability of Substitutes What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses to be a serious threat. Here are a few factors that can affect the threat of substitutes: Buyer propensity to substitute Relative price performance of substitutes Buyer switching costs Perceived level of product differentiation Fad and fashion Technology change and product innovation The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker is likely to switch over to a beverage like tea because the products are so similar. If substitutes are similar, then it can be viewed in the same light as a new entrant. Consider technology substitutes (who would have thought that MP3 technology would replace tape & CD s?) Michael Porter s Factor 5) Competitive Rivalry And last but not least, this describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from: Many players of about the same size, no dominant firm. Little differentiation between competitors products and services. A mature industry with very little growth. Companies can only grow by stealing customers away from competitors. For many industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc. Number of competitors Rate of industry growth Intermittent industry overcapacity Exit barriers Diversity of competitors Informational complexity and asymmetry Fixed cost allocation per value added Level of advertising expense

14 Use of the Porter s Five Forces model The Porter s Five Forces tool is a simple but powerful tool for understanding where power lies in a given business situation. This is important, as it helps you understand both the strength of your current competitive position, and the strength of a position you re looking to move into. With a clear understanding of where power lies, using the Five Forces) you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your business planning toolkit. Supplier Power Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products Degree of Rivalry Exit barriers Industry concentration Fixed costs/value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes Threat of Substitutes Switching costs Buyer inclination to substitute Price-performance trade-off of substitutes Buyer Power Bargaining leverage

15 Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers incentives STRATEGIC RESPONSE TO COMPETITON (How to use or Competitive Strength to respond quickly) Understanding what your customers want and reacting to their needs quicker than your competitors can give you a crucial advantage in a tough market. To be competitive, you must ensure the main focus of your business is on your customers. You must also understand your competitors' strengths and weaknesses and how they will react to customer needs and changes in the industry, so you can stay one step ahead. At the same time you must make sure your business complies with relevant competition laws. This guide will explain how to use your competitive strengths to respond quickly and effectively to market trends and competitors. 1. Responding to competition 2. Understand your market and competitors 3. Find a unique selling proposition 4. Using strategies to compete 5. Using fair and legal competitive practices