Competitive Forces

Ch. 7

Muhammad Adeel
Table of Contents
Business Environment............................................................................................................................. 2
Porter’s Five Forces Model ..................................................................................................................... 2
Bargaining Power of Customer ........................................................................................................... 2
Bargaining Power of Supplier.............................................................................................................. 3
Intensity of Rivalry among Competitors ............................................................................................. 3
Threat from Substitutes ...................................................................................................................... 3
Threat from New Entrants .................................................................................................................. 4
Impacts of Competitive Forces on Business ........................................................................................... 4
Product Life Cycle.................................................................................................................................... 4
Introduction Stage .............................................................................................................................. 5
Growth Stage ...................................................................................................................................... 6
Maturity Stage .................................................................................................................................... 6
Declining Stage.................................................................................................................................... 7
Relevance of PLC to Strategic Management ........................................................................................... 7
Benefits of Life Cycle Costing .................................................................................................................. 7
Boston Consulting Group (BCG) Matrix .................................................................................................. 8
Star ...................................................................................................................................................... 8
Cash Cow ............................................................................................................................................. 8
Question Mark .................................................................................................................................... 9
Dog ...................................................................................................................................................... 9
Market Segmentation ............................................................................................................................. 9
Market Segment ..................................................................................................................................... 9
Competitor Analysis .............................................................................................................................. 10
Strategic Group ..................................................................................................................................... 10
Strategic Space ...................................................................................................................................... 11
Types of Industries ................................................................................................................................ 12
Industry Convergence ........................................................................................................................... 12
Demand-led convergence ................................................................................................................. 13
Supply-led convergence .................................................................................................................... 13
Need of Industry Analysis ..................................................................................................................... 13
Practice Questions ................................................................................................................................ 14
 Competitive Environment (Ch. 7)

Business Environment

Business environment is composition of variable factors that influence business fraternity of

a country. For analysis purposes, business environment is divided in three layers

1. Macro-environment
Macro-environment is composition of following factors
a. Political, Economic, Social and Legal factors
b. Technological factors
c. Ecological factors

2. Micro-environment
Micro-environment is composition of factors that affect an industry rather whole
economy. These factors determine structure of an industry and help management to set
its competitive strategy. An organization uses Porter’s Five Forces Model to evaluate
micro-environment. Building-blocks of micro-environment are:
a. Customers and Suppliers
b. Competition among competitors
c. Threats from substitutes and new entrants

3. Internal environment
Internal environment is composition of various resources and competencies. These
resources and competencies contribute towards achievement of sustainable competitive
advantage. Organization uses various management tools to analyze its internal
environment like value chain model.

Porter’s Five Forces Model

It’s a framework to analyze micro-environment and to discover opportunities and threats

therein. Following variables are analyzed

1. Bargaining Power of Customer

2. Bargaining Power of Supplier
3. Intensity of Competition among Competitors
4. Threat of New Entrant
5. Threat of Substitutes

Bargaining Power of Customer

Bargaining power of customer means to what extent the customer of an entity can bargain.
If bargaining power of customer is stronger than the firm then the firm has to compromise
on its profit margins. It is considered as the weaker one in industry and investors would be
reluctant to invest in this entity. Firm experiences opposite state of affairs if its bargaining
position is better than its customer. Following factors determine bargaining position of an

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entity

1. Number of customers
2. Customer’s switching cost
3. Customer’s preferences
4. Customer information level
5. Volume of purchase by a customer

Bargaining Power of Supplier

Bargaining power of supplier means to what extent supplier of an entity can bargain. If
bargaining power of supplier is stronger than the firm then the firm has to compromise on
its profit margins. It is considered as the weaker one in industry and investors would be
reluctant to invest in this entity. Firm will experience opposite state of affairs if its
bargaining position is better than its supplier. Following factors determine bargaining
position of an entity

1. Number of Suppliers (as compared to firms buying from them)

2. Supplier’s switching cost
3. Switching cost of firm to change supplier
4. Supplier producing specialized products
5. Substitutes of supplier’s products are available?
6. Volume of purchase from supplier by the firm

Intensity of Rivalry among Competitors

Intensity of rivalry among competitors determines profitability of an entity. If competition is

hard-hitting among rival companies then firms within industry will be earning low profits
and vice versa happens in case of opposite circumstances. Following factors determine
intensity of rivalry among competing firms.

1. Number of firms in market (fighting for same target market share)

2. Size of firms competing for share from same market
3. Growth opportunities
4. Intensity of exit barriers
5. Idle production capacity

Threat from Substitutes

If threat from substitute product(s) is high then firm needs to take any strategic move very
carefully. Higher threat from substitute reflects high probability that firm’s customer would
shift towards substitute product(s). Following factors determine threat from substitutes

1. Availability of substitutes

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2. Price of substitutes comparative to firm’s products

3. Quality of substitutes compared to firm’s product
4. Technological advancements of substitutes
5. Customer’s preferences (brand or need?)

Threat from New Entrants

If threat from new entrants is high then firm needs to take any strategic move very carefully.
High threat from new entrant indicates high risk that the new firm joins industry with better
strategic moves and severely hits customer base of the firms already operating in industry.
Following factors determine threat from new entrants:

1. Legislative requirements to enter and stay in industry

2. Political interference in corporate affairs
3. Government inclination towards an industry
4. Availability of factors of production
5. Technological vibration e.g. mobile phone industry
6. Capital requirements e.g. automotive industry
7. Rivalry among firms in industry e.g. retail industry
8. Customers’ switching costs

Impacts of Competitive Forces on Business

If competitive forces are not in favor of industry then firms has to take following measures

 Aggressive marketing campaigns to lock in their customers

 Become a brand. For example if bargaining power of customers is high because they
prefer brand then survival would demand organizations to become brand)
 Improve product quality. This would let customers move away from company products
 Cut product prices if customers are price conscious
 Invest in technology to make product technologically advanced
 Invest to reduce risk of corporate espionage
 Discover more suppliers to make company bargaining position better than suppliers
 Conduct research and development activities to find out alternative input material
options, how to improve product quality and reduce operational costs

Product Life Cycle

Product life cycle (PLC) refers to the life span of a product from its birth to death. PLC
normally consists of 4 phases. Every stage has its own characteristics. Each product has
different life cycle spanning from months to centuries.

Phases of PLC are

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1. Introduction
2. Growth
3. Maturity
4. Decline

Introduction Stage

Following factors indicate that a product is at its introduction stage

1. Customer’s Response: The customer hesitates to buy and use product when it has just
been released in market. There may be number of reasons behind customer’s hesitation
e.g. customer is loyal with some other brand or customer is conscious about his health
etc. In short the customer resists shifting from existing brand or product.

2. Distributor’s Response: When the product is new and its demand is low in the market,
the distributor hesitates to invest in new product. The distributor is afraid of investing its
funds in less demanding product.

3. Costs and Revenue: Usually at introduction stage product cost is higher than its total
revenue. Following factors may contribute to high product cost Reason behind the
higher cost may be
a. High research and development costs
b. Short production runs so high cost per unit
c. Intensive promotional costs
d. Specialized distributors so higher costs
e. Usually low demands so low sales volume

4. Competitors: At initial stage, there are few or no competitor in market

5. Substitutes: At initial stage, there almost nothing available as alternate of product

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Growth Stage

Following factors indicate that a product is at growth stage of its life cycle

1. Customer’s Response: The firm made extensive advertisement when product was at its
introduction stage, this would generate lead at growth stage. Customer’s awareness of
product increases and they start demand firm’s product.

2. Distributor’s Response: The distributor observes increasing demand from market and
start showing interest in firm’s product. The distributor now wants to invest in firm’s
product and offers favorable terms to develop business relations with firm. At this stage,
firm’s bargaining position as compared to its distributor starts strengthening.

3. Cost and Revenue: At growth stage, total revenue of product starts increasing. Product
cost also increases because of succeeding reasons

a. Increasing capacity building cost to meet demand

b. Increasing working capital & financing cost,
c. High promotional costs to build customer loyalty

4. Competitors: Market becomes lucrative at growth stage because revenue increases at

rapid pace. Number of organizations jump in industry to make profits. This factor
becomes a reason of intense competition among competing rival firms and may badly
affect profitability of the firm.

Maturity Stage

Following factors indicate that a product is at maturity stage of its life cycle

1. Customer’s Response: At growth stage, number of firms jumped in industry, made

promotional efforts and occupied a fraction of total market. Every firm within industry
endeavors to defend its market share because there would be very low probability of
increasing customer base. So, it can be said that demand for firm’s product is high (as
compared to other stages of PLC) in this phase.

2. Distributor’s Response: At maturity stage, customer has many options to buy from and
satisfy its need. The distributor notices customer’s attitude towards firm’s product and
again shows reluctance in investing firm’s product.

3. Costs and Revenue: At maturity stage, total revenue is highest as compared to other
phases of PLC. SO far as cost is concerned, firm has to swallow following costs

a. High cost to differentiate firm’s product from competitive products

b. Advertisement costs to maintain market share
c. High promotional costs to maintain brand loyalty

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4. Competitors: At maturity stage, the industry experiences intensive competition as every

firm wishes to stay in market and make money.

Declining Stage

Following factors indicate that a product is at declining stage of its life cycle

1. Customer’s Response: When customer shows no interest in firm’s product and total
revenue starts falling, it reflects product has entered in declining stage of its life cycle.
There may be number of reasons for change in customer’s taste and preferences.

2. Distributor’s Response: When market does not generate demand for firm’s product,
distributors also stop investing in company product. There is hardly any distributor of
company product.

3. Cost and Revenue: Total revenue of company products starts deteriorating. Sometime
firm still incurs expenditures to keep product alive like promotional costs to attract
customers but usually it does not work.

4. Competitors: Competitors started leaving market at maturity stage. Only the large scale
companies, if any, hanged around in the market. So, normally there is hardly any
competitive product in market at this stage.

Relevance of PLC to Strategic Management

Product Life Cycle help senior management to

1. Estimate life of product

2. Predict customers’ response over product’s life
3. Predict competitors’ response over product’s life
4. Predict suppliers’ and distributors’’ responses over product’s life
5. Forecast costs, revenue, profits and cash flows over product life
6. Sort out with future strategy like
a) Product revival or modification
b) Market modifications
c) Guides when to withdraw a product from market

Benefits of Life Cycle Costing

Life cycle costing compares the revenues and costs of the product over its entire life. This
has many benefits
 Costs and revenue associated with a product throughout its life can be estimated
 Management can effectively define its pricing strategies
 Potential profitability can be assessed before any major product modifications

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 Helps management to sort out when to apply which type of cost reduction strategy
 Helps management to decide timings of research and development
 Management would be able to compare actual performance with plans and accordingly
improve its performance

Boston Consulting Group (BCG) Matrix

BCG matrix is a 2 X 2 matrix used to assess a

product’s (or an SBU’s) position against two
dimensions: product’s (or SBU’s) relative
market share and potential for its growth in
market.

One side of matrix represents rate of

growth for a particular product or an SBU.
Other side of matrix reflects relative market
share of product or an SBU

Star

A product of company that has high relative market share and high growth potential

Other Characteristics

 Star usually leads the market

 Product may be at Growth stage of its life cycle

Strategies: Company should invest to maintain its leading position and increase its customer
base

Cash Cow

A product of company that has high relative market share and low growth potential

Other Characteristics

 Cash Cow usually leads the market

 The product may be at Maturity Stage of its life cycle

Strategies: The firm should defend and maintain its strategic position and milk the cow to
feed the babies like question mark and star

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Question Mark

A product of company that has low relative market share and high growth potential is called
question mark. The product may be at either introduction or growth stage of its life cycle.

Strategies: The firm should invest in marketing efforts to increase its market share but
before there would be a risk that market leader might get defensive and start price war.

Dog

A product of company that has low relative market share and low growth potential is called
dog. Cash flows from product are usually negative. Product may be at declining stage.

Strategies: Firm should take deep consideration before investing in this product.

Market Segmentation

Market segmentation refers to a process of dividing target market into approachable groups
based on some common characteristics

A business entity might try to sell its products to all customers in the market. For example,
manufacturers of sugar might try to sell their product or products to all customers in the
market who buy sugar. Similarly, distributors of petrol (car fuel) might try to sell their
products to all car drivers/buyers of petrol.

However, a business entity might choose instead to target its products at a particular
section or segment of the market. This particular section of total market is called market
segment.

Market Segment

A market segment is a section of the total market in which the potential customers have
certain unique and identifiable characteristics and needs

Basis of Market Segmentation:

A market can be segmented on following basis:

1. Geographical basis
2. Demographics of a society
3. Type of customers (Retail, Corporate customers)
4. Social status of customers
5. Life style of customers

Benefits (or Purpose) of Market Segmentation

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Firm can better design its marketing (mix) strategies according to needs of target segment.
A firm can reap following benefits through market segmentation

1. Better service with limited resources

2. Firm can make better profits
3. Better opportunities for business growth
4. Firm can retain customers for long time
5. Firm can gain share of target segment

Example of Market Segmentation

An entity might decide to segment a market according to the life style of customers.
Possible life style segments include single people less than 30 years of age, newly married
couples with no children, married couples with young children, married couples with
teenage children, married couples whose children are grown up and have left home, retired
couples, and retired single people.

This form of market segmentation can be useful for certain products and services such as:
1. Holidays
2. Motor cars
3. Some food and drink products
4. Entertainment products

Competitor Analysis

Competitor analysis is the process of identifying competitors and evaluating their strategies
in order to determine their weaknesses and strengths so the company can better encounter
its competitors.

One of methods to analyze understand competitors is Strategic Grouping

Strategic Group

Strategic group refers to the number of entities that operate in same industry and have
similar strategies. Strategic grouping is a way to analyze competitors when there is large
number of competitors and it’s hard to assess each competitor individually

Basis of Strategic Grouping

Entities may be clustered on number of basis like

1. Strategies: Some companies prefer to be a brand while others decide to compete on

basis of price. If our company decides to target price conscious customers then group of
companies competing on basis of price would be our rivals.

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2. Region: Some companies operate globally whereas some companies have domestic
operations only. If our company is to operate locally then global company would not be
considered as our competitor.

3. Range of product (diversified or single): There are many companies with diversified
product portfolio and single product operating in market. If we decide to jump in
market with diversified product portfolio then first group will be our competitor.

4. Pricing strategy

5. Size of organization

Strategic Space

A strategic space is a gap in the market that has not yet been filled by any strategic group.
The existence of strategic space provides an opportunity to a organization to take initiative
to fill the space that no other rivals occupy.

Example

An organization classifies its competitors in terms of product quality and selling price and
finds that some firms are offering products at lower prices but their quality is probably not
as good. Other firms might offer higher- quality products for higher prices. The strategic
groups in a market might be mapped according to price and quality as follows

This map indicates that there

are four strategic groups, each
in a different market position
in relation to price and quality.
The largest group, Group 2,
sells products with a middle-
range price and middle-range
quality

This method of analysis can

help an entity to identify possible gaps in the market – strategic space. When there is a
perceived gap in the market, an entity might decide on a strategy of filling the empty space
by offering a product with the characteristics that are needed to fill the gap. If the
positioning of entities in a market is analyzed by price and quality, as above, possible
strategic spaces might be identified as follows

In this example, an entity might decide to target a position in the market where it sells a
high quality product for a low price, because there are no firms yet in this part of the
market. Alternatively, there might be a market for even higher-quality products at an even

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higher price. The entity might even decide to fill the gap between Group 1 and Group 2.

Types of Industries

Michael E. Porter suggested that there are five generic types of industries

1. Fragmented Industry
2. Emerging Industry
3. Mature Industry
4. Declining industry
5. Global Industry

1) Fragmented Industry: In fragmented industry there is large number of firms. Each firm
in industry is smaller in size and occupies a small portion of whole market e.g. retail
grocery industry, auto repair industry

2) Emerging Industry: Emerging industry is an industry that has just started and has good
growth potential. For example: Electric car manufacturing industry, Alternative
Technology Industry like wind energy, Online education industry

3) Mature Industry: Industry wherein products have reached at their maturity phase is
called mature industry. Firms’ growth rate in mature industry is low to zero e.g. Petrol
Car Manufacturing Industry,

4) Declining Industry: An industry that reflects a declining trend like falling total revenue,
declining number of competitors, decreasing customer base over time etc. For example
coal mining industry, diesel car manufacturing industry, recordable media industry and
DVD manufacturing industry

5) Global Industry: An industry that operates on global scale i.e. operate in almost every
country in the world like Automobile industry, Mobile manufacturing industry and
Telecommunication industry

Industry Convergence

Two or more industries or industrial segments converge (unite) and become part of a single
industry

Example

There were three separate industries in past having different consumer markets. These
were mobile manufacturers, telecommunication industry, and television industry. Now
mobile manufactures has its own telecommunication network and is providing data and
voice services along with entertainment. Think about Jazz. In short three different industries
have converged into a single industry

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Convergence is either Demand-Led or Supply-Led

Demand-led convergence

The pressure for industry convergence comes from customers. Customer start demanding
all or maximum complementary products from same end e.g. Designers and Developers

Supply-led convergence

The suppliers see a link between different industries or industrial segments and decide to
bridge gap between industries e.g. in case of entertainment, voice and data communication
industries. This happens a lot in technology oriented industries

Need of Industry Analysis

1) To evaluate current industry structure and strategic position of firm

2) To see industry life cycle and take appropriate measure
3) To predict future industry structure
4) To assess performance in comparison with rival firms in industry
5) To make strategic decisions like
a) Should the company expand its operations or not?
b) What should be strategic direction of firm?
c) Timings for strategic decisions

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Practice Questions

Q. 1. Product Life Cycle (Q. 5, Spring 2022)

Barganza Limited (BL) manufactures and markets four consumer durable products.
Presented below are the main costs incurred on each of the products:

 Product A: Costs of setting up and expansion of distribution channels

 Product B: Costs of withdrawals
 Product C: Marketing and product enhancement costs to extend product life
cycle
 Product D: Increased costs of working capital

Required
a. Identify and explain the stage of product life cycle for each product. (06)
b. From your answer to (a) above, for each product:
a. Provide one more cost, other than marketing and advertising cost, that is
likely incurred. (03)
b. Suggest a promotion strategy BL may pursue. (04)

Q. 2. BCG Matrix (Q. 3, Autumn 2022)

Product 1:
This product is the first product AUM introduced in the market and carries strong
brand value. Its repute carries positive influence on many other AUM business
activities. When the product was introduced, its market share quickly grew to 4%
and has remained steady for a long time now. Its market share is 7% less than the
market leader. The overall market is growing by 2.5% year on year basis.

Product 2:
This product has been consistently selling and enjoying high profits in the same
market for quite some time now. The annual market growth for this product is 5%
and market share is merely 1.5% less than the only competitor in the market.

Required:
For each of the products presented above:
 Identify the quadrant and explain the corresponding strategies from the
perspective of Boston Consulting Group (BCG) Model. (05)
 Highlight the relevant criticism of BCG Model and recommend future strategies
accordingly. (05)

Q. 3. Porter’s Five Forces Model (Q. 5, Autumn 2022)

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Saldia, a country in Asia, does not allow import of automobiles as a national policy. It
is now considering dissolving this policy. Discuss the impact of allowing the import of
automobiles on each of the Porter’s five competitive forces on Saldia’s automobile
industry. Your answer should also clearly mention whether the changed policy would
strengthen or weaken each of these forces. (08)

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