Kotler
on Marketing; “Poor firms ignore their competitors; average firms copy their
competitors; winning firms lead their competitors”
In Topic 6 we will look at who the primary competitors are, How to ascertain their
strategies, objectives, strengths and weaknesses, and reaction patterns, How to
design a competitive intelligence system, and whether to position as market
leader, challenger, follower or nicher and also how to balance a customer
versus competitor orientation.
Markets have become so
competitive, understanding customers is no longer enough. Companies must start
paying keen attention to their competitors. Successful companies design and
operate systems for gathering continuous intelligence about competitors.’
Competitive Forces
To understand the nature and
characteristics of competitors, let us look at Michael Potter five forces that
determine the intrinsic long-run profit attractiveness of a market.
1. Threat of intense segment rivalry
2. Threat of new entrants
3. Threat of substitute products
4. Threat of buyers’ growing bargaining power
5. Threat of suppliers’ growing bargaining power
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, fixed costs are
high, exit barrier are high. There will be continuous price war, advertising
battles, new product introduction which will make it expensive to compete.
Threat of new entrants
- The segment’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 exit barriers are low. The worst case is when entry
barriers are low and exit barriers are high. Here firms enter during good times
but find it hard to leave during bad time. The result is chronic overcapacity
and depressed earnings for all.
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. Companies have to monitor price trends closely. If technology
advances or competition increases in these substitute industries, prices and
profits in the segment are likely to fall.
Threat of
buyers’ growing bargaining power - A
segment is unattractive if the buyers possess strong or growing bargaining
power. A better defense consists of developing superior offers that strong
buyers cannot refuse.
Threat of
suppliers’ growing bargaining power - A segment is unattractive if the company’s
suppliers are able to raise prices or reduce quantity supplied. The best
defenses are to build win-win relations with suppliers or use multiple supply
sources.
Identifying Competitors
A company is more likely to
be hurt by emerging competitors or new technology than by current competitors.
In recent years, many businesses failed to look to the internet for their most
formidable competitors.
Example 1: Barnes & Noble and Borders bookstore chains
and Jeffrey Bezos cyber bookstore Amazon.com.
A few years back Barnes
& Nobles and Borders bookstore chains were competing to see who could build
the most megastores where book browsers could sink into comfortable couches and
sip coffee. While they were still deciding, Jeffrey Bezos was building an
on-line empire called Amazon.Com.
Example
2): 230 years old Encyclopedia Britannica &
Microsoft’s Encarta.
In 1996, 230 years old
Encyclopedia Britannica dismissed it entire home sales force after the arrival
of its $5 per month subscription Internet site made the idea of owning a
32-volume set of books for $1,250 less appealing to parents. Britannica decided
to create an on-line site after realizing that computer-savvy kids most often sought
information on-line or CD-ROMs such as Microsoft Encarta which sold for $50.
What really smarts is that Britannica had the opportunity to partner with
Microsoft in providing content for Encarta but refused. In 1999 Britannica made
its entire encyclopedia available on-line at no cost and began earning revenue
via Web advertising sales.
Industry Concept
of Competition
We can examine competition
from both an industry and a marketing point of view. What
exactly is an industry? 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;
1. Number of Sellers
2. Degree of Product Differentiation
3. Presence or Absence of Entry, Mobility and Exit
barrier
4. Cost structure,
5. Degree of Vertical Integration
6.
Degree of
Globalization
Number of
Sellers and Degree of Differentiation
Monopoly - One firm provides a certain product or service. In
a country or area. An unregulated monopolist might charge a high price, do
little or no advertising. A regulated monopolist is required to charge a lower
price and provide more service as a matter of public interest.
Oligopoly – Usually a small number of large companies produce
products that range from highly differentiated to standardize.
Pure Oligopoly – consists of a few companies producing essentially
the same commodity (Oil, Steel).
Differentiated
Oligopoly – consists of a few
companies producing products (auto, camera) partially differentiated along
lines of quality, features, styling or services.
Monopolistic
competition – Competitor
able to differentiate their offers in whole or in part. E.g. beauty shop,
restaurants. Competitors focus on market segments where they can meet customer
needs in a superior way and command a price premium.
Pure competition – Many competitors offer the same product and
services. E.g. Stock market, Commodity market. No competitor will advertise
unless advertising can create a psychological differences within the industry.
Entry, Mobility
and Exit barrier - Industry differs
greatly in ease of entry. It is easy to open a new restaurant but
difficult to enter the aircraft industry. Major entry barriers include
high capital requirements, economies of scale, patents and licensing
requirements, scarce locations, raw materials, distributors and reputation
requirements.
An
industry may face mobility barrier when it tries to enter more
attractive market segment Firms face exit barriers such as legal or
moral obligations to customers, creditors and employees, government
restrictions.
Cost structure -
Each industry has a certain cost burden that shapes
much of its strategic conduct. Firms strive to reduce their largest costs. E.g.
Steelmaking involves heavy manufacturing and raw material costs.
Degree of
Vertical Integration - Companies
find it advantageous to integrate backward or forward (vertical integration).
E.g. Major oil producers carry on oil exploration, oil drilling, oil refining,
chemical manufacture and service stations operation. Vertical integration often lowers costs, and the company gains
a larger share of the value-added stream.
Degree of
Globalization - Some industries
are highly local while others are global (Oil, Aircraft engines etc). Companies in global industries need
to compete on a global basis if they are to achieve economies of scale and keep
up with the latest advance in technology.
Market Concept
of Competition
In addition to the industry
approach, we can identify competitors using the market approach. The market
concept of competition reveals a broader set of actual and potential
competitors. Competitors are companies that satisfy the same customer need. Example: a customer who buys a
word-processing package really wants “writing ability” a need that can also be
satisfied by pencils, pens or typewriters. Example: Eastman Kodak (film business) Olympus for buying camera
and Fuji for buying film.
Analyzing
Competitors
Once a company identifies
its primary competitors, it must ascertain their characteristics;
·
Strategies
·
Objectives
·
Strengths and
weaknesses
·
Reaction
patterns
Competitors
Strategies
A group of firms following
the same strategy in a given market is called a strategic group. Companies
need to constantly monitor the strategies of their competitors and attempt to
either outperform them using the same strategy or develop an opposing strategy
which is more in tune with consumer needs.
Competitors
Objectives
Determining
the objectives of a competitor is useful because it gives one an insight on how
competitors may respond to different types of competition.
·
Is the objective
short term profit maximization or long term?
·
Is it mixed
objective – profitability, market share growth, cash flow, technological
leadership, services leadership?
Companies must also monitor
its competitor expansion plans.
Questions need
to be asked;
·
What is each
competitor seeking in the market place?
·
What drives each
competitor’s behavior?
Many factors shape a
competitor’s objectives, including size, history, current management, and
financial situation.
If the competitor is a
division of a large company, it is important to know whether the parent company
is running it for growth, profit or as a milking cow.
Strengths and
weaknesses
A company needs to gather
information on each competitor’s strengths and weaknesses. Is the competitor?
Dominant – Controls the behavior of other competitors and has
a wide choice of strategic options.
Strong – Take independent action without endangering its
long- term position.
Favorable – Has exploitable strength and a more–than average opportunity
to improve its position.
A company needs to gather
information on each competitor’s Strengths and weaknesses. Is the competitor?
Tenable – Performing at a sufficiently satisfactory level to
warrant continuing in business, but exists at the sufferance of the dominant
company and has a less than average opportunity to improve its position.
Weak - Unsatisfactory performance but can improve.
Nonviable – Unsatisfactory performance and cannot improve. To
improve market share, many companies benchmark their most successful
competitors, as well as world-class performers. The technique is aimed at
improving or copying on best practices either within an industry or across
industries.
Reaction
patterns
Companies react differently
to competitive assaults. Some are slow to respond, others respond only to
certain types of attacks such as price cuts while others strike back swiftly
and strongly to any assault. Frequent price war, Price war are frequent as a
result of cost breakthroughs,
Designing
Competitive Intelligence System
·
Have an
Intelligence System in place
·
Selecting
Competitors
·
Designing
Competitive strategies
Having an
Intelligence System in Place
1. Setting Up
the System – identifying vital type of
competitors’ information, identifying the best sources of this information
& assigning a system manager.
2. Collecting
the Data – Data collected on a
continuous basis from people doing business with the competitors in the field.
(Sales force, suppliers, market research firm, trade associations).
3.
Evaluating and Analyzing the Data – The data are checked for validity and reliability,
interpreted and organized.
4. Disseminating
Information and Responding – Key
information is sent to relevant decision makers and manager’s inquiries are
answered. With a well design system, company managers receive timely
information about competitor via e-mails, telephone calls etc.
Selecting
Competitors
With good competitive
intelligence, managers will find it easier to formulate competitive strategies.
Companies can begin with Customer value analysis (CVA). Customer Value
Analysis – Customers choosing between competitive brand offerings on the basis
of which delivers the most customer value? Customer Value = Customer Benefits –
Customer Costs.
Customer Benefits include Product
Benefits, Service Benefits, Personnel Benefits and Image Benefits.
Very often managers conduct
a Customer Value Analysis to reveal the company’s strength and
weaknesses relative to various competitors. Major steps in such an analysis
are;
Identify the
major attributes customers’ value
– Customers are asked what attributes and performance levels they look for in
choosing a product or vendors.
Assess the
quantitative importance of the different attributes – Customers are asked to rate the importance of the
different attributes. If the customers diverge too much in their ratings they
should be clustered into different segments.
Assess the
company’s and competitors’ performance
on the different customer values against their rated importance.
Examine how a
customer in a specific segment rates the company’s performance against a specific competitor on an
attribute-by-attribute basis.
Monitor customer
values over time – The Company
must periodically redo its studies of customer values and competitor standings
as the economy, technology and features change.
Classes of
Competitors
Customer Value
Analysis – After the company has
conducted its customer value analysis, it can focus its attack on one of the
following classes of competitors:
Strong versus Weak – Most companies aims their shot at weak competitors, because this
requires fewer resources per share point gained.
Close versus Distant - Most companies compete with competitors who resemble them the most.
E.g. Chevrolet competes with Ford not with Jaguar.
Good versus Bad
– A company should support its good competitors and attack its bad competitors.
Good competitors play by the industry rules.
Designing
Competitive Strategies
Competitive Strategies can
be designed by classifying firms by the roles they play in the target market.
Are the Competitors; Market Leaders, Challenger, Follower
or Nicher.
Market Leader
Strategies – The firm has a large
market share in the relevant product market. Usually leads in price changes,
new product introductions, distribution coverage and Promotional Intensity
Example of Market Leaders
·
Kodak
(photography),
·
Microsoft
(Computer software),
·
Caterpillar
(Earth moving equipment),
·
Coke Cola (Soft
drinks)
The market leader should
look for new users, new uses and more usage of its products.
Expanding the Total Marketing – the dominant firm normally gains the most when the
total market expands.
Defending Market Share – While trying to expand total market size, the
dominant firm must continuously defend its current business.
Defense Strategies – Position defense involves building superior brand power, making the
brand almost impregnable.
Designing
Competitive Defense Strategies.
Flank Defense
– The market leader should also erect outposts to protect a weak front or
possibly serve as an invasion base for counterattack.
Preemptive Defense – A more aggressive maneuver is to attack before the enemy starts its
offense. A company can launch a preemptive defense in several ways. It can wage
guerrilla action across the market (hit here and there) and keep everyone off
balance.
Counteroffensive Defense – When attacked most market leader will respond with
a counterattack. An effective counterattack is to invade the attackers main
territory so that it will pull back its competition.
Mobile Defense
– In mobile defense, the leader stretches its domain over new territories that
can serve as future centers for defense and offensive. It spread through market
broadening and market diversification.
Contraction Defense – Large companies sometimes recognize that they can no longer defend
all of their territory. The best plan of action then appears to be planned
contraction (also called strategic withdrawal).
Designing
Competitive Strategies (Expanding Market Share)
Expanding Marketing Share –
Market leaders can improve their profitability by increasing their market
share. In many markets, one share point is worth tens of millions of dollars.
No wonder normal competition has turned into marketing warfare. It should be
noted that gaining market share does not automatically produce higher profits.
Much depends on the company’s strategy for gaining increased market share.
Market Challenger Strategies
– Firms that usually occupy second, third or lower ranks in an industry are
often called runner up, or trailing firms.
Example of
Market Challenger – Colgate,
Ford, Avis and Pepsi Cola. These firms are quite large in their own right. They
can adopt one or two postures and attack the leader and other competitor in an
aggressive bid for further market share or they can play along with the
leaders.
Defining the strategic
objective and opponents – A market challenger must first define its strategic
objectives. Most aim to increase market share.
Choosing a General Attack
Strategy - What attack options are available? Frontal Attack, Flank Attack,
Encirclement Attack, Bypass Attack, Guerrilla Warfare.
Choosing a
General Attack Strategy - What
attack options are available?
Frontal Attack
– Attacker matches its opponent’s product, advertising, price and distribution.
Flank Attack
– Concentrated on weaknesses. Flank attack can be directed along two strategic
dimension geographical and segmental.
Encirclement Attack – Attempt to capture a wide slice of the enemy territory through a
blitz. Launching grand offensive on several front.
Bypass Attack
– Bypassing the enemy and attacking easier markets to broaden one’s resource
base
Guerrilla Warfare – Consists of waging small, intermittent attacks to harass and
demoralize the opponent and eventually secure permanent footholds.
Choosing a
Specific Attack Strategy – The
challenger must go beyond the five broad strategies and develop more specific
strategies:
Price Discount
– Offer comparable product at lower price
Lower Price Goods – Offer an average or lower quality product at a much lower price
Prestige Goods
– Market challenger can launch a higher quality product and charge a higher
price.
Prestige Goods
– Market challenger can launch a higher quality product and charge a higher
price.
Product Proliferation – The Challenger can attack the leader by launching a
larger product variety, thus giving buyers more choice.
Product innovation – The challenger can pursue product innovation.
Improved Services – The challenger can offer new or better services to customers.
Prestige Goods
– Market challenger can launch a higher quality product and charge a higher
price.
Product Proliferation – The Challenger can attack the leader by launching a
larger product variety, thus giving buyers more choice.
Product innovation – The challenger can pursue product innovation.
Improved Services – The challenger can offer new or better services to customers.
Market Follower Strategies – Most companies prefers to follow rather than
challenge the leader. They must know how to hold and retain their current
customers. The follower has to define a growth path, but one that does not
invite competitive retaliation. Four broad strategies can be distinguished;
Counterfeiter
– Duplicating the leader’s product.
Cloner
– Emulating the leader’s product, name and packaging with slight variation.
Imitator
– Copies but maintain some differentiation.
Adapter –
Takes the leader’s product, adapt or improves it.
Market Follower Strategies – Most companies prefers to follow rather than
challenge the leader. They must know how to hold and retain their current
customers.
Market-nicher Strategies – An alternative to be a leader in a big market is to
be a leader in a smaller market. The key idea in nichemanship is
specialization. The following specialist roles are open to nichers:
End-user specialist; Vertical-level specialist; Customer size specialist; Specific customer
specialist; Geographic specialist; Product feature specialist; Job-shop
specialist; Quality price specialist; Service specialist; Channel specialist.
Balancing
Customer and Competitor Orientations
In today's global market,
companies should not overdo the emphasis on competitors but maintain a good
balance of consumers and competitor monitoring. Clearly Customer-Centered Companies
are in a better position to identify new opportunities and set a course that
promises to deliver long-run profits.
By monitoring customer
needs, a customer-centered company can decide which customer groups and
emerging needs are the most important to serve given its resources and
objectives.
Summary and
Conclusion
To prepare an effective
marketing strategy, a company must study its competitors as well as its actual
and potential customers. Companies need to identify competitor strategies,
objectives, strengths, weaknesses and reaction patterns. They also need to know
how to design an effective competitive intelligence system.
A company’s closest
competitors are those seeking to satisfy the same customers and needs and
making similar offers. A company should also pay attention to latent
competitors, who may offer new or other ways to satisfy the same needs.
Competitive intelligence
needs to be collected, interpreted and disseminated continuously. Managers
should be able to receive timely information about competitors.
Managers need to conduct a
customer value analysis to reveal the company’s strengths and weaknesses
relative to competitors. The aim of this analysis is to determine the benefits
customers want and how they perceive the relative value of competitors’ offers.
A market leader has the
largest market share in the relevant product market. To remain dominant, the
leader looks for ways to expand total market demand, attempts to protect its
current market share, and perhaps tries to increase its market share.
A market challenger attacks
the market leader and other competitors in an aggressive bid for more market
share. Challengers must also choose specific strategies, discount prices,
produce cheaper goods, produce prestige goods, produce a wide variety of goods,
product and distribution innovation, improve services, reduce manufacturing
costs or engage in intensive advertising.
A market follower is a
runner up firm that is willing to maintain its market share and not rock the
boat. A follower can play the role of counterfeiter, cloner, imitator or
adapter.
A market nicher serves small
market segments not being served by larger firm (Specialization).
As important as a competitive
orientation is in today’s global markets, companies should not overdo the
emphasis on competitors. They should maintain a good balance of consumer and
competitor monitoring.
Source: Marketing
Management 11th Edition, Philip Kotler (2003) Apprentice Hall
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