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 consumer, not
protecting the existing brand

Thinking outside the Competitive Box

The competitive Box

New Types of
Competition

Traditional
Competitor
s

New
Business
Model

Conventional Value
Proposition
New
Customers

Existing
Customer Base
New
Customer
Base(s)

New
Customer

Markets and Strategies

An Array of Challenges
1. 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 IBMs 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
managements traditional strategic perspective of looking
for market opportunities inside the competitive box

Markets and Strategies

4. Fast-Changing Markets
. Fast changing markets require modification in
managements 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:
Existence of buyers with needs
Who have ability to purchase goods and services
Products are available to satisfy the needs
Competitive strength comes from putting customer
needs at the center of companys operation
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 firms 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 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 companys 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
Competitio
n
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 characteristics
3. 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 productmarket
A

Illustrative Fast-Food
Product-Market Structure
SUPER
MARKETS

MICROWAVE
OVENS

FAST-FOOD
MARKET
CONVENIENCE
STORES

TRADITIONAL
RESTAURANTS

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 Complexity
Three characteristics of markets capture a
large portion of the variation in their
complexity
1. The functions or uses of product needed by
the customer
2. The technology used in the product to
provide the desired function
3. 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
Food and beverages
for breakfast meal

Cereals

Generic Product
Class

Product Type

Variant A

Ready to eat

Regular

Natural
Nutritional
Life

Product 19

Pre-sweetened

Special K

Variant B

Brands

Identifying and
Describing Buyers

Building
Customer
Profiles

DESCRIBING
AND
ANALYZING
END-USERS
Environmental
Influences

How
Buyers
Make
Choices

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 noncontrollable 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
5. Identify
New
Competitors

4. Anticipate
Actions by
Competitors

Analyzing
Competition

2. Identify and
Describe Key
Competitors

3. Evaluate
Key
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
Baseball
cards
Bottle
water

Fast
Food
Regular
colas

Beer
Fruit
flavored
colas

Juices

Diet
Coke

Video
Games

Diet lemon
limes
Diet-Rite
Cola

Ice
Cream

Diet Pepsi

Product from
competition:
diet colas
Product category
competition:
soft drinks
Generic competition:
beverages
Budget competition:
food & entertainment

Wine
Lemon
limes
Coffee

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
SUPPLIERS

Industry Form
Industry
Environment
Competitive
Forces

PRODUCERS
WHOLESALERS/
DISTRIBUTORS
RETAILERS/DEALERS

CONSUMER/ ORGANIZATIONAL
END USERS

Value
Added
Chain

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 competitive
pressures associated with each of
the five forces
Step 2: Evaluate the strength of each
competitive force -- fierce, strong,
moderate to normal, or weak?
Step 3: Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits

Threat of New Entrants/ Entry Barriers

Factors
Economies
of scale
Capital
require red
Access to
distribution
channels
Expected
retaliation
Differentiati
on
Brand
Loyalty
Experience
Curve
Govt. Action

HUF MUF
A
A

Neutral

MFA HFA

comment

small

large

Low

High

Ample

Restri
cted

Low
Low

High
High

Low

High

Insignifi
cant
Low

Signifi
cant
high

Exit Barriers

Exit Barriers
Factors

Specialized
Assets
Fixed Cost of
Exit
Strategic
interrelations
hip
Government
Barriers

HUA MUA Neutr MA

al

HA

Comments

Hi

LOW

Hi

Low

Hi

Hi

Low

Low

Barriers and profitability

low

Low, stable
returns

Low, risky
returns

High, stable
returns

High, risky
returns

Entry Barriers

high

low

Exit Barriers

high

Competitive Pressures
Among 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 combative

contest involving
Offensive actions
Defensive countermoves

Competitive Rivalry
Factors

HU
FA

Composition of
Competitors
Mkt. Growth rate
Scope of
competition
Fixed storage
Cost
Capacity Increase

Equal
Size
Slow
Global

MU
FA

Neut MFA HF
ral
A

Comment

High

Unequa
l Size
High
Domest
ic
Low

Large

Small

Degree of
differentiation

Comm
odity

High

Strategic Stake

High

Low

Competitive Pressures from

Substitute Products
Concept
Substitutes matter when
customers
are attracted to the products of
firms in other industries

Examples

Sugar vs. artificial

sweeteners
Eyeglasses and
contact lens vs. laser
surgery

How to Tell Whether Substitute

Products Are a Strong Force
Whether substitutes are readily
available and attractively priced
Whether buyers view substitutes
as being comparable or better
How much it costs end users
to switch to substitutes

Threat Of Substitute Product

Factors
Threat of
Obsolescence
of Industrys
product
Aggressivenes
s of substitute
products in
promotion
Switching Cost
Perceived
price/ value

HUF
A

MUFA N

Comment

MFA HFA

Hi

Low

Hi

Low

Low

High

Hi

Low

Competitive Pressures From Suppliers

and Supplier-Seller Collaboration
Whether supplier-seller relationships
represent a weak or strong
competitive force depends on
Whether suppliers can exercise
sufficient bargaining leverage to
influence terms of supply in their favor
Nature and extent of supplier-seller
collaboration in the industry

Power of Supplier
Factors
# of important
Suppliers
Switching cost
Availability of
substitutes
Threat of forward
integration
Importance of
Buyer industry to
suppliers profit
Quantity purchased
by the industry of
suppliers product
Suppliers product
an important input
to the buyers
business

HUF
A

MUFA

N MFA HFA

commen
t

Few

Many

High

Low

low
High

high
Low

small

large

low

High

Highly
Importa
nt

Less
import
ant

Power Of Buyer
Factors
Number of
Important
buyers
Threat of
Backward
integration
Product
supplied
Switching
cost
% of
buyers
cost
Profit
earned by
buyer
Importance
to final
quality of
buyers Pr.

HUFA MUFA

MFA

HFA

Comment

Few

Many

High

Low

Commodit
y

Specialty

low
High

high
Low

Low

High

High

low

Overall Industry attractiveness

Factors
Entry Barriers
Exit Barriers
Rivalry among
existing firms
Power of buyers
Power of
Suppliers
Threat of
substitutes

Unfavora Neutral Favorable

ble

Strategic Implications of
the Five Competitive Forces
Competitive environment is ideal from
a profit-making standpoint when
Rivalry is moderate
Entry barriers are high
and no firm is likely to enter
Good substitutes
do not exist
Suppliers and customers are
in a weak bargaining position

Coping With the

Five Competitive Forces
Objective is to craft a strategy to
Insulate firm from
competitive pressures
Initiate actions to produce
sustainable competitive advantage
Allow firm to be the industrys 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,

Extent of
Market Coverage

Current
Capabilities

Competitor
Evaluation
Past
Performance

Customer
Satisfaction

Identifying New Competitors

New competitors may come from four major sources
1. Companies competing in related product-market
2. Companies with related technologies
3. Companies already targeting in similar customer groups with other
products
4. Companies competing in other geographical markets with similar
products
. Market entry by a new competitor is likely under one or more of these
conditions
I. High profit margins are being achieved by market incumbents
II. Future growth opportunities in the market are attractive
III. No major market-entry barriers
IV. Competition is limited to one or few competitors
V. Gaining an equivalent ( or better) competitve advantage over the
existing firm(s) serving the market is feasible

MARKET SIZE ESTIMATION

Product-Market Forecast
Relationships
(area denotes sales in $s)

Market Potential
Estimate

Unrealized
Potential

Company
Sales
Forecast

Industry
Sales
Forecast

Market Size Estimation

Market Potential
The upper limit of sales that can be
achieved from a defined productmarket 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
Source: C. K. Prahalad, Journal of Marketing, Aug. 1995, vi.