Chapter 2 Competition Analysis

8/6/2019 Chapter 2 Competition Analysis

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Competition analysis


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What is competition?y Competition is a contest between individuals, groups, nations, animals, etc.

for territory, a niche, or a location of resources. It arises whenever two or

more parties strive for a goal which cannot be shared. Competition occurs

naturally between living organisms which co-exist in the same environment.

y For example, animals compete over water supplies, food, etc. Humans

compete for water, food.

y Business is often associated with competition as most companies are incompetition with at least one other firm over the same group of customers.


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Competition analysis

y Building strong brands requires a keen understanding of competitors.

y New competition is coming from all direction

y Global competitors (eager to grow sales in new markets) e.g., Zongchina based company. Warid Royal bank of Scotland-BarclaysBank.

y

Online competitors (seeking cost efficient ways to expanddistribution) e.g., TESCO- Marks & Spencer-Dell

y Private label and store brands (designed to provide low-pricealternatives. E.g., Thunder cola, mekka cola


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Competitive forcesy Michael Porter has identified five forces that determine the

long run attractiveness of a market.

y Industry competition

y Threat of new entrants

y Threat of substitute product

y Buyer powery Supplier power.


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Competitive forces

IndustryCompetition

Threat ofNew entry

Buyerspower

Threat ofsubstitutes

Supplierspower


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Competitive forcesy Industry competition

An industry is unattractive if it already contains number of

strong or aggressive competitors.competitive industry lead to frequent price wars,

advertising battles and new product introduction and it is

very expensive to compete in such industry.

For example- The cellular phone market.


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Competitive forcesy Threat or new entrants

The most attractive segment is one in which entry barriers

are high and exit barrier are low.

It is not only the competitors that pose a threat to firms in

an industry; the possibility that new firms may enter the

industry also affects competition.For example- Zong cellular China based company enter

the Pakistan market as a new entrant.


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Competitive ForcesEntry Barriers

y Advertising (the incumbent company spending heavily on

advertising that new firms would find more difficult toafford.

y Customer loyalty - Large incumbent firms may have

existing customers loyal to established products. The

presence of established strong brands within a market canbe a barrier to entry in this case.


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Competitive Forcesy Threat of substitute product-

A segment is unattractive when there are actual or potential

substitutes for the product. Substitutes place a limit onprices and on profits.

If technology advances or competition increases, prices and

profits are likely to fall.

E.g., Surf excel is a substitute product of Arial


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Competitive Forcesy Threat of buyers growing bargaining power

y A segment is unattractive if buyers posses strong bargaining

power.y Buyers bargaining power are strong when they are few or

they purchase frequently or suppliers are many.

y Buyers can change suppliers easily.


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Competitive Forcesy Threat of suppliers growing bargaining power

y A segment is unattractive if the companys suppliers able to

raise prices or reduce quality supplied.y Suppliers are strong when there are few suppliers and many

buyers or the buyers purchases are not frequent.

y Suppliers can change buyers easily.


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Identifying Competitorsy The company should know about its competitors.

y Competitors in an industry are those they are satisfying the

same needs and wants of the target market/ customers.y E.g., Pepsi co, knows that Coca-Cola is its competitor

y Safe Guard knows that life boy is its competitor

y Proctal and Gamble knows that liver brother is its

competitor.


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Analyzing Competitorsy Strategies.

strategy is the scope and direction of the company over the

long term to achieve advantage through its limited resource in achallenging environment to fulfill the requirement of

customers.

In the analysis of competitors the company must check what

sort of strategy its competitors are using. E.g., the product

strategy, pricing strategy, distribution and promotion strategy.


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Analyzing Competitorsy Objectives

y Once a company has identified its main competitors and

their strategies, its must know, what is each competitorsseeking in the market place.

y The objective can be-maximize profits, sales growth, market

share, technological leadership, service leadership or a mix

of these.


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Analyzing Competitors

y Strength and Weaknesses

y A company needs to gather information about each

competitors strength and weaknesses.


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Analyzing Competitorsy Example of Strength and Weaknesses

Competitor-A is weak in Distribution and Technical assistanceCompetitor-C is Weak in all aspects.

Competitor-B is no weaknesses- can attack on the weak points of

Competitor A and B

Customer

Awareness

Product

Quality

Product

Availability

Technical

Assistance

Selling

Staff

Competitor-A excellent excellent poor poor good

Competitor-B good good excellent good excellent

Competitor-C fair poor good fair fair


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Analyzing Competitorsy Selecting Competitors

After the company has conducted customer Analysis and

examined its competitors carefully, it can focus its attackon one of the following classes of competitors.

1. Strong versus weak

2. Close versus distant

3. Good versus Bad


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Analyzing Competitorsy Strong versus Weak

Most companies aim their shots at weak competitors, because

this requires fewer resources.Competitor C in the previous example is weak competitor

comparatively.


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Analyzing Competitorsy Close versus Distant.

Most companies compete with the competitors that resemble

them most.For example

safeguard and Life boy Gold are close competitors.

Pepsi and Coca-Cola are closed Competitors.

Pepsi and Nestle are distant competitors


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Analyzing Competitorsy Good versus Bad

Every industry contains good and bad competitors. Good

competitors play by the industrys rules, they set prices inreasonable relationship to cost.

Bad competitors try to buy share rather than earn it.


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Competitive Strategiesy Market Leader Strategies:

y Among firms in an industry there is a business firm which is

acknowledged as Market leader.y The firm which has the largest market share

y Market leader leads other firms in Price change, New

Product Introduction, distribution and Promotions.

y

Some well know Market Leaders Microsoft, Intel, P&G,Caterpillar, Gillette


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Market leader40% Market Share

Market Challenger

30% Market Share

Market Follower

20% Market Share

Market Nicher

10%


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Market Challengery Market Challenger:

y Business firms that occupy the second highest market share

in the ranking are Market challengersy Pepsi Co, Ford.

y Some of the market challenger has overtaken the leaders.

For example Toyota has overtaken General Motors.


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Market Challenger Strategyy Price cut is the most intense reason of challenging a market

leader and maintaining quality.

y

Price reduction is achieved by decreasing the total fixed costy Or may challenge the leader by introducing Prestige Goods,

Price Discounts, Product line, Innovation, Services,

Intensive Distribution, low Manufacturing Cost and

Promotions.


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Market Follower

y Market Follower Strategy:

y product imitation might be as profitable as product

innovationy Innovator spend heavy cash on developing a new product,

distribute and promote it to people. But another firm comes

copy the new product and get the rewards of it at the

expense of market leader.

y Market followers are of three kind


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Market Follower strategiesy Counterfeiters:

y They copy market leader products and sell it to customers in black

market, e.g. Music companies, Videos.

y Cloners:

y Those companies who copy the name and packaging with slight

variation

y Imitators:

y Those companies who copy some part of the innovation frommarket leader but maintain the differentiation e.g. Sony mp3

players and iPods or Samsung touch phones and iPhones.


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Market Nicher:

y Market Nicher:

y An alternative to be a follower in large market is to be aleader in Small Market.

y Small business firms normally avoid competing with largerfirms thus targeting smaller markets.

y Firms with low share of the total market can become highlyprofitable.

yIn a study of hundreds of business units, the StrategicPlanning Institute found that the return on investmentaveraged 27% in smaller markets, but only 11% in largermarkets.


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Balancing Customer-Competitor Orientation

y Competitor Centered Companies: Companies that bring

changes to their marketing activities according to their

competitors:

y Customer Centered: Companies that bring changes to their

marketing activities according to their customer:


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Balancing Customer-competitor Orientation

cont..y Competitors-Centered

y Observed Situation

y Competitor W is going all out to crushus in north zone.

y Competitor X is improving itsdistribution coverage in the south zoneand hurting our sales

y Competitor Y has cut its prices in theeast zone and we lost 3% of the market

share in less than one-quarter.

y Competitor Z has introduced a newservice feature in the west zoneaffecting our sales.

y Reaction:

y We will withdraw from the north zone toavoid a messy battle.

y We will increase our trade-promotionbudget in the south zone

y We will meet the price cut in the east zone.

y We will increase our advertisingexpenditure in the west zone


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Balancing Customer-competitor Orientation cont..y Customer Centered

y Observed:

y The total market is growing 4% annually.

y The quality sensitive segment is growing at

8% annually.

y A growing number of customers have

expressed an interest in a 24-hour hotline,

which no one in the industry offers.

y Reaction:

y We will focus more effort on reaching and

satisfying the quality segment of the

market. We will buy better components,improve quality control, and shift our

advertising theme to quality.

y We will avoid cutting prices and making

deal because we do not want the kind ofcustomer that buys this way.

y We will install a 24-hour hotline if it looks

promising.


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Michael Porters Competitive Strategiesy Michael Porters competitive Strategies

1. Cost leadership

2. Differentiation3. Cost Focus

4. Differentiation Focus


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Michael Porters Competitive Strategies

conty Overall Price (Cost) Leadership: appealing to a broad section of the market by

providing products or services at the lowest price. E.g., Costco is the cost leader inretail stores, Hyundai is the cost leader in automobiles

y Differentiation: appealing to a broad section of the market through offeringdifferentiating features that make customers willing to pay premium prices, e.g.,

superior technology, quality, special features, and service.

y Price (Cost) Focus: concentrating on a narrow customer segment and competingwith lowest prices, which, again, requires having lower cost structure thancompetitors (e.g., a single, small shop on a side-street in a town, in which they willorder electronic equipment at low prices, or the cheapest automobile made in Indiaby TATA company)

y Differentiation Focus: concentrating on a narrow customer segment and competingthrough differentiating features (e.g., a high-fashion women's clothing boutique inParis, orFerrari).

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Chapter 2 Competition Analysis