CHAPTER 3: DEALING WITH COMPETITION

CompetitionCompetitive environment includes the specific organizations with which the organization interacts. The competitive environment includes rivalry among current competitors, threat of a new entrants, threat of a substitutes suppliers and power of customers. Successful managers do more than simply react to the environment; they act in ways that actually shape or change the organizations environment.

Competition Is Defined by the Customery Product form competition - includes only products or services of

the same product type. y Product category competition - products that have similar features and provide the same basic function. y Generic competition - incorporates the customers notions of substitutability. y Budget competition - products and services that are purchased from the same general budget.

Competitor Analysisy Identifying your competitors and evaluating their strategies to

determine their strengths and weaknesses relative to those of your own product or service.y Evaluate your competitors by placing them in strategic groups

according to how directly they compete for a share of the customer's dollar.y For each competitor or strategic group, list their product or service,

its profitability, growth pattern, marketing objectives and assumptions, current and past strategies, organizational and cost structure, strengths and weaknesses, and size (in sales) of the competitor's business.

Steps: Competitor Analysisy Performing a market analysis to identify

your major competitors. y Performing a competitor analysis. y Alternative sources of information for analyzing competitors

Analyzing Competitorsy Strategic Grouping y Objectives y Strengths and Weaknesses (SWOT

Analysis) y Reaction Patterns

Analyze Critical Development of business Plany Defining the competition is important in

determining which products are competing. y Studying competitors is crucial to develop a value proposition. y It is beneficial to anticipate competitors moves and act in a preemptory fashion.

Market Structure Analysisy A market structure analysis enables

the marketing manager to understand the competition. y Overlooking an important competitive threat can be disastrous. y Ambiguous definition of the competition creates uncertainty.

Industry Analysis Industry Classification Schemesy Number of Sellers and Differentiation y Entry, Mobility and Exit Barriers y Degree of Vertical Integration y Degree of Globalization

Characteristics of Industry StructuresTYPE OF COMPETITION Perfect Competition Monopolistic Competition Differentiated Oligopoly Undifferentiated Oligopoly Monopoly NUMBER OF FIRMS Many Many PRODUCT Similar Different PRICING CONTROL None Some EASE OF ENTRY Easy Relatively Easy Difficult

Few

Different

Substantial

Few

Similar

Some

Difficult

One

No Substitutes

Government Regulated

Impossible

COMPETITOR REACTION PATTERNy Laid - Back y Selective y Tiger y Stochastic

Major Forces That Determine Competition Within an Industry Michael Porter This

section of the chapter discusses the microenvironment that influences the organizations business contexts. This is also called the industry analysis. Industry analysis aims to establish the nature of the competition in an industry and the competitive position of a business with respect to its microenvironment. Porter developed a framework for analyzing the nature and extent of competition within an industry.

Major Forces That Determine Competition Within an Industry Michael Porter (cont) He argued that there are five competitive forces within

an industry and the five forces are as follows:

The threat of new entrants in the industry; The threat of substitute products; The power of buyers or customers; The power of suppliers; Rivalry amongst businesses in the industry. Porter asserts that by determining the power of each

forces, an organization would be able to determine in turn on how to position itself to take advantage and overcome the threats.

Major Forces That Determine Competition Within an Industry Michael Porter (cont)Threat of new entrants Buyers bargaining strength

Suppliers bargaining strength

Rival Firms (Competition among Existing industry firms)

Threat of substitute productsExcellent method for analyzing the competitive environment in order to adapt or to influence the nature of competition.

Force 1: Threat of New Entrants

Force 1: Threat of New Entrants

New entrants into an industry compete with established companies. If many factors prevent new companies from entering the industry, the threat to established firms is less serious. If there are few barriers to entry, the threat of new entrants is more serious. The threat of entry to an industry to new competitors depends on the strength of a number of entry barriers. As a general rule the lower the barrier the entry, the more players in an industry. Barrier to entry-condition that prevent new companies from entering an industry i.e government policy, cost disadvantages, brand identification, distribution channels

Force 2: Threat of Substitutesy The availability of substitutes is the principal factor influencing y y

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customers willingness to pay a premium price for a product. This price sensitivity on the part of the customers is indicated by the elasticity of demand for the product. If there are close substitutes available, there is a limit to the price that customers are willing to pay, demand is elastic in relation to price and the customer will switch to another product in respond to the higher price. Technology advances and economic efficiencies are among the ways firms can develop substitutes for existing products. Company need to think about the potential substitute that may be viable in near future. I.e Hybrid car to replace the normal car.

Force 3: Power of Suppliers Suppliers provide resources needed for production and may come

in the form of people, raw material, information or financial capital. But suppliers can raise prices or provide poor quality good and services. Powerful supplier can reduce an organization profits (especially when the supplier cannot pass on the price increases to its customers. Organization disadvantage if they become overly dependent on any powerful supplier. Switching cost are the fixed cost buyer face if they change suppliers. Choosing the right supplier is important in firms strategic decision. Supplier can effect manufacturing time, product quality and inventory levels.

Force 3: Power of Suppliers (cont)y Suppliers can be powerful if they are concentrated and few. Some

components especially essential components such as Microprocessors (Intel) are essential to all computer manufacturers.

Example (Intel and DRAMS) Intel was initially dealing with DRAMS and the manufacturing of RAMS or memories in the 1990s. All other micro processors were supplied by other suppliers overseas or local. Then the entire computer hardware industry became extremely hypercompetitive and the prices of microchips supplied to Intel became higher. Due to market pressure Intel opened its own factory to produce micro-chips. Until present, Intel is the largest micro-chip producer in the world.

Force 4: Power of Customers- Final vs Intermediate customers. - Intermediate customers make more purchases than individual -

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customers. Customers can demand low prices, higher quality, unique product specifications, or better service. In all businesses-services as well as manufacturing that emphasize a good customer service provide a critical competitive advantage. The organization is at a disadvantage if it depends too heavily on powerful customers. Customers are powerful if they make large purchases or they can easily find alternative places to buy.

Force 5: Rivalry Among existing Firmsy In many industries the main determinant of the overall state of

competition and the general level of profitability is the level of competition among existing firms in the industry. The intensity of competition can be seen from few angles such as below:

y Seller concentration

This refers to the number of sellers or competitors in the market and their relative sizes. For example Xerox was the only photo copier during the 1970s and dictated the market. But in 1980s Xerox faced intensive competition from Japanese producers that flooded the entire market in the industry providing fast, cheap and easily maintained machines. Xerox lost approximately 80% of their up market shares to the fast and cheap machines from brands such as Sharp, Ricoh and Cannon.y The extent of product differentiation

This refers to the degree of different product features in the market. The more product differentiation and features, the more intensive the competition.

Limitations of the Five Forces Framework (Risks Associated in Applying the Five Forces Framework)y The major limitations of Michael Porter's five Forces Framework are listed as

below: a. Porter s five forces framework only provides an external analysis and did not discuss or evaluate the internal competitive position of an organization within a given competitive environments. Therefore, there may be a mismatch between the strategy developed and the incapacity of an organization to implement the strategy. There is insufficiency of linkage between the five forces model and the PESTEL analysis. Both theories and analysis are still performed in isolation. Also it also assumed that the macroevironment remained constant.

b.

Limitations of the Five Forces Framework (Risks Associated in Applying the Five Forces Framework) (Cont)c. It implies that the five forces model may be applied across the board and in all industries. In fact, many industries share different levels of competitions. For example, large companies face lesser threat from suppliers than smaller ones. It assumes that the relationship between buyers, competitors and suppliers is adversarial. This is not the case. Buyers have been at times very helpful in aiding companies capture market share. For example Netscape Inc. incorporated buyers perception and feedback using concurrent engineering to produce Netscape Browsers faster than Microsoft Internet Explorer. Also Coca-Cola formed strategic alliance with its bottling suppliers who were specialists in designing the bottles for the giant company. This is called effective forward and backward integration.

d.

NATIONAL COMPETITIVE ADVANTAGE : PORTERS DIAMONDy In 1990, Michael Porter (Harvard Business School)

published the result of an intensive research effort that attempted to determine why some nation succeed and fail in international competition. y Porter & team looked at 100 industries in 10 nations. y The book that contains the results of this work The Competitive Advantage of Nations

Porters Diamond continues Michael Porter explains thaty Explain why nation achieves international success in

a particular industry. y I.e Why Japan do so well in the automobile industry?Why Germany and US do so well in chemical industry? Why does Switzerland excel in the production and export of pharmaceuticals?

Porters Diamond continuesy Porter theorizes that 4 broad attributes of a nation

shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage.y These attributes are:-

(A) (B) (C) (D)

Factor Endowments Demand Conditions Relating and supporting industries Firm strategy, structure and rivalry.

Porters Diamond continuesy Porter speaks these 4 attributes as constituting a

diamond. y He argues that firms are most likely to succeed in industries or industry segment where diamond is most favorable. y He argues that the diamond is a mutually reinforcing system-the effect of one attribute is contingent on the state of others. y I.e favorable demand conditions will not result in competitive advantage unless the state of rivalry is sufficient to cause firms to response to them.

NATIONAL COMPETITIVE ADVANTAGE : PORTERS DIAMOND

4 attributes are:(i)

Factor endowments

y Availability of Basic and Advance factors y Basic factors: natural resources, climate, location, demographic. y Advance

factors: communication infrastructure, skilled labor, research facilities, and technology know-how). y Basic factors provide an initial advantage that is subsequently reinforced and extended by investment in advance factors. y A nations position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry. y I.e Japan has large pool of engineers (graduates) than any other nations has been vital to Japan success in many manufacturing industries.

(ii) Demand conditionsy the nature of how demand for the industrys product or service.y Characteristic of home demand are particularly important in shaping the

attributes of domestically made products and creating pressures for innovation and quality. y Nations firm gain competitive advantage if their domestic consumers are sophisticated and demanding. y Such consumers pressure firms to meet high standard of product quality and to produce innovative products. y I.e Japan sophisticated and knowledge buyers of cameras helped stimulate the Japanese camera industry to improve product quality and to produce innovative models.

(iii) Relating and supporting industriesy the presence and absence of supplier industries and

related industries that are internationally competitive. y I.e Technological leadership in the US semiconductor industries until the mid 1980s provided the basis for US success in personal computer & several other technical advanced electronic products.

(iii) Firm strategy, structure and rivalryy the conditions governing how companies are created,

organized, and managed and the nature of domestic rivalry. y Management ideology which will help them or do not help them to build national competitive advantage. y Strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage of the industry. Domestic rivalry creates pressures to innovate, to improve quality, to reduce cost, and to upgrade the advance factors.

y Porter suggests 2 additional variables that can

influence the national diamond in important ways:

Chance & Government(i) Chance events-such as major innovations that can reshape industry structure and provide the opportunity for one nations firms to supplant anothers. (ii) Government- by its choice and policies can detract from or improve national advantage. y I.e Government subsidies or investments in education can change factor endowments.