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Dealing With Competition: Competitive Forces
Dealing With Competition: Competitive Forces
Dealing With Competition: Competitive Forces
Competitive forces
Michael porter has identified five forces that determine the long run attractiveness of a market or market
segment: industry competitors, potential entrants, substitutes, buyers and suppliers. Each of these pose
threats as follows
These conditions lead to frequent price wars, advertising battles and new product introductions, which
make it expensive to compete.
The best defenses are to build win-win relations with suppliers or use multiple supply sources.
Threat of growing
suppliers
bargaining power
Threat of growing
buyers bargaining
power
IDENTIFYING COMPETITORS
A company is more likely to be hurt by emerging competitors or new technologies than by current
competitors. Many businesses failed to look at the Internet as a formidable competitor. Eg web sites
versus printed material; physical bookstores versus online stores.
An industry is a group of firms that offer a product or class of products that are close substitutes for one
another. Industries are classified according to number of sellers, degree of differentiation, presence or
absence of entry, mobility and exit barriers; cost structure; degree of vertical integration; and degree of
globalization.
2. Oligopoly
A small number of large firms produce products that range from highly differentiated to
standardized. Pure oligopoly consists of a few companies producing essentially the same
commodity. The only way to gain a competitive advantage is through lower costs.
Differentiated oligopoly consists of a few companies producing products partially
differentiated on the lines of quality, features, styling or services.
3. Monopolistic competition –
Many competitors are able to differentiate their offers in whole or in part. Competitors focus
on market segments where they can meet customer needs in a superior way and command a
price premium
4. Pure competition
Many competitors offer the same product or service eg commodity market. Because
there is no basis for differentiation, competitors prices will be the same.
Exit barriers include legal and moral obligations to customers, creditors, employees, government
restrictions, low asset salvage value, lack of alternative opportunities, high vertical integration and
emotional barriers.
Cost Structure
Each industry has a certain cost burden that shapes its strategic conduct. Eg Toy manufacturing involves
heavy distribution and marketing costs. Firms strive to reduce their largest costs.
Degree of Globalization
Some industries are highly local eg lawn care and others global eg oil. Companies in global industries
need to compete on global basis if they are to achieve economies of scale and keep up with the latest
advances in technology.
ANALYZING COMPETITORS
A firm needs identify its primary competitors, their strategies, objectives, strengths and weaknesses.
Strategies – A group of firms following the same strategy in a given target market is called a strategic
group. The height of entry barriers differs for each group. If the firm successfully enters a group, the
members of that group become its key competitors.
Objectives – what the competitors are seeking in the market place? Possible objectives may be
maximise current profits, market share growth, cash flow, technological leadership or service leadership.
Need to monitor competitors expansion plans
Strengths and weaknesses – helps identify where competitor is weak and can be attacked. Eg if
competitor is poor in technical assistance, then the firm can attack the market by offering very good
technical assistance.
SELECTING COMPETITORS
A firm can examine competitors and focus its attacks on classes of competitors.
Strong versus weak – weak competitors are easy targets because this requires fewer resources per share
point gained. Even strong competitors have weaknesses that can be attacked.
Close versus distant – most firms compete with others who resemble them the most, yet companies
should recognize distant competitors
Good versus bad – a firm should support good competitors and attack bad competitors. Good
competitors play by the industry rules, set realistic prices, limit themselves to a portion of the market
COMPETITIVE STRATEGIES
Having identified and evaluated its major competitors, the company must now design broad competitive
marketing strategies that will best position its offer against competitors offers and gives the company the
strongest possible competitive advantage.
Each company must determine what makes sense given its position in the industry, its objectives,
opportunities and resources.
Michael Porter suggested four basic strategies that companies might follow.
a) Overall cost leadership – firm works to achieve the lowest cost of production and distribution
so that it can price lower than its competitors and win a large market share.
b) Differentiation – Firm concentrates on creating a highly differentiated product line so that it
comes across as the class leader in the industry.
c) Focus – Firm focuses its efforts in serving a few market segments rather than going after the
whole market.
Firms that pursue a clear strategy – one of the above are likely to perform well and make profits.
But firms that do not pursue a clear strategy - middle of the road- do the worst. They try to be good
in everything then end up not being good at anything.
COMPETITIVE POSITIONS
Market leader - the firm which has the largest market share in the relevant product market and usually
leads the other firms in price changes, new product introductions, distribution coverage and promotional
intensity.
Market challenger – a runner up firm in an industry that is fighting hard to increase its market share.
Market follower – a firm that is willing to maintain its market share and not rock the boat
Market Nichers – firms that serve small market segments not being served by larger firms
The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening
areas and lessen their intensity.
b) Flank defense – need to protect the weak front from attack by the competition.
c) Pre emptive defense – attack before the enemy starts its offense. Preannouncements of new
products or services – these signal to other competitors that they will have to fight to gain market share.
d) Counter offensive defense – when attacked, most market leaders will invade the attackers
territory so that the attacker has to pull back to defend the territory.
e) Mobile defense- the leader stretches their domain over new territories that can serve as future
centres for defense and offense through market broadening (shifting focus from the current
product to the underlying need) and market diversification (shifting into unrelated
industries).
Firms that are second, third or lower in an industry can sometimes be quite large. They can challenger
the leader and other competitors in an aggressive bid for more market share (market challengers). Or
they can play along with competitors and not rock the boat (market followers).
a) Challenger can attack the market leader – this is a high risk but potentially high gain strategy
that makes good sense if the leader is not serving the market well. To succeed, the challenger
must have some sustainable competitive advantage over the leader eg cost advantage leading to
lower prices, or ability to provide better value at premium price. The objective of attacking a
market leader may be to take over market leadership or to gain a larger market share.
b) Challenger can avoid the leader and attack other firms of its own size or smaller firms.
These may be underfinanced firms or not serving their customers well. If challenger goes after a
small company, the objective may be to put it out of business. The challenger must choose its
opponents carefully and have clearly defined and attainable objective.
A follower can gain many advantages. The leader often bears the huge costs of developing new
products and markets, expanding distribution and educating the market. The follower can learn from the
leaders experience and copy or improve the leader’s products and programs, usually with less
investment. Although the follower will not overtake the leader, it often can be very profitable.
Nichers are often firms with limited resources that target subsegments or niches instead of pursuing the
whole market. They may be smaller divisions of larger firms. Firms with low market shares of the total
market can be highly profitable through smart niching. These firms offer high value, charging a
premium price and having strong corporate cultures and vision.
Niching is profitable because the market nicher ends up knowing the target group so well that it meets
their needs better than other firms that casually sell to this niche. Nichers can hence charge a substantial
markup over costs because of the added value. Whereas the mass marketer achieves high volume, the
nicher achieves high margins.
The key idea in niching is specialization. This can be along any of several market, customer, product or
marketing mix lines. Eg a type of end user, few specific customers, a customer size group – all who are
neglected by the major players.
Niching has risks – the niche could dry up, or could grow to a point that is attracts the larger players.
Hence many companies practice multiple niching to increase its survival chances.
o Firms entering a market should initially aim at a niche rather than the whole market.
o Multiple niching is preferable to single niching: with strength in two or more niches,
the company increases its chances for survival.
o Types of roles: