CH06

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Dealing with the Dealing with the CompetitionCompetition

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Kotler on Marketing

Poor firms ignore their competitors; average firms copy their competitors; winning firms lead their competitors.

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In this chapter, we focus on five things companies need to know about their competition: Who the primary competitors are How to ascertain their strategies, objectives,

strengths and weaknesses, and reaction patterns

How to design a competitive intelligence system Whether to position as market leader,

challenger, follower, or nicher How to balance a customer versus

competitor orientation

Chapter Objectives

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Five Forces Determining Segment Structural Attractiveness

Competitive Forces

Threat of:1. intense segment

rivalry2. new entrants3. substitute products4. buyers’ growing

bargaining power5. suppliers’ growing

bargaining power

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Competitive ForcesThreat of:1. Intense segment rivalry segment is unattractive if it already contains numerous, strong,

or aggressive competitors it is even more unattractive if the segment is stable or

declining if plant capacity additions are done in large increments if fixed costs are high if exit barriers are high if competitors have high stakes in staying in the segment price

wars Result: price wars, advertising battles, and new-product

introductions will make it expensive for the companies to compete

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Competitive ForcesThreat of:2. New entrants the most attractive segment is one in which entry barriers are

high and exit barriers are low (few new firms can enter the industry, poor-performing firms can easily exit)

entry and exit barriers are high, profit potential is high, but firms face more risk because poorer-performing firms stay in and fight it out

entry and exit barriers are both low, firms easily enter and leave the industry, and the returns are stable and low

the worst case is when entry barriers are low and exit barriers are high (firms enter during good times but find it hard to leave during bad times). Result is chronic overcapacity and depressed earnings for all

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Competitive Forces

Threat of:3. substitute products segment is unattractive when there are actual or potential

substitutes for the product

4. buyers’ growing bargaining power segment is unattractive if the buyers possess strong or growing

bargaining power trying to force prices down demand more quality or services set competitors against one another

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Competitive ForcesThreat of:4. buyers’ growing bargaining power Buyers' bargaining power grows when: they become more concentrated or organized product represents a significant fraction of the buyers‘

costs the product is undifferentiated buyers' switching costs are low buyers are price sensitive because of low profits buyers can integrate upstream

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Competitive Forces

Threat of:5. suppliers’ growing bargaining power 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 there are few substitutes the supplied product is an important input the costs of switching suppliers are high the suppliers can integrate downstream

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Barriers and Profitability

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owners.com:“the smart way to buy or sell a owners.com:“the smart way to buy or sell a home.”home.”

http://www.owners.com/

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Get There.com, launched as the Internet Travel Network Get There.com, launched as the Internet Travel Network in 1995, was the first company to book trips over the in 1995, was the first company to book trips over the WebWeb

http://www.getthere.com/

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Competitive ForcesFour levels of competition, based on the degree ofproduct substitutability: Brand competition – occurs when a company sees its competitors as other companies offering a similar product and services to the same customers at similar pricesIndustry competition - occurs when a company sees its competitors as all companies making the same product or class of productsForm competition - occurs when a company sees its competitors as all companies manufacturing products that supply the same serviceGeneric competition - occurs when a company sees its competitors as all companies that compete for the same consumer dollars

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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 each other Number of Sellers and Degree of Differentiation

Pure monopoly - exists when only one firm provides a certain product or service in a certain country or area (local electricity company)

Oligopoly - small number of (usually) large firms produce products that range from highly differentiated to standardized Pure oligopoly - few companies producing essentially the same

commodity (oil, steel) Differentiated oligopoly - few companies producing partially

differentiated products (autos, cameras)

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Identifying Competitors Industry Concept of Competition Monopolistic competition - consists of many

competitors able to differentiate their offers in whole or part (restaurants, beauty shops)

Pure competition - consists of many competitors offering the same product and service (stock market, commodity market)

Since there is no basis for differentiation, competitors' prices will be the same

No competitor will advertise unless advertising can create psychological differentiation (cigarettes, beer)

Sellers will enjoy different profit rates only to the extent that they achieve lower costs of production or distribution

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Identifying Competitors Entry, Mobility, Exit Barriers

Entry barriers - include high capital requirements; economies of scale; patents and licensing requirements; scarce locations, raw materials, or distributors; and reputation requirements

Mobility barriers Exit barriers - are legal or moral obligations to

customers, creditors, and employees; government restrictions; low asset salvage value due to over specialization or obsolescence; lack of alternative opportunities, high vertical integration, and emotional barriers

Shrinkage barriers - contract commitments, stubborn management

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Identifying Competitors Cost StructureFirms will pay the greatest attention to their greatest

costs and will strategize to reduce these costs Degree of Vertical Integration

Vertical integration Ex: oil industry, where major oil producers carry on

oil exploration, oil drilling, oil refining, chemical manufacture, and service-station operation.

Advantages: lowers costs and gives the company more control over the value-added stream

Disadvantages: being stuck with high costs in certain parts of the value chain and a certain lack of flexibility

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Identifying Competitors Degree of Globalization 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

If company wants to enter other segments, it would need to estimate:

each segment's market size competitors' market shares in each segment competitors' capabilities, objectives, strategies entry barriers in each segment

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Competitor Map – Eastman Kodak

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Analyzing Competitors Strategies

Strategic Groups in the Major Appliance Industry

Other dimensions include: level of technological sophistication geographical scope manufacturing methods

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Analyzing Competitors StrategiesStrategies

Company needs detailed information on eachcompetitor's business marketing manufacturing R&D financial and human resource strategiesproduct quality, features, and mixcustomer services pricing policy distribution coveragesales force strategyadvertising and sales-promotion programs

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Analyzing Competitors Objectives Initial assumption - competitors strive to maximize their profits Alternative assumption - each competitor pursues a mix of objectives: current profitability market share growth cash flow technological leadership service leadership Competitors' goals can differ sharply:U.S. firms operate on a short-run profit-maximization model, their current performance is judged by stockholdersJapanese firms operate on a market-share-maximization model

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A Competitor’s Expansion Plans

Analyzing Competitors

Objectives competitor's objectives are shaped by: its size history current management financial situation place in larger organization

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Analyzing Competitors Strengths and Weaknesses Company should gather recent information on each

competitor's business: data on sales market share profit margin return on investment cash flow new investment capacity utilization secondary data, personal experience, hearsay

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Customer’s Ratings of Competitors on Key Success Factors

Customer Customer AwarenessAwareness

Product Product QualityQuality

Product Product AvailabilityAvailability

Technical Technical AssistanceAssistance

Selling Selling StaffStaff

Competitor ACompetitor A EE EE PP PP GG

Competitor BCompetitor B GG GG EE GG EE

Competitor CCompetitor C FF PP GG FF FF

Note: E = excellent, G = good, F = fair, P = poor.Note: E = excellent, G = good, F = fair, P = poor.

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Analyzing Competitors Three Variables to Monitor

When Analyzing Competitors: Market share - the competitor's share of the target

market Mind share - % of customers who named the

competitor in responding to the statement "Name the first company that comes to mind in this

industry " Heart share - % of customers who named the

competitor in responding to the statement "Name the company from whom you would prefer

to buy the product."

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Market Share, Mind Share, and Heart ShareMarket ShareMarket Share Mind ShareMind Share Heart ShareHeart Share

20002000 20012001 20022002 20002000 20012001 20022002 20002000 20012001 20022002Competitor ACompetitor A 50%50% 47%47% 44%44% 60%60% 58%58% 54%54% 45%45% 42%42% 39%39%

Competitor BCompetitor B 3030 3434 3737 3030 3131 3535 4444 4747 5353

Competitor CCompetitor C 2020 1919 1919 1010 1111 1111 1111 1111 88

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Most competitors fall into one of four categories:

1. The laid-back competitor - competitor that does not react quickly or strongly to a rival's move

Ex: Anheuser-Busch beer-industry leader 2. The selective competitor - competitor that reacts only to

certain types of attacks and not to others Ex: Shell and Exxon 3. The tiger competitor - competitor that reacts swiftly and

strongly to any assault on its terrain Ex: P&G 4. The stochastic competitor - competitor that does not

exhibit a predictable reaction pattern


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Reaction Patterns1. If competitors are nearly identical and make their

living the same way, then their competitive equilibrium is unstable.

2. If a single major factor is the critical factor, then the 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.


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Reaction Patterns

4. The fewer the number of critical competitive variables, 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.


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Designing The Competitive Intelligence System

Four Main Steps Setting Up the System - identifying vital types of

competitive information, identifying the best sources of this information, assigning responsible person

Collecting the Data – sales force, channels, suppliers, market research firms, trade associations

Evaluating and Analyzing the Data - validity and reliability

Disseminating Information and Responding - sent to relevant decision makers, and managers

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Selecting Competitors Customer Value Analysis (CVA)

Customer Value = Customer Benefits – Customer Costs

Customer Benefits = product benefits, service benefits, personnel benefits, image benefits

Customer Costs = purchase price, acquisition costs, usage costs, maintenance costs, ownership costs, disposal costs

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Customer Cost of Three Brands

AA BB CC

PricePrice $100$100 $ 90$ 90 $ 80$ 80

Acquisition costsAcquisition costs 1515 2525 3030

Usage costsUsage costs 44 77 1010

Maintenance Maintenance costscosts

22 33 77

Ownership costsOwnership costs 33 33 55

Disposal costsDisposal costs 66 55 88Total costsTotal costs $130$130 $135$135 $140$140

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Major Steps in Customer Value Analysis:1. Identify the major attributes customers value.2. Assess the quantitative importance of the different attributes.3. Assess the companies’ and competitors’ performances 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.5. Monitor customer values over time.

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Classes of Competitors Strong versus Weak strategy requires fewer resources and time per share point

gained but in the process of attacking weak competitors, the firm

may achieve little in the way of improved capabilities Close versus Distant company should avoid trying to destroy the close competitor Ex: Bausch and Lomb - contact lens manufacturer


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Classes of Competitors “Good” versus “Bad” “Good” - play by the industry's rules make realistic assumptions about the industry's

growth potential set prices in a reasonable relation to costs favor a healthy industry limit themselves to a portion or segment of the

industry motivate others to lower costs or improve differenti-

ation accept the general level of their share and profits


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Classes of Competitors “Good” versus “Bad” “Bad” - buy share rather than earn it take large risks invest in overcapacity upset the industrial equilibrium Company benefits in several ways from good competitors lower the antitrust risk increase total demand lead to more differentiation share the cost of market development and legitimatize a new

technology improve bargaining power vis-a-vis labor unions or regulators may serve less attractive segments


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Analyzing Competitors Arthur D. Little consulting firm Dominant - firm controls the behavior of other competitors and

has a wide choice of strategic options Strong - firm can take independent action without endangering

its long-term position and can maintain its long-term position regardless of competitors' actions

Favorable - firm has an exploitable strength and a better-than-average opportunity to improve its position

Tenable - firm is performing at a sufficiently 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

Weak - firm has unsatisfactory performance but an opportunity exists for improvement

Nonviable - firm has unsatisfactory performance and no opportunity for improvement

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Hypothetical Market Structure

Designing Competitive Strategies

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Designing Competitive Strategies Market-Leader Strategies

Expanding the Total Market New Users

Market-penetration strategy New-market segment strategy Geographical-expansion strategy

New Uses More Usage

Defending Market Share Coca-Cola must constantly guard against Pepsi-Cola;

Gillette against Bic; Hertz against Avis; McDonald's against Burger King; General Motors against Ford; Kodak against Fuji

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Designing Competitive Strategies 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 leader must guard all fronts and not leave any major flanks exposed it must keep its costs down its prices must be consonant with the value the customers see in the brand the leader must "plug holes" so that attackers do not jump in

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Six Types of Defense Strategies


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Defense Strategies Position Defense Flank Defense Preemptive Defense wage guerrilla action across the market - hitting one

competitor here, another there - and keep everyone off balance achieve a grand market envelopment, as Seiko with its 2,300

watch models begin sustained price attacks, as Texas Instruments Counteroffensive Defense - leader has the strategic choice of

meeting the attacker frontally, maneuvering against the attacker's flank, or launching a pincer movement to cut off the attacking formations from their base of operation

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


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Defense Strategies Mobile Defense - leader stretches its domain over new

territories that can serve as future centers for defense and offense

Market broadening - shift focus from the currentproduct to the underlying generic need and get involved in R&D across the whole range of technology associated with that need

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

Ex: Armstrong World Industries carried out a successful market-broadening strategy by redefining its domain from "floor covering" to "decorative room covering" (including walls and ceilings)


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Defense Strategies Market diversification Ex: tobacco companies like Reynolds and Philip

Morris acknowledged the growing curbs on cigarette smoking. They moved quickly into new industries, such as beer, liquor, soft drinks, and frozen foods

Contraction Defense Planned contraction

(Strategic withdrawal) Planned contraction is not market abandonment but

rather giving up the weaker territories and reassigning resources to stronger territories


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Relationship Between Market Share and Profitability

Expanding Market Share


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Expanding Market Share Company should consider three factors before

pursuing increased market share possibility of provoking antitrust action economic cost companies might pursue the wrong marketing-mix

strategy in their bid for higher market share and therefore not increase their profit

Higher shares tend to produce higher profits when unit costs fall with increased market share and when the company offers a superior-quality product and charges a premium price that more than covers the cost of offering higher quality


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Designing Competitive StrategiesThe Concept of

Optimal Market Share

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Expanding Market Share Share-gaining companies typically outperformed their

competitors in three areas: new-product activity companies typically developed and added more new

products to their line relative product quality companies that increased their product quality

relative to competitors enjoyed greater share gains marketing expenditures companies that increased their marketing expenditu-

res faster than the rate of market growth typically achieved share gains


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Two Case Studies: Procter & Gamble and Caterpillar Proctor & Gamble

Customer knowledge Long-term outlook Product innovation Quality strategy Line-extension strategy

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Brand-extension strategy Multibrand strategy Heavy advertising and

media pioneer Aggressive sales force Effective sales promotion Competitive toughness Manufacturing efficiency

and cost cutting Brand-management system

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Two Case Studies: Procter & Gamble and Caterpillar Caterpillar

Premium product quality Extensive and efficient dealership system Superior service Superior parts management Premium price Full-line strategy Good financing

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Designing Competitive Strategies Market-Challenger Strategies Firms that occupy second, third, and lower ranks in

an industry are often called runner-up, or trailing, firms.

Some, such as Colgate, Ford, Montgomery Ward, Avis, Westinghouse, and Pepsi-Cola, are quite large in their own right.

Runner-up firms can adopt one of two postures: They can attack the leader and other competitors in

an aggressive bid for further market share (market challengers)

They can play ball and not "rock the boat" (market followers)

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Designing Competitive Strategies Market-Challenger Strategies Defining the Strategic Objective and Opponent(s)

It can attack the market leader 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. Ex: Miller's "lite beer" campaign

less caloric, less filling beer It can attack firms of its own size that are not doing the

job and are under financed 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

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Attack Strategies

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Designing Competitive Strategies Market-Challenger Strategies

Choosing a General Attack Strategy Frontal attack – two forms: Pure frontal attack - the attacker matches its opponent's

product, advertising, price, and so on. Modified frontal attack - involves cutting aggressor's price

vis-a-vis the opponent's (two forms):1. to match the leader's offer on other counts and beat it on price.

It works if: the market leader does not retaliate by cutting price the competitor convinces the market that its product is

equal to the competitor's, but better because it is sold at a lower price

2. heavy investment by the attacker to achieve lower production costs and then an attack on competitors on a price basis.

Texas Instruments, Japanese firms had success in launching modified frontal attacks involving price and cost cutting

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Market-Challenger Strategies Choosing a General Attack Strategy Flank attack: The aggressor may attack the strong side to tie up the

defender's troops but will launch the real attack at the side or rear.

Flank attacks make excellent marketing sense and are particularly attractive to an aggressor with fewer resources than the opponent.

If the aggressor cannot overwhelm the defender with brute strength, it can outmaneuver the defender with subterfuge

Flank attack can be directed along two strategic dimensions -geographical and segmental

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Choosing a General Attack Strategy Flank attack: In a geographical attack - the aggressor spots areas where the

opponent is underperforming. Ex: IBM's rivals chose to set up strong sales branches in

medium- and smaller-size cities that were relatively neglected by IBM

In segmental attack - the aggressor spots uncovered market needs not being served by the leaders.

Ex: Japanese automakers did it when choosing to serve the growing consumer market for fuel-efficient cars, and as Miller Brewing Company did when it discovered the consumer market for light beer

A flanking strategy is another name for identifying shifts in market segments that are causing gaps to develop, then rushing in to fill the gaps and develop them into strong segments

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Choosing a General Attack Strategy Encirclement attack: 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 Encirclement makes sense where the aggressor commands

superior resources and believes that a swift encirclement will break the opponent's will

Ex: Seiko, the Japanese watch manufacturer, expanded distribution in every major watch market and overwhelmed its competitors with an enormous variety of models. Globally it makes and sells 2,300 models

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Market-Challenger Strategies Choosing a General Attack Strategy Bypass attack: Strategy offers three lines of approach: diversifying into unrelated products diversifying into new geographical markets leapfrogging into new technologies to supplant existing

products Ex: Nintendo's successful attack in the video-game market by

introducing a superior technology and redefining the"competitive space"

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Choosing a General Attack Strategy Guerilla attack: Guerrilla warfare consists of waging small, intermittent attacks

on an opponent's different territories The aim is to harass and demoralize the opponent and eventual-

ly secure permanent footholds The object may be sought by: raiding enemy's supplies local attacks which annihilate or inflict disproportionate loss on

parts of his force bringing him into unprofitable attacks causing an excessively wide distribution of his force exhausting his moral and physical energy

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Choosing a General Attack Strategy Guerilla attack:

The guerrilla aggressor uses both conventional and unconventional means to attack the opponent. These include selective price cuts, intense promotional blitzes, and occasional legal actions

Military dogma holds that a continual stream of minor attacks usually creates more cumulative impact, disorganization, and confusion in the enemy than a few major attacks

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Swedish firm SCA’s www.libero.se site creates a dialogue with expectant and new parents and even allows users to send pictures, brief stories, and child wish list to family all over the world.

http://www.libero.se/

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Designing Competitive Strategies Choosing a Specific Attack

Strategy Price-discount (Best Buy and Office Depot) Lower price goods (Lime Debbie snack cakes Vs. Drake) Prestige goods (Mercedes Vs. Cadillac) Product proliferation (launching a larger product variety,

Baskin-Robbins) Product innovation (3M ) Improved services (IBM , Avis's Vs. Hertz) Distribution innovation (Avon ) Manufacturing cost reduction Intensive advertising promotion (Miller Beer Vs.

Budweiser)

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Designing Competitive Strategies Market-Follower Strategies

Innovative imitation (Product imitation) Product innovation Product imitation might be as profitable as a

strategy of product innovation (Sony – Panasonic) Four Broad Strategies:

Counterfeiter - duplicates the leader's product and package and sells it on the black market or through disreputable dealers

Cloner - emulates the leader's products, distribution, advertising, and so on ("Coko-Cola" instead of "Coca-Cola“)

Imitator - copies some things from the leader but maintains differentiation in terms of packaging, advertising, pricing, and so on

Adapter - takes the leader's products and adapts or improves them

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Designing Competitive Strategies Market-Nicher Strategies

An alternative to being a follower in a large market is to be a leader in a small market, or niche

Smaller firms normally avoid competing with larger firms by targeting small markets of little or no interest to the larger firms

High margin versus high volume Strategic Planning Institute - ROI averaged 27% in smaller

markets, but only 11% in larger markets Main reason - 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 valueThe nicher achieves high margin, while the mass marketer achieves high volume

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Designing Competitive Strategies Market-Nicher Strategies

Nicher Specialist Roles End-user specialist (law firm can specialize in the criminal, civil,

or business law markets) Value-added reseller (customized the computer hardware and

software for individual clients or customer segments and earned a price premium in the process)

Vertical-level specialist (copper firm may concentrate on producing raw copper, copper components, or finished copper products)

Customer-size specialist (selling to either small, medium-size,or large customers)

Specific-customer specialist (selling to one or a few major customers)

Geographic specialist (certain locality, region, or area of theworld)

Product or product-line specialist (producing lenses for microscopes )

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Designing Competitive Strategies Market-Nicher Strategies Nicher Specialist Roles

Product-feature specialist (Rent-a-Wreck is a car-rental agency that rents only "beat-up" cars)

Job-shop specialist (customizes its products for individual customers)

Quality-price specialist (HP specializes in the high-quality, high-price end of the hand-calculator market)

Service specialist (bank that takes loan requests over the phone and hand delivers the money to the customer)

Channel specialist (soft-drink company decides to make a very large-size soft drink available only at gas stations)

Multiple niching is preferable to single niching Niches can weaken, the firm must continually create new

niches

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Balancing Customer and Competitor Orientations

Competitor-centered company one whose moves are basically dictated by competitors'

actions and reactions company tracks competitors' moves and market shares

on a market-by-market basis Customer-centered company focuses more on customer developments in formulating

its strategies is in a better position to identify new opportunities, set a

strategy course that makes long-run sense it can decide which customer groups and emerging

needs are the most important to serve

CH06

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challenger

challenger

competitive

designing

competitive

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