Ch-12(dealing With Competition)

Chapter-12 Dealing with Competition

CHAPTER – 12. DEALING WITH COMPETITION: -

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To be successful, a firm needs to: o Understand customer & satisfy them profitably. o Deal with competition. To understand competition, starting point could be Porter’s 5-Forces Model determining segment structural attractiveness.

Competitive Forces: - Michael Porter has identified 5 forces that determines intrinsic/ long run profit attractiveness of a market/segment. - Forces are Industry competition.  Potential entrants. Potential Entrants  Substitutes. (Mobility Threat)  Buyers.  Suppliers. Suppliers (Supplier Power)

Industry Competitor (Segment Rivalry)

Buyers (Buyer Power)

Substitutes (Threat of Substitutes)

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Each force pose varying attracts to a firm that could be:-

Threats of Intense Segment Rivalry: - Segment is unattractive if: o Segment contains numerous / strong / aggressive competitors. o It is stable / declining. o Fixed costs are high. o Exit bearers are high. -

Above may lead to: o Price wars. o More advertising cost. o Multiple new product introductions which may be expensive.

Chapter-12 Dealing with Competition Threat of New Entrants: - Depends on size of entry/ exit/ barriers.

Low Low Low, Stable Returns Entry Barrier

High, Stable High Returns

High Low, Risky Returns High, Risky Returns

Threat of Substitute Product: - If actual/ potential substitute cost, then there is a limitation on price/ profit. Hence, segment may not be attractive. - Impact of technology change / competition is more in substitutes. Industry need to be monitored. Threat of Buyers Growing Bargaining Power: - If buyers have strong/growing bargaining power, then segment may be unattractive - This may happen when:  Buyers get organised.  Products you are selling is a significant purchase of buyers cost (intermediate products).  Product is undifferentiated, hence buyers can switch.  Buyers are price sensitive.  Buyers may integrate. Hence firms need to develop offers with superior C.D.V. Threat of Suppliers Growing Bargaining Power: - May be manifest through suppliers:  Increasing price  Reducing quality. -

Happens when situation similar \ reverse of buyer’s threat occurs. Firm needs to :  Develop multiple supply sources.  Develop win-win relationship with suppliers.

Chapter-12 Dealing with Competition Identifying Competitors: - Competition could be identified from two view points:  Industry point of view.  Market point of view. Industry Concept of Competition: Industry is a group of firms that offer a product class of products that are close substituted for one another. Industries may be classified based on:  Number of sellers.  Degree of vertical integration  Degree of globalization. -

Number of Sellers + degree of Product Differentiation: o Four industry structure type emerge based on this. o Pure Monopoly:  Only one form provides a certain product in a certain territory/ region.  May change high price & provide low value.  Regulated monopolist may be required to provide more service from public interest point of view. - Example: Indian Railways. o Oligopoly:  Small member of firm provide product (Standard/ Differentiated).  Types could be: - Pure Oligopoly: o Standard products/ commodities. o Example: cement/steel. - Differentiated Oligopoly: o Differentiated products (quality/ feature/ style). o Example: Automobile. o Monopolistic Competition:  Many companies are able to differentiate their product in part or in whole. - Example: Restaurants/ Beauty Parlours.  Competition focus on market segments where they can meet customer needs in a superior way & may command price premium. o Pure Competition:  Many companies offer same product/ service. Products are not differentiated. Prices are similar/ same. - Example: Stock Market brokers/ commodities.  Advertising may create psychological differentiation in which case industry may become monopoly competition.  Industry’s competitive structure may change over time.

Chapter-12 Dealing with Competition

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Entry/ Mobility/ Exit Barriers: o Industries differ in terms of the barriers they may present for entry/ mobility within the industry to enter specific/ more attractive segments. o Entry Barriers Include:  High capital requirements.  Economies of scale.  Patent/ License requirements.  Scarce location/ raw material/ distribution.  Reputation/ track record requirements.  Mobility barriers present a firm from moving across segments within an industry. o Exit Barriers Include:  Legal/ Moral obligation to customers/ Creditors/ Employer.  Government restrictions.  Low asset salvage value due to over specialization/ obsolescence.  Lack of alternative opportunity.  High vertical integration.  Emotional Barriers. o Firms may stay in an industry as long as variable costs are covered to some/ all part of fixed costs. However, this may dampen profits for every player in the industry. o Even if some firms do not wish to exit an industry, they may decrease their size.

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Cost Structure: o Each industry has a certain cost structure in terms of % of cost of MRP sheet on:  Raw material.  Production/ Plant & equipment.  Marketing.  Distribution.  After Sales Service.  Manpower. o Different firms may have varying competencies in each above.

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Degree of Vertical Integration: o Some industries may provide advantages if firms are vertically integrated. Integration could be forward/ backward. o However, some other industries may provide cost/ profit advantages if outsourcing is done to specialist firms.

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Degree of Globalisation: o Some industries are local/ global/ regional.

Chapter-12 Dealing with Competition o Firms need to understand their industry type & be competitive accordingly.

Market Concept of Competition: - In addition to the industry concept, competition may be identified from the market point of view. - Market concept of competition: o Competitors are companies that satisfy the same competitor need. - This may reveal a broader set of actual/ potential competitors. - A firm may need to profit: o Actual/ direct competition. o Potential/ indirect competition. - This may be done by mapping buyer’s steps/ stages in obtaining/ using products. - This analysis highlights both challenges/ opportunities that a firm may face. Analysing Competition: - Once a company identifies its primary competition, it needs to analyse/ understand their characteristic in terms of: o Strategies. o Objectives. o Strength/ Weakness. o Reaction Patterns. - Strategies: o A group of firms following the same/ similar strategy in a given market is called strategic group. o A company should identify strategic groups that exist in order to:  Understand entry/ exit barriers for each strategic group.  Pinpoint its competition & monitor their strategies. -

Objectives: o Company should try to understand the objective of each competitor individually. o Issues for analysis could be:  What is each competitor seeking from the market place?  What drives competitor behaviour?  Is competitor looking for: - Current profitability. - Higher market share. - Cash flows. - Technical leadership. - Service leadership. - A mix of above.  What are competitor expansion plans? (Check for mobility barriers).  Understand size/ history/ current management & financial situation of competition.

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Strength & Weakness:

Chapter-12 Dealing with Competition o Company needs to gather information on each competitor’s strength & weakness. o As per Aurthur D’Little, a company would occupy one of six competitive positions in the target market.

o These are  Dominant: - Leader: o Controls behaviour of other competitor. o Has wide choice of strategies.  Strong: - Can take independent action without putting long term positions in danger.  Favourable: - Firm has exploitable strength. - Can improve positions.  Tenable: - Just satisfactory to continue in business. - Less opportunity to improve.  Weak: - Unsatisfied performance. Firm must change or exit. - Opportunity to improve exists.  Non-viable: - Unsatisfactory performance. - No opportunity to improve. o Another way of analyzing strength & weakness of competition could be:  Market Share : Sales.  Mind Share : Top of mind recall.  Heart Share : Top of mind preference to buy product from. o Mind/ Heart share increase help to increase market share & profitability in long term. -

Reaction Patterns: o Companies react differently to competitive actions. o Some may respond slowly/ others quickly. o Some may respond only to price change. o Each industry is likely to have a competitive equilibrium. o This needs to be understood by firms/ companies. o Equilibrium could be stable/ unstable. o If differentiators are clear, equilibrium may be stable, else price reduction may lead to price wars.

Designing Competitive Intelligence System (CIS): - To formulate strategy, a good CIS needs to be designed. - For this, steps could be: o System Set up.

Chapter-12 Dealing with Competition Need to Identify: - Types of information needed. - Sources of information. - Manpower required. o Data Collection (Including Primary/ Secondary). o Data Evaluation/ Analysis. o Disseminate Information/ Responding. 

Customer Value Analysis (CVA): - Competition needs to be analysed using CVA. - Customer Value = Customer Benefit – Customer Costs. - Customer Value = Customer Benefit / Customer Costs. - For competitive situations: o Customer benefits include:  Product benefit.  Service benefit.  Personal benefit.  Image benefit. o Customer costs include:

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 Purchase price.  Acquisition costs.  Usage costs.  Maintenance costs.  Ownership costs.  Disposal costs. Analysis to be done for own/ competitor product. For this: o Identify major attribute valued by customers. o Assess relative importance of each attribute. o Assess company/ competition performance on each attribute. o Evaluate own performance with/ against competitor individually, attribute by attribute check CDV status. o Monitor customer values over time.

Design Competitive Strategies: - A market with competition may typically be occupied by: o o o o -

Market leader (40%). Market Challengers (30%). Market Follower (20%). Market Nichers (20%).

Figures % are for Typical Market Share.

Competitor strategies are different for each.

Market Leader Strategies: - Market leader strategies could be:  Expand total market demand.

Chapter-12 Dealing with Competition  

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Protect total market share. Increase market share.

Expanding Total Market: o In order to do this, market leader should look for: o New Users:  May be found in three ways. - Market penetration strategy. o Those who may use, but do not. - New market segment strategy. o Those who have never used. - Geographical expansion strategy. o New Uses:  Expand market by discovering/ promoting new product uses.  Example: Jute : Sacks to fashion Items. o More Usage:  Convince people to use more product per use occasion.  Example: Shampoo.

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Protect/ Defend Market Share: o While trying to expand, market leader needs to continuously defend its current business/ market share. o No major flank should be exposed. o Defense strategies could be (Six) :  Position Defense: - Involves building superior brand power.  Flank Defense: - Involves fortifying leading products with one another products for protection. - Example: Lux.  Pre-Emptive Defense: - Involves attacking before competitor starts its offence. - Example: Nokia handsets (many new products).  Counter Offensive Defense: - Involves responding to an attack with a counter attack. May be manifest through: o Invading attacker’s territory. o Price cutting. o Initiating political action to weaken competition.

Chapter-12 Dealing with Competition 

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Mobile Defense: - Involves switching domain over new markets. - Market broadening: o Move towards satisfying underlying genuine needs. - Market diversification: o Into unrelated areas. Contraction Defense: - Involves planned contraction/ strategic withdrawal to reassign resources to stronger products/ market. Manifest through line pruning.

Different strategies shown diagrammatically as: (2) Flank. Attacker

(3) Pre-Emptive. (4) Counter Offensive.

(1) Position

(6) Contraction

Defender

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(5) Mobile Expanding Market Share: o Market leaders can improve their profitability by increased market share. o As per a study by Strategic Planning Institute (SPI) called PIMS, a company’s profitability rises with its relative market share of served market shown as: P R O F I T A B I L I T Y

30

0

10

20 30 Market Share

40

50

o This has led to many companies pursuing market share expansion/ leadership as their objective. o However, cost of buying higher market share may exceed its revenue value, i.e., it may not lead to higher profitability at times. Hence, a company needs to consider following factors while trying for higher market share.  Possibility of providing legal/ anti trust action.

Chapter-12 Dealing with Competition Economic cost of more market share. Marketing mix strategy: - May not be a good idea to increase market share through price reduction alone. o Typically, companies that gain/ increase market share outperform competitor in 3-Areas:  New Product Development.  Relative Product quality.  Marketing Expenditure.  

Market Challenger Strategies: - Market Challenger are non market leader who attack the leader/ other competitor to increase market share. - Market challengers may follow the following process: o Define Strategies, objectives & opponents. o Choose a general attack strategy. o Choose a specific attack strategy. -

Defining Strategies, Objectives & Opponents: o Market challenger’s strategic objective could be to increase market share. o Opponents could be (for attacking):  Market Leader (High risk/ high pay-off strategy).  Firms of own size that are under performing/ under financed.  Small local/ regional firms.

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Choosing a General Attack Strategy: o Given clear opponents & objectives. Attack strategies could be as per diagram. Bypass Flank

Attacker

Frontal

Defender

Encirclement Guerilla o Frontal Attack:  Attacker matches opponents marketing mix, i.e., product/ price/ place/ promotion.  Side with greater resources (better P's) is likely to win.  Modified frontal: - Price reduces. - Example: Tide attacked Surf (market leader). o Flank Attack:

Chapter-12 Dealing with Competition Concentrates on opponents weakness. Could be directed on two dimensions. - Geographic. - Segmental (Create New Segments). o Encirclement Attack:  Capture wide share of opponents market by attacking on several fronts.  Makes sense only when market challenger has superior resources. o Bypass Attack:  Indirect attack involves bypassing opponent & attacking easier market to broaden one’s resource base.  Technology may play a role in bypassing.  

o Guerilla Warfare:  Involves waging small/ intermittent attacks to demoralize opponent & eventually secure markets.  May include: - Selective price cuts. - Interim promotion blitzes. - Occasional legal actions.  Normally practiced by smaller firms against larger firms.  May need to be followed up with other attack strategies for long term gains (may be experimental in nature). - Example: Paras pharmaceuticals:  Krack cream, Moov, Set-Wet, Livon. -

Choosing a Specific Attack Strategy: o Market challenger needs to go beyond 5-broad strategies & develop more specific strategy. o These could be:  Price discount.  Offer average product at much lower cost.  Prestige goods : High quality product at high price.  Product Proliferation : Offer high product variety.  Product Innovation : Offer product improvements.  Improved services.  Innovative distribution.  Manufacturing cost reduction through: - Purchasing efficiency. - Lower labour cost. - Modern production equipment.  Intensive promotion/ advertising. o Market challenger success depends on combining several strategies to improve its position over time.

Market Follower Strategies:

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Chapter-12 Dealing with Competition As per Theodre Levitt, for a company, product imitation (mine-too) may be as profitable a strategy as product innovation. This is called Innovative Imitation. Innovator bears cost of: o New product development. o Distributing new product. o Informing/ educating market. As a result, innovator may become market leader. However, another firm may copy/ improve new product. This firm may be (more?) profitable because it may not have borne innovation expenses. It may prefer to follow & not challenge leader. Such a firm is a market follower. Follower must offer some distinct advantage to its target market to hold current customer & wins a shape of a new customer. This advantage could be:  Location.  Services.  Financing.  Low manufacturing cost.  High product quality. Follower tries to grow without inviting competitive retaliation. Strategies could be: o Counter-Feiter:  Duplicates leaders product/ package & sells it through black market/ disreputable dealers. o Cloner:  Emulate leader with some variation/ low price. o Imitator:  Copies some points of leader. But maintains differentiators through packaging/ advertising/ pricing/ location.  Can service as long as it does not attack leader strongly. - Example: Britannia Tiger Chap Biscuits. o Adaptor:  Takes leader products & adopts/ improves them.  May sell to different markets.  Overtime, may grow into market challenger. - Example: Most of the Japanese firms.

Market Nicher Strategy: - As alternatives to being a follower in a large market is to be a leader in a small market/ sub-market/ Niche. - Nicher may be highly profitable even though its sales volume/ market share are relatively low in the small market. - Key to success is specialization. Specialist roles for a Nicher could be: o End User Specialist:  Firm specializes in serving one type of end users. o Vertical Level Specialist:  Firm specializes at some vertical level of production-distribution value chain. o Customer Size Specialist:  Firm concentrates on selling to small/ medium size customer who are neglected by major companies.

Chapter-12 Dealing with Competition

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o Specific Customer Specialist:  Firm sells only to one & few customer.  May be vendors to large companies. o Geographical Specialist:  Firm sells only in a certain locality/ area/ region. o Product/ Product line Specialist:  Firm carries/ produces only one product/ product line. o Product Feature Specialist:  Firm specializes in producing/ selling only a certain product type/ product feature. o Job Shop Specialist:  Firm customizes products for individual customers. o Quality Price Specialist:  Firm operates at either: - Highest end of market (High price & quality). - Lowest end of market (Low price & quality). o Service Specialist:  Offer one/ more services not available from another firm. o Channel Specialist:  Offers products to only one channel of distribution. Service niches may weaken over time; firm may stick to “Nichine” as strategy but not necessarily to a single niche. Hence, multiple niching is preferable to single niching. This increases survival chances. Small firms entering a market may prefer to aim at a niche initially rather than whole market.

Customer Orientation Verses Competitor Orientation: - It is important for companies to position itself competitively as a market Leader/ Challenger/ Follower/ Nicher. However, a firm may not spend all its time focusing on competition. - Focus on competition may develop a fighter orientation and make a firm alert. - However, this may make a firm reactive rather thn proactive vis-à-vis its customers. - A customer centered company focuses more on customer development in strategy formulation. This may be better in the long run. - Hence, a firm needs to balance between the two. - Balanced strategy may involve: o Focus on customers need satisfaction (Current + Emerging). o Watch over competition to learn from them & copy good things to extent possible. .

As a result, try to continuously increase CDV to customers.