Part 4 : Building Strong Part 4 : Building Strong BrandsBrands

Chapter 11 – Dealing with CompetitionChapter 11 – Dealing with Competition

Competitive ForcesCompetitive Forces

• Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market as follows:

a. Industry competitors (segment rivalry): a segment is unattractive if it already contains numerous, strong or aggressive competitors. These condition will lead to frequent price wars, advertising battles, and new product introduction (expensive to compete) e.g. cellular phone market

b. Substitute products: a segment is unattractive if substitutes place a limit on prices and on profits

Competitive ForcesCompetitive Forcesc. Potential entrants: a segment’s attractiveness varies with the

height of its entry and exit barriers. The most attractive segment is entry barriers are high and exit barriers are low. But the worst case when entry barriers are low and exit barriers are high e.g. airline industry.

- The main points of entry barriers: higher capital investment, economies of scale, patent and licensing, strategic location, raw materials, distributors, reputation etc

- The main points of exit barriers: moral or legal obligation to employees, creditors, customers; less worthy of book value assets, higher vertical integration (be able to make lower operating cost and more controllable)

d. Buyers’ growing bargaining power: a segment is unattractive when buyers are concentrated, product is undifferentiated, price sensitive, switching costs are low. Thus, firms must develop superior offers than competitors’ made.

e. Suppliers’ growing bargaining power: a segment is unattractive when suppliers are concentrated, few substitutes, supplied product is an important input, switching costs are high. Thus, firms must win-win relation

Identifying Competitors Identifying Competitors • Coca-cola versus PepsiCo (as competitor myopia). We can

identify competitors from two point of view as follows: I. Industry Concept of Competition:a. The number of sellers and the degree of differentiation (the

product is homogenous or highly differentiated). These characteristics give pure monopoly, oligopoly, monopolistic competition, and pure competition

b. Entry barriers and exit barriers (see the major points for each barrier in previous page)

c. Cost structure. Different firms strive to reduce their largest cost e.g. toy manufacturing involves heavy distribution and marketing costs, steelmaking involves heavy plant and raw material costs

d. Degree of vertical integration (integrate backward and forward). If inefficiency exists, the specialist firms take part (outsourcing methods)

e. Degree of Globalization. Companies in global industries need to compete on economies of scale and technological advancement

Identifying CompetitorsIdentifying Competitors

II. Market concept of competition: using the market approach, competitors are companies that satisfy the same customer need. For example: A competitor map of Eastman Kodak in the film business:

a. Direct competition as main competitors: Olympus for buying camera, Fuji for purchasing film, Adobe system for digitally manipulate pictures

b. Indirect competition: Hewlett Packard (HP) and Intel corporation

• Once a company identifies its primary competitors, it must ascertain their strategies, objectives, strengths, and weaknesses.

Analyzing CompetitorsAnalyzing Competitors

• Strategies to enter the major appliance industry

Vertical Integration

Qua

lity

Low

High

High Low

Group A•Narrow line•Lower mfg. cost•Very high service•High price

Group C•Moderate line•Medium mfg. cost•Medium service•Medium price

Group B•Full line•Low mfg. cost•Good service•Medium price

Group D•Broad line•Medium mfg. cost•Low service•Low price

Analyzing CompetitorsAnalyzing Competitors

• Objectives: it is important to know whether the parent company is running it for growth, profits or milking it.

• One useful initial assumption is that competitors strive to maximize profits on “short term” (current performance is judged by stockholders) versus “long term” (low profit to gain market share maximization)

• Other assumptions: market share growth, cash flow, technological or service leadership

Analyzing Competitors Analyzing Competitors

• Strength and Weakness: a company needs to gather information on Competitors’ Key Success Factor from customer ratings such as Customer Awareness, Product Quality, Product Availability, Technical Assistance, and Selling Staff

• Then the company will select the competitor:a. Strong versus Weak: company with fewer resources

can attack the competitors’ weak. Instead, with the abundant resources can attack the strong competitors

b. Close versus Distant e.g. Chevrolet compete Ford, not with Ferrari

c. Good versus Bad: a company should follow its good competitors and keep away from its bad competitors

Balancing Customer and Competitor OrientationBalancing Customer and Competitor Orientation

• In today’s global market, the companies should not overdo the emphasis on competitors. They should maintain a good balance of consumer and competitor monitoring

• Competitor-centered companies should be based on competitor’s marketing mix strategy as benchmarking and reacts these matters with company’s strong resources

• Customer-centered companies should be based on customer needs and thus company will find out the target market to serve e.g. quality-sensitive segment