Lecture 4

Dealing with the Competition

“Poor firms ignore their competitors; average firms copy their competitors; winning firms lead their
competitors.” – Philip Kotler

Michael Porter’s Competitive Forces

Potential 1. Threat of intense segment rivalry

Entrants  A segment is unattractive if it already contains
(Threat of numerous, strong, or aggressive competitors.
mobility)  It is more unattractive if it is stable or declining, if plant
capacity additions are done in large increments, if fixed
costs are high, if exit barriers are high, or if competitors
Suppliers Industry Buyers have high stakes in staying in the segment.
(Supplier Competitors (Buyer power)
power) (Segment
rivalry) 2. Threat of new entrants
 A segment’s attractiveness varies with the height of its
entry and exit barriers.
 The most attractive segment is one in which entry
barriers are high and exit barriers are low. (see next
diagram)
Substitutes
(Threat of 3. Threat of substitute products
substitutes)
 A segment is unattractive when there are actual or
potential substitutes for the product.
 Substitutes place a limit on prices and on profits.
Exit Barriers
Low High 4. Threat of buyers’ growing bargaining power
 A segment is unattractive if the buyers possess strong or
Entry Barriers

Low, stable Low, risky

Low returns returns growing bargaining power.
 Buyers’ bargaining power grows when they become
High
High, stable High, risky more concentrated or organized, when the product
returns returns
represents a significant fraction of the buyers’ costs,
when the product is undifferentiated, when the buyers’
switching costs are low, when buyers are price sensitive because of low profits, or when buyers can
integrate upstream.

5. Threat of suppliers’ growing bargaining power

 A segment is unattractive if the company’s suppliers are able to raise prices or reduce quantity
supplied.
 Suppliers tend to be powerful when they are concentrated or organized, when there are few substitutes,
when the supplied product is an important input, when the costs of switching suppliers are high, and
when the suppliers can integrate downstream.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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Identifying Competitors

Industry Concept of Competition

 Industry is a group of firms that offer a product or class of products that are close substitutes for one
another.

Industry Classifications
1. number of sellers and degree of product differentiation
2. presence or absence of entry, mobility, exit, and shrinkage barriers
3. cost structure
4. degree of vertical integration
5. degree of globalization

1. Number of Sellers and Degree of Differentiation

a. Pure monopoly
b. Oligopoly
c. Monopolistic competition
d. Pure competition

2. Entry, Mobility, and Exit Barriers

 Industries differ greatly in their ease of entry – that is, how easy it is for a new firm to enter a
market that is showing profits (entry barriers).
 After entering the industry, a company might face mobility barriers when it tries to enter more
attractive market segments

Major Entry Barriers

1. high capital investments
2. economies of scale
3. patents and licensing requirements
4. scare locations, raw materials, or distributors
5. reputational requirements

Exit and Shrinkage Barriers

 Ideally, firms should be free to leave industries in which profits are unattractive, but often
face exit barriers.
 Many firms persevere in an industry as long as they cover their variable costs and some or
all of their fixed costs

Common Exit Barriers

1. legal or moral obligations to customers, creditors, and employees
2. government restrictions
3. low asset salvage value due to over-specification or obsolescence
4. lack of alternative opportunities
5. high vertical integration
6. emotional barriers
7. Even if some firma do not want to exit the industry, they might want to decrease their size.
8. Companies should try to reduce the shrinkage barriers to help their ailing competitors get
smaller gracefully.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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 Common Shrinkage Barriers
1. contract commitments
2. stubborn management

4. Cost Structure
 Each industry has a certain cost mix that drives much of its strategic conduct.
 Example: manufacturing costs for food processing industry
 Firms will pay greatest attention to their greatest costs and will strategize to reduce these costs.

5. Degree of Vertical Integration

 In some industries, companies find it advantageous to integrate backward and/or forward.
 Vertical integration often lowers costs and gives the company more control over the value-
added stream.
 Vertically integrated firms can manipulate their prices and costs in different segments of their
business to earn profits where taxes are lowest.
 However, vertical integration can create certain disadvantages, such as being stuck with high
costs in certain parts of the value chain and a certain lack of flexibility.

6. Degree of Globalization
 Some industries are highly local; others are global.
 Companies in global industries need to compete on a global basis if they are to achieve
economies of scale and keep up with the latest advances in technology.

Market Concept of Competition

 In addition to looking at companies making the same product (the industry approach), we can look at
companies that satisfy the same customer need (market approach).
 In general, the market concept of competition opens the company’s eyes to a broader set of actual and
potential competitors and stimulates more long-run strategic market planning.
 The key to identifying competitors is to link industry analysis with market analysis by mapping out the
product/market battlefield (target marketing and positioning)

Identifying Competitors’ Strategies

Competitors’ Strategies
 A company’s closest competitors are those pursuing the same target markets with the same strategy.
 A group of firms following the same strategy in a given target market is called a strategic group.
 A company needs to identify the strategic group in which it competes.

 Important insights emerge from this strategic-group identification:

 The height of the entry barriers differs for each strategic group
 If the company successfully enters one of the groups, the members of that group become its key
competitors. It will need to possess some competitive advantage if it hopes to succeed.

 Competition among Strategic Groups

 Some strategic groups may appeal to overlapping customer groups.
 Customers might not see much difference in the different strategic groups’ offers.
 Each group might want to expand its market share, especially if the companies are fairly equal in size
and power and the mobility barriers between groups are low.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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 A company must continuously monitor its competitors’ strategies. Resourceful competitors revise their
strategy through time.

Determining Competitors’ Objectives

 Once a company has identified its main competitors and their strategies, it must ask:
 What is each competitor seeking in the marketplace?
 What drives each competitor’s behavior?
 A useful initial assumption is that competitors strive to maximize their profits.
 However, companies differ in the weights they put on short-term versus long-term profits.
 Furthermore, some companies orient their thinking around “satisficing” rather than maximizing.
 An alternative assumption is that each competitor pursues a mix of objectives: current profitability, market
share growth, cash flow, technological leadership, service leadership, and so on.
 A competitor’s objectives are shaped by many things, including its size, history, current management,
financial situation, and place in the larger organization.
 Finally, a company must also monitor its competitors’ expansion plans.

Assessing Competitors’ Strengths and Weaknesses

 Whether a company’s competitors can carry out their strategies and reach their goals depends on each
competitor’s resources and capabilities.
 A company must gather primary and secondary data from its competitors using company’s MIS.
 In general, every company should monitor three variable when analyzing its competitors:
1. Share of market – the competitor’s share of the target market.
2. Share of mind – The percentage of customers who named the competitor in responding to the
statement, “Name the first company that comes to mind in this industry.”
3. Share of the heart – The percentage of the customers who named the competitors in responding to
the statement, “Name the company from you would prefer to buy the product.”

 Companies that make steady gains in mind share and heart share will inevitably make
gains in market share and profitability.

 Benchmarking – comparing a product or process against the best-in-class product.

 In searching for competitors’ weaknesses, we should identify any assumptions they make about their
business and the market that are no longer valid.

Assessing Competitors’ Reaction Patterns

 One needs a deep understanding of a competitor’s mind-set to have hope of anticipating how it might act
or react.
 Most competitors fall into one of four categories:
1. Laid-back competitor
 A competitor that does not react quickly or strongly to a rival’s move.
 They feel their customers are loyal;
 They may be milking the business;
 They may be slow in noticing the move;
 They may lack the funds to react.
2. Selective competitor
 A competitor that reacts only to certain types of attacks and not to others.
3. Tiger competitor

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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  A competitor that reacts swiftly and strongly to any assault on its terrain
4. Stochastic competitor
 A competitor that does not exhibit a predictable reaction pattern

 Observations regarding Competitive Relationships (Competitive Equilibrium):

1. If competitors are nearly identical and make their living in the same way, then their competitive
equilibrium is unstable.
2. If a single major factor is the critical factor, then competitive equilibrium is unstable.
3. If multiple factors may be critical factors, then it is possible for each competitor to have some advantage
and be differentially attractive to some customers. The more factors that may provide an advantage,
the more competitors who can coexist. Competitors all have their competitive segment, defined by the
preference for the factor trade-offs that they offer.
4. The fewer the number of critical competitive variable, the fewer the number of competitors.
5. A ratio of 2 to 1 in market share between any two competitors seems to be the equilibrium point at
which it is neither practical nor advantageous for either competitor to increase or decrease share.

Designing the Competitive Intelligence System

 Four Main Steps
1. Setting up the system
2. Collecting the data
3. Evaluating and analyzing the data
4. Disseminating information and responding

Selecting Competitors to Attack and Avoid

 Steps in Conducting Customer Value Analysis
1. Identify the major attributes that customer value.
2. Assess the quantitative importance of the different attributes.
3. Assess the company’s and competitors’ performance on the different customer values against their
rated importance.
4. Examine how customers in a specific segment rate the company’s performance against a specific
major competitor on an attribute-by-attribute basis.

Designing Marketing Strategies for Market Leaders, Challengers, Followers, and Nichers

Competitive Positions in the Target Market

1. Dominant – The firm controls the behavior of other competitors and has a wide choice of strategic
options.
2. Strong – This firm can take independent action without endangering its long-term position and can be
maintain its long-term position regardless of competitor’s action.
3. Favorable – This firm has an exploitable strength and a better-than-average opportunity to improve its
position.
4. Tenable – This firm is performing at a sufficient satisfactory level to warrant continuing in business, but
it exists at the sufferance of the dominant company and has a less-than-average opportunity to improve
its position.
5. Weak – This firm has unsatisfactory performance but an opportunity exists for improvement. The firm
must change or else exit.
6. Nonviable – This firm has unsatisfactory performance and no opportunity for improvement.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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Classification of Firms According to the
Role they play in the Market and their Strategies

To facilitate the discussion, you must be aware of The 22 Immutable Laws of Marketing.

1. Market-Leader
 This firm has the largest market share in the relevant product market.
 It usually leads the other firms in price changes, new-product introductions, distribution coverage, and
promotional intensity.
 The leader may or may not be admired or respected, but other firms acknowledge its dominance.
 The leader is an orientation point for competitors, a company to either challenge, imitate, or avoid.
 It must maintain constant vigilance because other firms keep challenging its strengths or trying to take
advantage of its weaknesses.
 The market leader can easily miss a turn in the road and plunge into second or third place.
 A product innovation may come along and hurt the leader.
 The leader might spend conservatively, expecting hard times, while a challenger spends liberally.

Strategies:
1. Expanding the Total Market
 New users
 Every product class has the potential of attracting buyers who are unaware of the
product or who are resisting it because of its price or lack of certain features.
 Available strategies to expand more users:
 Market-penetration strategy
 New-market strategy
 Geographical-expansion strategy
 New uses
 Markets can be expanded through discovering and promoting new uses for the product
 The company’s task is to monitor customers’ uses of product.
 More usage
 A thirds market expansion strategy is to convince people to use more of the product per
use occasion.

2. Defending Market Share

 The leader refuses to be content with the way things are and leads the industry in developing new
product and customer services, distribution effectiveness, and cost cutting.
 It keeps increasing its competitive effectiveness and value to customers.
 The leader applies the military principle of the offensive: The commander exercises initiative, sets
the pace, and exploits enemy weaknesses.
 The best defense is a good offense.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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 (2) Flank defense

(1)
(3) Position
Pre-emptive defense
defense
(6)
ATTACKER (4) Contraction
Counter- defense
offensive DEFENDER
defense

(5)
Mobile
defense

 Position defense
 The most basic idea of defense is to build an impregnable fortification around one’s
territory
 Flank defense
 The market leader should not only guard its territory but also erect outposts to protect a
weak front or possibly serve as an invasion base for counterattacking.
 Preemptive defense
 A more aggressive defense maneuver is to launch an attack on the enemy before the
enemy starts its offense against the leader.
 Guerilla attack
 Market envelopment
 Price attack
 Counteroffensive defense
 Most market leaders, when attacked, will respond with a counterattack.
 The leader cannot remain passive in the face of a competitor’s price cut, promo blitz,
product improvement, or sales-territory invasion.
 The leader has the strategic choice of meeting the attacker frontally, maneuvering
against attacker’s flank, or launching a pincer movement to cut off the attacking
formations from the base of operation.
 A better response to an attack is to pause and identify a chink in the attacker’s armor – a
segment gap in which a viable counteroffensive can be launched.
 Another common form of counteroffensive defense is the exercise of economic or
political clout to deter the attacker.
 Mobile defense
 It involves more than the leader aggressively defending its territory.

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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  The leader stretches its domain over new territories that can serve as future centers for
defense and offense.
 Market broadening calls upon a company to shift its focus from the current
product to the underlying generic need and get involved in R&D across the whole
range of technology associated with that need.
 But the market leader should avoid too much market broadening effort to
marketing hyperopia:
 Principle of the objective – pursue a clearly defined, decisive, and
attainable objective.
 Principle of Mass – concentrate your efforts at a point of the enemy’s
weakness.
 Contraction defense
 Large companies sometimes recognize that they can no longer defend all of their
territory.
 Planned contraction (Strategic withdrawal) is not market abandonment but rather
giving up the weaker territories and reassigning resources to stronger territories.
 Planned contraction is a move to consolidate one’s competitive strength in the market
and concentrate mass at pivotal positions.

3. Expanding Market Share

 Market leaders can improve their profitability by increasing their market share
 In many markets, one share point is worth tens of millions of dollars/pesos.
 Profit Impact of Market Strategy (PIMS) study shows that profitability increases as a business gains
share relative to its competitors in its served (target) market.

Profitability

Market Share

 However, companies must not think that gaining increased market share in their served market will
automatically improve their profitability.
 Much depends on their strategy for gaining increased market share.
 Because the cost of buying higher market share may far exceed its revenue value.

2. Market-Challenger
 Firms that occupy second, third, and lower ranks in an industry are often called runner-up, or training,
firms.
 These runner-up firms can adopt one or two postures:

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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  Market challengers – they can attack the leader and other competitors in an aggressive bid for
further market share.
 Market followers – they can play ball and not “rock the boat”.

Strategies
1. Defining the Strategic Objective and Opponent(s)
 A market challenger must first define its strategic objective.
 Most market challengers’ strategic objective is to increase their market shares.
 It can attack the market leader.
 This is a high-risk but potentially high-payoff strategy and makes good sense if the
leader is a “false leader” who is not serving the market well.
 The terrain to examine to examine is consumer need or dissatisfaction. A
substantial segment that is unserved or poorly served provides an excellent
strategic target.
 The alternative strategy is to out-innovate the leader across the whole segment
 It can attack firms of its own size that are not doing the job and are underfinanced.
 It can attack firms that have aging products, are charging excessive prices, or are not
satisfying customers in other ways.
 It can attack small local and regional firms that are not doing the job and are underfinanced.
 Several of the companies grew to their present size not by stealing each other’s
customers but by gobbling up the smaller firms, or “guppies”.

2. Choosing a General Attack Strategy

 After having a clear picture of the opponents and objectives, the next step is to select the best attack
strategy.

(4) Bypass attack

(2) Flank attack

(1)
Frontal
attack

ATTACKER DEFENDER

(3)
Encirclement
attack

(5)
Guerrilla
attack

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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  Frontal Attack
 An aggressor is said to launch a frontal (or “head-on”) attack when it masses its forces
right up against its opponent.
 It attacks the opponent’s strengths rather than its weaknesses.
 The outcomes depends on who has the more strength and endurance
 Modified frontal attack involves cutting its price vis-à-vis the opponents
 Match the leader’s offer on other counts and beat it on price
 Can work if the market leader does not retaliate by cutting price
 If the aggressor convinces the market that its product is equal to the
competitor’s, but better because it is sold at a lower price.
 Other price-aggressive strategy involves heavy investment by the attacker to
achieve lower production costs and then an attack on competitors on a price
basis.
 Flank Attack
 Concentration of strength against weakness
 Strategic dimensions:
 Geographic
 Segmental
 Encirclement Attack
 It is an attempt to capture a wide slice of the enemy’s territory through a comprehensive
“blitz” attack.
 It involves launching a grand offensive on several fronts, so that the enemy must protect
its front, sides, and rear simultaneously
 The aggressor may offer the market everything the opponent offers and more, so that
the offer is unrefusable.
 It makes sense where the aggressor commands superior resources.
 Bypass Attack
 It is the most indirect of assault strategies.
 It means bypassing the enemy and attacking easier markets to broaden one’s resource
base.
 Approaches:
 Diversifying into unrelated products
 Diversifying into new geographical markets
 Leapfrogging into new technologies to supplant existing products.
 Guerilla Attack
 It consists of waging small, intermittent attacks on an opponent’s different categories.
 The aim is to harass and demoralize the opponent and eventually secure permanent
footholds.
 Conducting this attack can be expensive, although admittedly less expensive than a
frontal, flank, or encirclement attack.
 It is more a preparation for the war than a war itself
 The guerilla aggressor uses both conventional and unconventional attacks:
 Price cuts
 Intense promotional blitzes
 Occasional legal actions

3. Choosing a Specific Attack Strategy

 Among the broad strategies, the challenger must put together a total strategy consisting of several
specific strategies:

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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  Price-discount strategy
 Cheaper-goods strategy
 Prestige-goods strategy
 Product-proliferation strategy
 Product-innovation strategy
 Improved-services strategy
 Distribution-innovation strategy
 Manufacturing-cost-reduction strategy
 Intensive advertising promotion

3. Market-Follower
 “Product imitators” rather than “product innovators”.
 This is not to say that market followers lack strategies.
 They must know how to hold current customers and win a fair share of new customers
 Each follower tries to bring distinctive advantages to its target market – location, services, financing.
 It must keep its manufacturing costs low and its product quality and services high.
 It must also enter new markets as they open up.
 Followership is usually not the same as being passive or a carbon copy of the leader. The follower has to
define a growth path, but one that does not invite competitive retaliation.
 But followership is not often a rewarding path to pursue.

Strategies
1. Counterfeiter
 It duplicates the leader’s product and package and sells it on the black market or through disreputable
dealers
2. Cloner
 It emulates the leader’s products, distribution, advertising, and so on.
 The cloner’s product and packaging may resemble the leader’s, while the brand name might be
slightly different.
3. Imitator
 It copies some things from the leader but maintains differentiation in terms of packaging, advertising,
pricing, and so on.
 The leader doesn’t mind the imitator as long as the imitator doesn’t attack the leader aggressively.
 The imitator even helps the leader avoid the charge of monopoly.
4. Adapter
 It takes the leader’s products and adapts or improves them.
 It may adapter may choose to sell to different markets to avoid direct confrontation with confrontation
with the leader.

4. Market-Nicher

Characteristics of a Successful Nicher

1. Pick its fight carefully
2. Keeps costs down by developing and producing its product in-house
3. Innovate constantly by bringing out a dozen new products a year
4. Acquire smaller rivals to help stretch and expand its product offering

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

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 In a study conducted by Strategic Planning Institutes reveals that the return on investment in smaller
market is 27%, compared to 11% of larger markets.
 The main reason is that the market nicher ends up knowing the target customers so well that it
meets their needs better than other firms that are selling to this niche casually.
 As a result, the nicher can charge a substantial markup over costs because of the perceived
added value.
 The nicher achieves high margin, while the mass marketer achieves high volume.

Niching Process
1. Creation
2. Expansion
3. Protection

Niche Specialization
1. End-user specialist
2. Vertical-level specialist
3. Customer-size specialist
4. Specific-customer specialist
5. Geographic specialist
6. Product or product-line specialist
7. Product-feature specialist
8. Job-shop specialist
9. Quality/price specialist
10. Service specialist
11. Channel specialist

Culled from Kotler, Philip; Marketing Management, 14th ed.; Prepared by Mr. Angelo A. Abejero for class room lecture purposes only.

AAA’17-‘18