Competitive Analysis

Prof. P.V.S.SAI SSIM HYDERABAD

Why we need to study competition?

Competition implies rivalry between two or more interested parties for similar goals. In business it refers to the drive for the share of market consisting of similar customers.

Traditional view of Competition

Has been around variables of market strategy like product quality, adherence to delivery schedules, attractive prices and aggressive promotion. This is not sufficient and companies should focus on deep routed aspects like Whys and Hows

Modern View
By answering the following questions strategists can understand competition in a better perspective. 1. What is driving competition in a specific industry? 2. What actions the competitors are likely to take in the wake of increased competition? 3. How can a firm position itself to maintain competitive advantage in over the long run?

Types of Competitive Advantage

Ohmae and others identified two types of competitive advantage 1. Operational Competitive Advantage 2. Strategic Competitive Advantage

Operational Competitive Advantage refers to the short term advantage of a company over its competitors Strategic Competitive Advantage refers to the competitive advantage which enhances and ensures long term profit potential.

Competition: Some theoretical constructs

The Economists View Point The Marketing View Point Porters Frame work Closer Analysis of competition Ohmae model of building Competitive Advantage Porters model of building competitive advantage

The Economists view point

Provides useful insights into the nature of industry structure. This, to a large extent, determines a firms behaviour in market place. This can be understood by analyzing Industry Structure.

Types of Industry Structure

FACTOR
Number of Players --------------Product Differentiation --------------Entry or Exit
PERFECT COMPETITION MONOPOLISTIC COMPETITION

OLIGOPOLY

MONOPOLY

Many --------NO --------Open

Some --------YES --------Open

Few ------YES ------Restricted

One --------UNKNOWN ________ Blocked

Perfectly competitive industry consists of large number of sellers, marketing undifferentiated products. The other features are free entry and exit of firms, Perfect knowledge of market conditions, non intervention of the govt. In Monopolistic competition, there are many sellers, many customers and a differentiated product. An Oligopoly situation lies between monopolistic competition and monopoly situations. Consolidations, Mergers and Acquisitions will lead to oligopolistic situation.

The Marketing View Point

Competition is viewed through a buyers view point. The buyer, in his drive to satisfy need, may find different choices. Ex: Entertainment Need Choices are: Visit to a Park A Social call on a friend A Visit to a restaurant Listening to music Seeing a movie Playing cards Going for a picnic Watching TV

1. 2. 3. 4. 5. 6. 7. 8.

Thus, physical products may belong to different industries or technologies, they become competitors to each other. This view can be perceived as belonging to four types of competitors.

Kotlers Classification
1. 2. 3. 4. Desire Competitors Generic Competitors The Form Competitors The Brand Competitors

Levits Classic Article on Marketing Myopia is an excellent illustration of shifting the focus from product to need to ensure long term survival and growth of a firm.

Porters Framework to Analyze Industry Structure

According to Porter the industry structure has a strong influence in determining the competitive rules of the games as well as strategies potentially available to the firm The intensity and the state of competition depends on five basic forces which collectively determine the ultimate profit potential in industry.

The Five Forces are

1. Rivalry among the current competitors 2. Threat of new entrants 3. Threat of substitutes 4. Bargaining power of suppliers 5. Bargaining power of buyers

Industry Rivalry
1. 2. 3. 4. 5.
Determined by Number of Competitors Industry Growth Asset Intensity Product Differentiation Exit Barriers Among them, the number of competitors, and the industry growth are most influential.

Industries with high fixed costs are likely to opt for price wars in case of stagnant markets. Perceived or Real product differentiation dampens rivalry. Difficulty to exit intensifies competition.

Threat of New Entrants

The threat is intense in the case of mature markets. In the case of industry which is at introduction or growth stage, new players are welcomed as this expands the market. In case of mature markets, barriers to entry can be due to high capital requirement, proprietary technology, inaccessibility to distribution. In the absence of these entry barriers, intensity of competition may be severe. Ex: Dot Com Business.

Substitute Products
Substitutable products satisfying similar needs of the same customer group can intensify the competition. The similarity may be in terms of functional similarity, performance similarity or product identity. Ex: Steel tubes and PVC tubes, Wooden Doors and Plastic Doors, Leather shoes and Plastic shoes.

Bargaining Power of Buyers

Refers to the ability of the industrys customers to force the industry to reduce prices or supply with extra features at the same price. This usually happen when buyers have choice of substitutes for the same product. High Buyers concentration, threat of backward integration and low switching costs add to the power of the buyers. Ex: Reliance industries entering into cement business.

Bargaining power of Suppliers

Refers to a situation where suppliers can force the buyers to pay higher prices and thus effect their profitability. This would happen if suppliers enjoy monopoly. Suppliers concentration, Number of buyers, Switching costs, Substitute Raw materials and Threat of forward integration may decide this aspect.

Competitor Analysis : A Closer Look

A firm, for a corporate strategy in a workable time frame, need to have a closer look on the immediate competitor. Hence, competitive behaviour of each competitor is to be understood. This can be done by putting the following questions.

1. What is their competitive strategy? 2. How are they performing? 3. What are their strengths and weaknesses? 4. What actions can be expected from them in the near future?

Competitor Strategy
1. How is the competitor defining the business in terms of customer groups, customer functions, technologies and how vertically integrated is he? How is he segmenting the markets and what are his target segments? What are his missions for the specific product lines, business units and firm as a whole? What are the specific contribution expectations from each product line, business unit and for the total organisation? What are dominant policies for each functional area like production, design, marketing and so on? What are his financial resources and how are they being allocated over various business units and business functions?

2. 3. 4. 5.

Competitor Performance
The actual performance of the competitor, should be ascertained with the help of published information in terms of sales, profits, return on investment, market share, cash and cash flow situation? This should be a regular activity rather than a one time or ad hoc activity.

Competitor Strengths and Weaknesses

Function Marketing
Facilities and equipment

Personal skills

Organizational capabilities

Management capabilities

Ware housing Retail Outlets Sales Offices Training for sales staff

Door to Direct door selling sales Retail Service Selling network Advertising Custom After Sales er loyalty service

Industrial marketing Household marketing Large Customer Base

Competitors Reactions
This helps a company to choose Defense or Offense strategy. This can be studied at two levels: 1. Reaction to the secular trends. 2. Reaction to the moves of other competitors.

Porters Generic Strategies

Overall Cost Leadership Differentiation Focus.

Overall Cost Leadership

In this strategy, company makes all possible attempts to achieve the lowest costs in production and marketing. Efficiency is the keyword guiding all decisions to keep the costs low.

Differentiation
The aim is to achieve class leadership by creating something which is perceived as unique. The differentiation may be in terms of design or brand image, customer service, or dealer network or any other feasible dimension.

Focus
The underlying assumptions in Focus is that a firm should be able to serve a narrow strategic target effectively and efficiently. As a result the firm achieves either differentiation from meeting the need of a particular target segment better, or lower costs in serving the target, on both.