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Markets and Competitive Space
Chapter 2
Chapter Road Map
• Interrelationship between markets and strategies
• Determination of product-market scope and structure
• Description and analysis of buyers• Process of competitor analysis • Guidelines for developing strategic vision about
scope and composition of markets in the future• Estimation of market size
Markets and Strategies
• Markets and Strategies are Interlinked• Market changes often require altering business and marketing strategies Managers who do not understand their markets and how they will change in
future may find their strategies inadequate because: Buyers value requirements change New products become available that better satisfy buyers’ requirements Many forces are causing this change: The transformation of industries Changing the structure of markets, and competitive space These influences create: Both opportunities and threats Altering the nature and scope of products, markets, and competitive space Market-Driven companies proactively alter their strategies to deliver superior
value to existing and new customers
Markets and Strategies
• Thinking outside the Competitive Box There is a tendency for executives to think in terms of stable “competitive
Box” around their businesses defined by technology, geography , competitors, and existing customer base
This frame of reference enables: Analytical tools to be successfully applied Applied research to be carried out Plans to be made This traditional perspective is logical in stable markets but fails to address
the reality that real threats and opportunities may be present outside the competitive box
Increasingly new markets , new types of competition are emerging that: Fuel market growth Cannibalize the existing base of incumbent markets
Markets and Strategies Effective processes for understanding markets and
competitive space and guiding the strategic initiatives appropriate for market requirement require thinking outside the competitive box
PepsiCo shows impressive performance in understanding and catering to changing tastes in beverage and snack market, rather than trying to change and adapt products to them.
To capitalize on the growing market for new age herbal enhanced beverages. PepsiCo acquired SoBe beverages, extended brand into energy drink for the school age market.
PepsiCo defines its mission as serving the co9nsumer, not protecting the existing brand
Thinking outside the Competitive BoxThe competitive Box
Conventional Value Proposition
Existing Customer Base
New Customer Base(s)
New Types of Competition
New Customers
New Business Model
New Customer
Traditional Competitors
Markets and Strategies
• An Array of Challenges1. Disruptive Innovation May impact various technologies and industries Indications of these new threats to existing firms can be identified
through perspective market sensing outside the competitive box Complacency and management hesitancy to consider options beyond the
core business focus are core problems Examples of disruptive innovations Amazon.com on traditional bookstores Digital photography on cameras and film Steel mini-mills on integrated mills Disruptive innovations may meet the needs of new segments or entire
markets
Markets and Strategies
2. Commoditization Threats When modularization( products composed of standardized components) occurs product
became commodities, making it difficult to earn anything more than subsistence returns When the personal computer market became commoditized the opportunity for profit
shifted to: Microprocessor (Intel) Operating system software (Microsoft) Commoditization was the key factor for IBM’s management in deciding in moving out of
PC market The potential effect of commoditization in markets highlights the importance of: Developing vision about how the market is going to change Deciding what business strategy initiatives to follow s Strategies to overcome commoditization threats may involve Competing at a different stage in the value chain Moving into different product category that provide attractive growth and profit
opportunity
Markets and Strategies
3. Creating New Market Space Actions require finding and pursuing opportunities to offer
potential buyers value in markets and segments not being served The purpose is to target new opportunities where buyers’ value
requirements are not being satisfied Unit sales of camera phone were over four times digital camera
sales Cell phone users have access to digital photography because the
camera is subsidized by wireless carriers Creating new market space requires changing management’s
traditional strategic perspective of looking for market opportunities inside the competitive box
Markets and Strategies4. Fast-Changing Markets Fast changing markets require modification in management’s strategic
thinking Indications of change are signaled by: Shifting customer value requirements New technologies Changes in competitive space New business models Fast changing may sometimes be difficult to predict and strategy
initiatives may necessitate trial and error adjustments guided by market responses
Not acknowledging or responding to the threats and requirement of fast changing markets are real danger
Matching Needs with Product Benefits
The term product-market recognizes that a market exists only when there are buyers exists with needs who have ability to purchase goods and services and products are available to satisfy the needs
Competitive strength comes from putting customer needs at the center of company’s operation
Markets are composed of groups of people who have the ability and willingness to buy something because they have need (value requirement) for it
The ability to buy and willingness to buy indicate that there is demand for a particular product
A product-market matches people with needs to the product benefits that satisfy those needs
Matching Needs with Product Benefits
A product-market combines the benefits of a product with the needs that motivate people to express demand for that product
Markets are defined in terms of needs substitutability among different product and by different ways in which people choose to satisfy their needs
A product-market is the set of products judged to be substitute within those usage situation in which similar pattern of benefits are sought by groups of customers
By determining how a firm’s specific product or brand is positioned within the product market :
Management can monitor and evaluate changes in the product-market Decide whether alternate targeting and targeting and positioning strategies and
product offering are needed When defining product-market, it is essential to establish boundaries that are
broad enough to contain all of the relevant product categories which are competing for the same buyer needs
Determining Product-Market Boundaries and Structure
• Product-Market Structure A company’s brand competes with other companies brands in generic,
product type, product variant market• The Generic product-market Includes a broad group of product that satisfy a general yet similar
need The starting point in determining product-market boundaries is to
identify the particular need or want that is being satisfied Since people with similar need may not satisfy the need in the same
manner, generic product markets are often heterogeneous, containing different end-user groups and several type of related product
Several classes of or types of products can be combined to form the generic product market for kitchen appliances
Determining Product-Market Boundaries and Structure
• Product-type product market (product class) Includes all brands of a particular product type (ovens) for
use in food preparation by consumers The product type is a product category or product
classification that offers a specific set of benefits intended to satisfy a customer need or want in specific way
Differences in the product within a product-type product-market may exist, creating product variants (product form)
Electric, gas, microwave ovens all provide heating functions but employ different technologies
Defining and Analyzing Product-Markets Determining the
Boundaries and structure of the Product-Market
Form the product-Market
Describe and Analyze End
Users
Analyze Competition
Forecast Market Size and Rate of
Change
Guidelines for Definition
• In identifying the product market, it is helpful to indicate
1. The basis for identifying buyers in the product-market of interest (geographical area, consumer business)
2. The market size and characteristics3. Brand and or product categories competing
for the needs and wants of the buyers included in product-market
Determining The Composition Product-Market
Start with the generic need satisfied by the product category of interest to
management
Identify the product categories(types) that can satisfy the generic need
Identify the specific product-markets within the generic
product-market
A B C D
SUPER MARKETS
MICROWAVEOVENS
CONVENIENCESTORES
TRADITIONAL RESTAURANTS
Illustrative Fast-Food Product-Market Structure
FAST-FOOD MARKET
Forming Product-Markets for Analysis
• Purpose of Analysis When different products satisfy the same need, the
product-market boundaries should contain all relevant products and brands
Product-market boundaries should be determined in a manner that will facilitate strategic analysis and thinking, enabling management to capitalize on existing and potential opportunities and to avoid possible threats
The photography product market should include digital cameras, related equipment and services, smart phones, and services
Forming Product-Markets for Analysis
I. Changing Composition of Markets Product market structure may change as: New technologies become available New competition emerges Industry classification often do not clearly define product-market
boundaries Industry-based definitions do not consider alternative ways of
meeting the needs Industry classification typically have a customer supply rather
than demand orientation People may meet their need for food with products from several
industries
Forming Product-Markets for Analysis
II. Extent of Market ComplexityThree characteristics of markets capture a large
portion of the variation in their complexity1. The functions or uses of product needed by the
customer2. The technology used in the product to provide
the desired function3. The different customer segments using the
product to perform a particular function
Forming Product-Markets for Analysis
1. Customer function: Value provided to the customer The function provides the capability to satisfy the
value requirements of the customers In case of personal computer, the functions provided
may be: Entertainment provided for the household Information search Internet purchasing Performance of various business functions
Forming Product-Markets for Analysis
2. Different technology: May satisfy the use situation of the customer Steel and aluminum materials meet a similar need in various
situations The technology consists of the materials and designs
incorporated into products In the case of service , technology relates to how the service is
rendered Voice calls can be sent via: Internet Traditional phone lines Wireless phones
Forming Product-Markets for Analysis
3. Customer segments Recognizes the diversity of the needs of customers in a particular
product-market A specific brand and model will not satisfy all buyers’ needs and
wants It is important to focus on the end user of the product when defining the market the end user drives demand for the
product When end users’ needs and wants change the market changes Even though a producer considers the distributor to be the
customer the market is defined by the consumer who purchase the product for consumption
Illustrative Product – Market Structure
•Generic Product Class
•Product Type
•Variant A
Regular•Variant B
•Brands
Food and beveragesfor breakfast meal
Cereals
Ready to eat
NaturalPre-sweetened
Life
Nutritional
Special KProduct 19
Identifying andDescribing Buyers
HowBuyersMake
Choices
BuildingCustomerProfiles
EnvironmentalInfluences
DESCRIBINGAND
ANALYZINGEND-USERS
Describing and Analyzing End-Users
• Illustrative buyer characteristics in consumer markets:
Family size, age, income, geographical location, sex, and occupation
• Illustrative factors in organizational markets: Type of industry Company size Location Type of products
Describing and Analyzing End-Users
BUYING DECISION PROCESS:
1. Problem recognition
2. Information search
3. Alternative evaluation
4. Purchase decision
5. Post-purchase behavior
Describing and Analyzing End-Users
• External factors influencing buyers’ needs and wants: Government, social change, economic
shifts, technology etc.• These factors are often non-controllable
but can have a major impact on purchasing decisions
Describing and Analyzing End-Users
• Building Customer Profiles• Start with generic product – market
• Move next to product- type and variant profiles >> increasingly more specific
• Customer profiles guide decision making (e.g. targeting, positioning, market segmentation etc.)
ANALYZING COMPETITION
1. Define the competitive arena for generic, specific, and variant product-markets
2. Identify and Describe Key Competitors
5. IdentifyNew
Competitors
3. Evaluate Key
Competitors
Analyzing Competition
4. Anticipate Actions by
Competitors
ANALYZING COMPETITION
• Defining Competitive Arena Competition often includes more than the firms that direct
competitors( Coke and Pepsi) The product variant is the most direct type of competitions Other product categories also compete for buyers A complete understanding of the competitive arena helps to
guide strategy design and implementation Since competition often occurs within specific industries, study of
the industry structure is useful in: The competitive arena Recognizing that more than one industry may be competing in
the same product-market Digital photography product-market includes traditional camera
and film competitors and electronic industry competitors
Examples of Levels of Competition
Diet-RiteCola
Diet PepsiDiet Coke
Product from competition:
diet colas
Regular colas
Diet lemonlimes
Lemon limes
Fruitflavored
colas
Product categorycompetition:
soft drinks
Bottlewater
Wine
Beer
Coffee
Juices
Generic competition:beverages
Baseballcards
FastFood
VideoGames
IceCream
Budget competition:food & entertainment
Industry Analysis
• Industry size, growth, and composition
• Typical marketing practices
• Industry changes that are anticipated (e.g. consolidation trends)
• Industry strengths and weaknesses
• Strategic alliances among competitors
Analysis of the Value-Added chain
Industry FormIndustry EnvironmentCompetitive Forces Value
AddedChain
SUPPLIERS
PRODUCERS
WHOLESALERS/ DISTRIBUTORS
RETAILERS/DEALERS
CONSUMER/ ORGANIZATIONAL END USERS
Figure 3.3: The Five Forces Model of Competition
3-36
Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitivepressures associated with each ofthe five forces
Step 2: Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak?
Step 3: Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits
Threat of New Entrants/ Entry BarriersFactors HUF
AMUFA
Neutral MFA HFA comment
Economies of scaleCapital require redAccess to distribution channelsExpected retaliationDifferentiationBrand LoyaltyExperience CurveGovt. Action
small
Low
Ample
LowLow
Low
InsignificantLow
large
High
Restricted
High High
High
Significanthigh
Exit Barriers
• Exit BarriersFactors HUA MUA Neutr
alMA HA Comments
Specialized AssetsFixed Cost of ExitStrategic interrelationshipGovernment Barriers
Hi
Hi
Hi
Hi
LOW
Low
Low
Low
Entry Barriers
Exit Barrierslow high
high
low Low, stable returns
Low, risky returns
High, stable returns
High, risky returns
Barriers and profitability
Competitive PressuresAmong Rival Sellers
• Usually the strongest of the five forces
• Key factor in determining strength of rivalry
– How aggressively are rivals using various weapons of competition to improve their market positions and performance?
• Competitive rivalry is a combativecontest involving
– Offensive actions
– Defensive countermoves
Competitive Rivalry
Factors HUFA
MUFA
Neutral
MFA HFA
Comment
Composition of CompetitorsMkt. Growth rateScope of competitionFixed storage CostCapacity Increase
Degree of differentiation
Strategic Stake
Equal Size SlowGlobal
High
Large
Commodity
High
Unequal SizeHighDomesticLow
Small
High
Low
Competitive Pressures from Substitute Products
Concept
Substitutes matter when customersare attracted to the products of
firms in other industries
Examples
Sugar vs. artificial sweeteners
Eyeglasses and contact lens vs. laser surgery
Newspapers vs. TV vs. Internet
How to Tell Whether SubstituteProducts Are a Strong Force
• Whether substitutes are readilyavailable and attractively priced
• Whether buyers view substitutesas being comparable or better
• How much it costs end usersto switch to substitutes
Threat Of Substitute Product
Factors HUFA
MUFA N MFA HFA Comment
Threat of Obsolescence of Industry’s productAggressiveness of substitute products in promotionSwitching CostPerceived price/ value
Hi
Hi
Low
Hi
Low
Low
High
Low
Competitive Pressures From Suppliersand Supplier-Seller Collaboration
• Whether supplier-seller relationships represent a weak or strong competitive force depends on
– Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor
– Nature and extent of supplier-sellercollaboration in the industry
Power of Supplier
Factors HUFA
MUFA N MFA HFA comment
# of important SuppliersSwitching cost
Availability of substitutesThreat of forward integrationImportance of Buyer industry to supplier’s profitQuantity purchased by the industry of supplier’s product Suppliers product an important input to the buyer’s business
Few
High
low High
small
low
Highly Important
Many
Low
high Low
large
High
Less important
Power Of Buyer
Factors HUFA MUFA N MFA HFA Comment
Number of Important buyersThreat of Backward integrationProduct suppliedSwitching cost% of buyer’s costProfit earned by buyerImportance to final quality of buyers Pr.
Few
High
Commodity
lowHigh
Low
High
Many
Low
Specialty
highLow
High
low
Overall Industry attractiveness
Factors Unfavorable
Neutral Favorable
Entry BarriersExit BarriersRivalry among existing firmsPower of buyersPower of SuppliersThreat of substitutes
Strategic Implications ofthe Five Competitive Forces
• Competitive environment is ideal froma profit-making standpoint when
– Rivalry is moderate
– Entry barriers are highand no firm is likely to enter
– Good substitutesdo not exist
– Suppliers and customers arein a weak bargaining position
Coping With theFive Competitive Forces
• Objective is to craft a strategy to
– Insulate firm fromcompetitive pressures
– Initiate actions to producesustainable competitive advantage
– Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability
• As a rule, the stronger collective impact of the five forces, the lower the combined profitability of industry participants
• Fierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levels
• An industry can be competitively unattractive even when not all five forces are strong
• Intense competitive pressure from just two or three forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business
Key Competitor Analysis
• Business scope and objectives• Management experience, capabilities, and
weaknesses• Market position and trends• Market target(s) and customer base• Marketing program positioning strategy• Financial, technical, and operating
capabilities• Key competitive advantages (e.g., access to
resources, patents)
Extent of Market Coverage
CustomerSatisfaction
CurrentCapabilities
PastPerformance
Competitor Evaluation
Identifying New Competitors• New competitors may come from four major sources1. Companies competing in related product-market2. Companies with related technologies3. Companies already targeting in similar customer groups with other
products4. Companies competing in other geographical markets with similar products• Market entry by a new competitor is likely under one or more of these
conditionsI. High profit margins are being achieved by market incumbentsII. Future growth opportunities in the market are attractiveIII. No major market-entry barriersIV. Competition is limited to one or few competitorsV. Gaining an equivalent ( or better) competitve advantage over the existing
firm(s) serving the market is feasible
MARKET SIZE ESTIMATION
UnrealizedPotential
CompanySales
Forecast
IndustrySales
Forecast
Market PotentialEstimate
Product-Market Forecast Relationships (area denotes sales in $’s)
Market Size Estimation
• Market PotentialThe upper limit of sales that can be achieved
from a defined product-market during specified time period
It includes the total opportunities for sales by all the firms serving the product-marketing
Actual industry sales in a specified year fall somewhat below market potential
Market Size Estimation
• Sales forecast The sales-forecast indicates the expected sales for a defined
product-during a specified time period The industry sales forecast is the total volume of sales expected by
all firms serving the product market The sales forecast can be no greater than market-potential and
typically falls short of potential
• Market Share Company sales divided by the total sales of all firms for a specified
product-market determines the market share of a particular firm Market share can be used to forecast future company sales and to
compare actual market position among competing brands
DEVELOPING A STRATEGIC VISION ABOUT THE FUTURE
Industry Boundaries Blurring and Evolving
Competitive Structure and Players Changing
Value Migration Paths
Product Versus Business Design Competition
Firms are Collaborating to Influence Industry Standards
Source: C. K. Prahalad, Journal of Marketing, Aug. 1995, vi.