Lecture 6

Dealing with the Competition

Objectives

Distinguish the difference between an industry and market concept of competition;

Identify competitors strategies;

Determine competitors objectives and estimate competitors reaction patterns;

Select competitors to attack or avoid; and

Appreciate what is means to balance a customer and competitor orientation.

Commentary
Introduction
A vital skill for any marketer is the capacity to understand the nature of the competitive
environment surrounding the organization and how these evolve over time. This lecture
examines the forces that shape the competitive environment, then discusses how organizations
go about monitoring competition and finally, how organizations select which markets to compete
in and which markets to avoid. Kotler et al. (2009, pp. 227-228) make the point that intuitively
one would think it simple to identify a companys actual or potential competitors, citing clear
examples such as Coca Cola/Pepsi rivalry. However, probably the most significant threat is that
from emerging competitors or new technologies. The music recording industry badly
underestimated the threat posed by the peer-to-peer music sharing networks and the popularity
of the MP3 format that collectively resulted in a 25% decline in world-wide sales of music CDs
since 1999.
Industry Structure

Industry analysis refers to the assessment of attractiveness of an industry based on its

economic structure.

Comparative analysis assesses how each firm in an industry is likely to perform within
the structure of the industry.

We can examine competition from both an industry and a market point of view.
Industry Concept of Competition
According to Kotler et al., an industry is a group of firms that offer a product or class of products
that are close substitutes for each other (2009, p. 228). Marketers classify industries according
to number of sellers; degree of product differentiation; presence or absence of entry; mobility;
and exit barriers; cost structure; degree of vertical integration; and degree of globalization.
Market Concept of Competition
The market concept of competition focuses on the needs of the customer, and sees competition
in the form of those organizations that satisfy the same need. This rather broader view is more
latent in its approach, and alerts companies to possible unheard or un-thought of competitors.
Thus for Kodak the competition was not Fuji but the rise of digital cameras.

Competitive Forces
The famous business guru, Michael Porter argues that there are five forces determining the
structural attractiveness of an industry or market segment.
1. Potential new entrants: A segments attractiveness is determined by the nature of entry
and exit barriers. A segment with high entry barriers and low exit barriers is more attractive
that one with low entry barriers and high exit barriers.

Most attractive segments:

a. High entry barriers & low exit barriers.
b. Few companies can enter & poor performing companies exit easily.
c. High entry barriers and high exit barriers- high profit potential. Companies face
high risk.
d. Low entry and exit barriers returns low but stable.
e. Low entry barriers & high exit barriers depressed earning for all.
2. Buyers: segments with concentrated, powerful buyers are unattractive as their economic
power may force prices down and demand even greater levels of support. Major retailers
throughout the world use this power against their suppliers e.g. in Australia, both Coles
Myer and Woolworths exert strong price pressure on their suppliers.
Unattractive segments:
a. Buyers possess strong bargaining power.
b. Dominating buyer (Agora/Shopno/Meenabazar)
Buyers bargaining power grows:
c. Whey they become more concentrated
d. When product is undifferentiated
e. When product represents a significant fraction of the buyers costs.
f. When buyers switching costs are low
3. Substitutes: Where substitutes are available of sufficient quality, this tends to exert a
downward pressure on the price that suppliers can obtain.
A segment is unattractive:
a. Actual or potential substitutes
b. Substitute places a limit on prices & profits
c. If technology advances or competition increases, prices & profits fall.
d. Camera film/digital camera.
4. Suppliers: A segment is unattractive if it has concentrated, organized suppliers, few
substitutes, the product is important and the cost of switching supplier is high.
A. segment is unattractive:
a. Suppliers are able to raise prices or reduce the quantity.
b. Example: Mobile, BP, Shell or OPEC
Suppliers are concentrated
c. When they are concentrated or organized
d. Few substitutes
e. Supplied product is important product.

f.

Costs of switching supplier is high

g. Build win-win relationships with suppliers or use multiple supply sources.

5. Segment rivalry: A segment may be unattractive if there are a number of strong competitors,
require large capital expenditure, declining market size and aggressive competitors. This
leads to price wars, advertising battles and frequent new-product introductions.
A segment may be unattractive
a. A number of strong competitors,
b. Require large capital expenditure,
c. aggressive competitors
A segment may be more unattractive
d. declining market size
e. If fixed costs or exit barriers are high
f. If competitors have high stakes in the segments.
This leads to price wars, advertising battles and frequent new-product introductions.
Example: Mobile operator in BD & ISPs (689, march 2005) in Aust. Aggressive
marketing.

Figure 6.1: Porters five forces analysis. Source: Internet.

Porters model is very useful as it applies sound economic theory to the dynamic of business.

Competitor Analysis
In this section, let us briefly examine the main theories regarding the analysis of competitors.
Identifying Competitors
Companies that either make the same product or make products that satisfy the same needs
can be considered as a competitor. Remember that the main threat may be from latent
competitors, rather than current competitors.

Its not simple to identify a companys actual or potential competitors.

Coca Cola/Pepsi rivalry. Eastern Bank/HSBC Bank rivalry. Or, Biman/Emirates rivalry or
Biman/Malaysia.

The most significant threat is that from emerging competitors or new technologies.
Example: music recording industry has been loosing huge market share because of the
emergence of MP3 technology.

Emerging Giants from developing countries by exploiting knowledge of local factors of

production. Example: Indian software companies. (Infosys, Wipro, Satayam Computer)
or Inventec: Taiwan based notebook, PC & servers manufactures.

Once a company identifies its primary competitors, it must analyse their

Strategies

Objectives

Strengths & Weaknesses

Selecting Competitors to Attack and Avoid

Estimating Competitors Reaction Patterns

Determining Competitors Strategies

Organizations need to monitor constantly the strategies of their competitors, and attempt either
to outperform them using the same type of strategy, or develop an opposing strategy that is
more in tune with consumer needs.
A group of companies following the same strategy in a given target market is a
strategic group.
Kotler identifies four groups (2009, fig 11.3).
The height of the entry barriers differs for each group.
If the company successfully enters a group, the members of that group become its

key competitors.
Determining Competitors Objectives
Determining the objectives of competitors is useful because it gives one an insight into how
competitors may respond to differing types of competition. Kotler et al. (2009, p. 319) cites the
often heard argument that Western type organizations are more concerned with short-term
profits compared to their Japanese counterparts who focus on the long-term, especially
increasing market share.

Objectives:
What is each competitor seek in market?
What drives competitors behavior?
Short-run or long-run profit?

Objective mix:
Current profitability
Market share growth
Cash flow
Technological leadership
Service leadership

What is competitors expansion plan?

Assessing Competitors Strengths and Weaknesses

The above heading is basically a prerequisite in any competitive situation, be that in business,
politics or in the sporting arena. It is through the constant gathering of market intelligence that
companies are able to analyse the strengths and weaknesses of their competitors, and also the
values and assumptions of their competitors. Note that kotler et al. (2009, P. 320) argue that
there are three important variables: share of market, share of mind, share of heart. In summary,
Companies that make steady gains in mind share and heart share will inevitably make gains in
market share and profitability. Figure: SWOT analysis

Strengths & Weaknesses:

Rate the competitor according to Customer awareness, product quality, product

availability, technical assistance & selling staff.
SWOT analysis is the best tool.
You need to do SWOT analysis for each competitor including your company

(Google offers).

Company should also monitor 3 variables:

Share of market
Share of mind: Name the first company that comes to mind in this industry.

Share of heart: Name the company from which you would prefer to buy the
product.

Companies that make steady gains in mind share and heart share will inevitably make
gains in market share and profitability.
Selecting Competitors to Attack and Avoid

One of the most effective ways to position your company against its competitors is to undertake
a customer value analysis. Essentially, this involves the following.
1. Discover what customer value.
2. Determine how your company and your competitors measure up on such attributes.
3. Constantly monitor the above.
After the company has conducted customer value analysis, company should focus its attack on
one of the following classes of competitors:
Strong versus Weak: Most companies aim their shots at weak competitors, because this
requires fewer resources. Yet, the firm should also compete with strong competitors to
keep up with the best. Even strong competitors have some weaknesses.
Close versus Distant: Most companies compete with the competitors that resemble them
the most. Banglalink complete with GrameenPhone, not with Varati airtel. Coca-Cola
recognizes that its number-one competitor is tap water, not Pepsi. Bangladesh Museums
now worry about theme parks (such as wonderlands).
Good versus Bad: Every industry contains good and bad competitors. Good competitors
play by the industrys rules; they set prices in reasonable relationship to costs; and they
favour a healthy industry. Bad competitors try
to buy share rather than earn it; they take large risks; they invest in overcapacity; and
they upset industrial equilibrium. A company may find it necessary to attack its bad
competitors to reduce or end their dysfunctional practices.

Estimating Competitors Reaction Patterns

If an organization is considering making an important strategic move, it is vital that it

understands the possible reactions of competitors and likely scenarios from such reactions.
For example, Qantas and Virgin Blue currently are very quick to react to each others
marketing strategies, matching and responding very quickly to changes in each others
prices. Grameen Phone and Banglelink currently are very quick to react to each others
marketing strategies, matching and responding very quickly to changes in each others
prices.

Selecting Customers
At this stage, company must evaluate its customer base and think about which customers its
willing to lose and which it wants to retain. One way to divide up the customer base is in
terms of whether a customer is valuable and vulnerable, creating a grid of four segments as a
result, see table 6.1 (Kotler, p. 232).
Valuable

Not valuable

Vulnerable
These
customers
are
profitable
but
not
completely happy with the
company. Find out and
address their
sources of
vulnerability
to
retain
them.
These customers are likely
to defect. Let them go or
even encourage
their
departure.

Not vulnerable
These customers are loyal
and profitable. Dont take
them for
granted
but
maintain
margins
and
reap the benefits of their
satisfaction.
These
unprofitable
customers are happy. Try
to make them valuable
or vulnerable.

Table 6.1: Customer selection grid (Kotler et al. (2009), p. 232)

Balancing Customer and Competitor Orientations

The main point here is that despite all of the previous discussion being concerned with
focusing on competitors, there is a danger that this can lead the company to ignore its
customers. Moreover, a constant focus on competitors, without a balance, can lead to the
organization reacting to competitor moves as opposed to being innovative and making its
own decisions. Kotler et al (2009) explain in detail a comparative analysis of competitorcentered companies and customer-centered companies in page 245-246.

Only focusing on competitors can lead the company to ignore its customers.

Competitor Centred Companies

Positive side: Develop fighter orientation

 Negative side: Determines its moves based on competitors moves.

Customer Centred Companies

Better position to identify new opportunities
Better monitor customers needs.