DEALING WITH COMPETITION 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 1. Threat of intense segment rivalry A segment is unattractive if it already contains numerous, strong or aggressive competitors. - It is even 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 - If competitors have high stake staying in the segment

These conditions lead to frequent price wars, advertising battles and new product introductions, which make it expensive to compete. 2. Threat of new entrants A segments attractiveness varies with the height of its entry and exit barriers. - The most attractive segment is one which entry barriers are high and exit barriers are low. Few new firms can enter the industry and poor performing firms can easily exit. - when both 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. - when both barriers are low, firms easily enter and leave the industry and the returns are stable and low. - worst case is when entry barriers are low and exit are high. This results in chronic overcapacity and depressed earnings for all. Threat of substitute products A segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and on profits. If technology advances or competition increases in these substitute industries, prices and profits are likely to fall. Threat of buyers’ growing bargaining power A segment is unattractive if buyers possess strong or growing bargaining power. Buyers bargaining power grows - when they become more concentrated and organized - when the product is undifferentiated - when buyers switching costs are low Dealing with Competition By Phides Mugo



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sellers might select buyers who have the least power to negotiate or switch suppliers. Suppliers tend to be powerful .when the cost of switching suppliers are high .when there are few substitutes .when they are concentrated or organized .when suppliers can integrate downstream The best defenses are to build win-win relations with suppliers or use multiple supply sources. Many businesses failed to look at the Internet as a Page 2 of 9 Dealing with Competition By Phides Mugo .when the buyers are price sensitive because of low profits .when the supplied product is an important input . 5. A better defense consists of developing superior offers that strong buyers cannot refuse.. Threat of growing suppliers bargaining power Threat of New Entrants Degree of Segment Rivalry Threat of Substitutes 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.when the buyers can integrate upstream To protect themselves. Threat of suppliers growing bargaining power A segment is unattractive if the company’s suppliers are able to raise prices or reduce the quantities supplied.when the product presents a significant fraction of the buyers costs .

cost structure. Competitors focus on market segments where they can meet customer needs in a superior way and command a price premium 4. Entry. Pure oligopoly consists of a few companies producing essentially the same commodity. Eg Toy manufacturing involves heavy distribution and marketing costs. Firms strive to reduce their largest costs. mobility and exit barriers. 2. lack of alternative opportunities. features. Pure competition a. degree of differentiation. Monopolistic competition – Many competitors are able to differentiate their offers in whole or in part. physical bookstores versus online stores. Pure monopoly Only one firm provides a certain product or service in a certain area. The only way to gain a competitive advantage is through lower costs. government restrictions. Mobility barriers are faced when a firm tries to enter into more attractive segments Exit barriers include legal and moral obligations to customers. low asset salvage value. Many competitors offer the same product or service eg commodity market. Industries are classified according to number of sellers.formidable competitor. INDUSTRY CONCEPT OF COMPETITION An industry is a group of firms that offer a product or class of products that are close substitutes for one another. Differentiated oligopoly consists of a few companies producing products partially differentiated on the lines of quality. raw materials. A small number of large firms produce products that range from highly differentiated to standardized. high vertical integration and emotional barriers. and degree of globalization. styling or services. competitors prices will be the same. Page 3 of 9 Dealing with Competition By Phides Mugo . Major entry barriers include high capital requirements. scarce locations. creditors. patents and licensing requirements. employees. Cost Structure Each industry has a certain cost burden that shapes its strategic conduct. Number of sellers and degree of differentiation 1. distributors and reputation requirements. economies of scale. Oligopoly a. Eg web sites versus printed material. presence or absence of entry. Mobility And Exit Barriers Industries differ greatly in ease of entry. Because there is no basis for differentiation. degree of vertical integration. 3.

then the firm can attack the market by offering very good technical assistance. ANALYZING COMPETITORS A firm needs identify its primary competitors. technological leadership or service leadership.share of mind – how easily the competitor is remembered by customers . market share growth. 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. competitors are companies that satisfy the same customers need. objectives. the members of that group become its key competitors. MARKET CONCEPT OF COMPETITION Using the market approach. their strategies. The height of entry barriers differs for each group. The disadvantage is high costs in some parts of the value chain and a lack of flexibility. Need to monitor competitors expansion plans Strengths and weaknesses – helps identify where competitor is weak and can be attacked. strengths and weaknesses. Degree of Globalization Some industries are highly local eg lawn care and others global eg oil. Eg if competitor is poor in technical assistance. Analyse three variables when analyzing competitors .share of heart – customers preference of competitors product/service Companies that make steady gains in mind and heart share inevitably make gains in market share and profitability. A company can profile its direct and indirect competitors by mapping the buyers steps in obtaining and using the product. Page 4 of 9 Dealing with Competition By Phides Mugo . Objectives – what the competitors are seeking in the market place? Possible objectives may be maximise current profits. Strategies – A group of firms following the same strategy in a given target market is called a strategic group.share of market – the competitors share of target market . They can manipulate prices and costs in different parts of the value chain to earn profits. If the firm successfully enters a group. cash flow. This reveals a broader set of actual and potential competitors.Degree of Vertical Integration Vertical integration lowers costs and the company gains a larger share of the value added stream.

To improve competitive performance. limit themselves to a portion of the market segment. Close versus distant – most firms compete with others who resemble them the most. The aim of benchmarking is to copy or improve on best practices either within an industry or across industries. There can be a large difference between the quality. Benchmarking is the art of learning from companies that perform certain tasks better than other companies. speed and cost performance f a world class company and an average company. c) Focus – Firm focuses its efforts in serving a few market segments rather than going after the whole market. SELECTING COMPETITORS A firm can examine competitors and focus its attacks on classes of competitors. Firms that pursue a clear strategy – one of the above are likely to perform well and make profits. 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. Good competitors play by the industry rules. COMPETITIVE STRATEGIES Having identified and evaluated its major competitors.middle of the Page 5 of 9 Dealing with Competition By Phides Mugo . Basic Competitive Strategies Michael Porter suggested four basic strategies that companies might follow. But firms that do not pursue a clear strategy . its objectives. Bad competitors try to buy share rather than earn it. companies bench their most successful competitors. opportunities and resources. motivate others to lower costs. set realistic prices. 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. take large risks and upset industrial equilibrium. Each company must determine what makes sense given its position in the industry. b) Differentiation – Firm concentrates on creating a highly differentiated product line so that it comes across as the class leader in the industry. Strong versus weak – weak competitors are easy targets because this requires fewer resources per share point gained. yet companies should recognize distant competitors Good versus bad – a firm should support good competitors and attack bad competitors. Even strong competitors have weaknesses that can be attacked.

The aim of defensive strategy is to reduce the probability of attack. the dominant firm must continuously defend its current business. Fortifying its current position. COMPETITIVE POSITIONS Market leader . new product introductions. Market challenger – a runner up firm in an industry that is fighting hard to increase its market share.find ways to expand total market demand . distribution effectiveness and cost cutting. A dominant firm can use six defense strategies: a) Position defense – involves occupying the most desirable market space in the minds of the consumers. 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 COMPETITIVE STRATEGIES FOR MARKET LEADERS To remain the leader a firm must . distribution coverage and promotional intensity. b) Flank defense – need to protect the weak front from attack by the competition. They try to be good in everything then end up not being good at anything. It keeps increasing competitive strength and value to customers.road. getting more usage – (increase the level or frequency of consumption) Defending / Protect market share While trying to expand total market sizes. This can be done by continous innovation. new uses (discover and promote new uses). Page 6 of 9 Dealing with Competition By Phides Mugo .the firm which has the largest market share in the relevant product market and usually leads the other firms in price changes.try to increase its market share even if the market size remains constant Expanding the Total Market The market leader usually gains when the total market the worst. divert attacks to less threatening areas and lessen their intensity. Attracting new customers (get non users to try the product). The leader leads the industry in developing new product and customer services.protect its current market share through good defensive and offensive actions .

third or lower in an industry can sometimes be quite large. when the company offers a superior quality product and charges a premium price that more than covers the cost of offering higher quality. the challenger must have some sustainable competitive advantage over the leader eg cost advantage leading to lower prices. most market leaders will invade the attackers territory so that the attacker has to pull back to defend the territory. or ability to provide better value at premium price. Most seek to increase their profitability by increasing the market shares. Profitability rises with increasing market share. small market share increases mean very large sales increases. Expand the Market share Market leaders can grow by increasing their market shares further. In many markets. The strategic objective chosen depends on the competitor the firm has chosen to challenge. MARKET CHALLENGER STRATEGIES Firms that are second. Or they can play along with competitors and not rock the boat (market followers). To succeed. Defining the strategic objective and the competitor A challenger must first define its strategic objective. 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. Profitability increases as business gains share relative to competitors in its served market. f) Contraction defense (strategic withdrawal) – giving up weaker territories and reassigning resources to stronger territories.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). e) Mobile defense. Competitive strategies for market challengers 1. These may be underfinanced firms or not serving their Page 7 of 9 Dealing with Competition By Phides Mugo . or. d) Counter offensive defense – when attacked. Higher shares tend to produce higher profitability only when the unit costs fall with increased market share.c) Pre emptive defense – attack before the enemy starts its offense. They can challenger the leader and other competitors in an aggressive bid for more market share (market challengers). Preannouncements of new products or services – these signal to other competitors that they will have to fight to gain market share. 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.

The follower has to define a growth path. Follower must therefore keep its manufacturing costs low and its product quality and services high. expanding distribution and educating the market. it often can be very profitable. the objective may be to put it out of business. The challenger must choose its opponents carefully and have clearly defined and attainable objective. It must also enter new markets as they open up. increase promotional outbursts or assorted legal actions. price and distribution efforts. The challenger might use selective price cuts. Each follower tries to bring distinctive advantages to its target market – location. In technological leapfrogging. This strategy makes sense when the challenger has superior resources and believes it can break the competitors hold on the market quickly. This means finding an unserved market segment and filling the void. Although the follower will not overtake the leader. Page 8 of 9 Dealing with Competition By Phides Mugo . Strategy usually used by smaller or poorly financed challengers. The follower can learn from the leaders experience and copy or improve the leader’s products and programs. e) Guerilla attacks – These are small periodic attacks to harass and demoralize the competitor. CHOOSING AN ATTACK STRATEGY A challenger can use five possible attack strategies: a) Frontal attack . sides and rear all at once. MARKET FOLLOWER STRATEGIES A follower can gain many advantages. Follower must know how to hold current customers and win a fair share of new ones. The leader often bears the huge costs of developing new products and markets. the challenger bypasses the competitor with the next technology.Challenger matches the competitors product. instead of copying the competitors product. b) Flanking attack – challenger concentrates its strengths against the competitors weaker flanks(sides) or gaps (weaknesses) in the competitors market offer. usually with less investment. Followers are often major targets of market challengers. services. If challenger goes after a small company. executive raids. Flank attacks make good sense when the challenger has fewer resources than the competitor c) Encirclement attack – challenger attacks from front. It attacks the competitors strengths rather than its weaknesses. financing. The outcome depends on who has the greater strength and endurance. with the goal of eventually establishing permanent foot holds. but one that does not create competitive retaliation. d) Bypass attack – challenger bypasses the competitor and targets easier markets. It might diversify into unrelated products.customers well. advertising. move into new geographic markets or leapfrog into new technologies or replace existing products.

Hence many companies practice multiple niching to increase its survival chances. few specific customers. 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. These firms offer high value. the nicher achieves high margins.MARKET NICHER STRATEGIES Nichers are often firms with limited resources that target subsegments or niches instead of pursuing the whole market. This can be along any of several market. a customer size group – all who are neglected by the major players. Niching has risks – the niche could dry up. The key idea in niching is specialization. Eg a type of end user. Page 9 of 9 Dealing with Competition By Phides Mugo . or could grow to a point that is attracts the larger players. Firms with low market shares of the total market can be highly profitable through smart niching. Whereas the mass marketer achieves high volume. product or marketing mix lines. They may be smaller divisions of larger firms. customer.

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