Selecting competitor to attack and avoid
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This document provides an overview of competitor analysis. It defines key terms like competition, competitor, and competitor analysis. It discusses identifying competitors and evaluating them by looking at their objectives, strategies, strengths, weaknesses, market share, and classification as strong/weak and close/distant competitors. The document also covers designing competitive strategies based on a company's role as a market leader, challenger, follower, or nicher. It provides details on strategies for market leaders to expand demand, defend market share, and expand market share. Strategies for market challengers are also discussed.
Selecting competitor to attack and avoid
- 1. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved1 Competitor Analysis (Teaching Manual for MBA 1st Semester) Gopal Thapa Lecturer Nepal Commerce Campus
- 2. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved2 Competitor Analysis Competition: All actual and potential rival offerings and substitutes in the market Competitor: A person or company which competes. Competitor Analysis, “The processing of analyzing information about competitors and their products in order to build up a picture of where their strengths and weaknesses lie.” - Dictionary of Marketing Identifying Competitors Competitor analysis is second phase of external analysis. The analysis should focus on the identification of threats, opportunities, or strategic uncertainties created by emerging or potential competitor moves, weaknesses or strengths. Competitor analysis starts with identifying current and potential competitors. There are two different ways of identifying current competitors. The first examines the perspective of the customer who must take choices among competitors. This approach groups competitors according to the degree they compete for a buyer’s choice. The second approach attempts to place competitors in strategic groups on the basis of their competitive strategy. Industry Concept of Competition An industry is a group of firms that offers a product or class of products that are close substitutes for each other. Industries are classified as follows: 1. Number of sellers and degree of differentiation – based on number of sellers and product differentiation • Pure monopoly – regulated and unregulated monopoly • Oligopoly – pure oligopoly (a few companies produce same commodity), differentiated oligopoly (a few companies produce partially differentiated product) • Monopolistic competition: Many Competitors offer differentiated product • Pure competition – many competitors offer undifferentiated product An industry’s competitive structure can change over time. 2. Entry, mobility and exit barriers Entry barrier: high capital requirement, economies of scale, patent and licensing requirement, scarce location, raw material or distributor and reputation requirement Mobility barrier: shifting to more profitable segments Exit barrier: legal or moral obligation to consumers, creditors, and employees, government restrictions, low asset salvage value, lack of alternative opportunities, high vertical integration, emotional barriers 3. Cost structure: certain cost burden that shapes much of its strategic conduct such as heavy manufacturing and raw material cost, heavy distribution and marketing cost. 4. Degree of vertical integration: Vertical integration often lowers cost and the firm gains a large share of value-added stream. 5. 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.
- 3. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved3 Market Concept of Competition Using the market approach, competitors are companies that satisfy the same customer need. For example, a customer who buys word processing software really want “writing ability” – a need that can be satisfied by pencils, pens, or typewriter. The market concept of competition reveals a broader set of actual and potential competitors. Evaluating Competitors Once a company identifies its main competitors , its must ascertain their strategies, objectives, strengths and weaknesses. Objectives: Each competitors has a mix of objectives. The company wants to know the relative importance that a competitor places on: • Current profitability • Market share growth • Cash flow • Technological leadership • Service leadership • Quality leadership etc. Knowing a competitors’ mix of objectives reveal whether the competitor is satisfied with its current situation and how it might react to different competitive actions. For example, a company that pursues low-cost leadership will react much more strongly to competitor’s cost-reducing manufacturing break through than to the same competitor’s advertising increase. A company also must monitor its competitors’ objectives for various segments. If the company finds that a competitor has discovered a new segment, this might be an opportunity. If it finds that competitors plan new moves into segments now served by the company, it will be forewarned and hopefully forearmed. Strategies The more that one firm’s strategy resembles another firm’s strategy, the more the two firms compete. In most industries, the competitors can be sorted into groups that pursue different strategies. A strategic group is a group of firms in an industry following the same or similar strategy in a given target market. The company needs to look at all of the dimensions that identify strategic groups within the industry. It must understand how each competitor delivers value to its customers. It needs to know each competitor’s product quality, features, and mixes, customer services, pricing policy, distribution coverage, sales force strategy, and advertising and sales promotion. And it must study the details of each competitor’s R&D, manufacturing, purchasing, financial and other strategies. Strength and weaknesses : a company should monitor three variables when analyzing the strengths and weaknesses of competitors: i. Share of market – the competitor’s share of target market ii. 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.” iii. Share of heart – The percentage of customers who named the competitor in responding to the statement, Name the company from which you would prefer to buy the product.” Classification of Competitors
- 4. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved4 After the company has conducted its customer value analysis, it can focus its attack on one of the following classes of competitors: Most companies aim at weak competitors, because this requires fewer resources per share point gained. Yet, in attacking weak competitors, the firm barely improve its own capabilities. Thus, the firm should also compete with strong competitors to keep up with the best. Even strong competitors have some weaknesses, and the firm may prove to be a worthy opponent. In addition most companies compete with competitors who most resemble them. One risk is that a much larger competitor will buy out the weakened rival; another risk is that additional, stronger competitors will enter the market. Thus, companies should also recognize distant competitors. Coca-Cola states that its number one competitor is tap water, not Pepsi. U.S. Steel worries more about plastic and aluminum; museums now worry about theme parks and malls. Finally, every industry contains good and bad competitors. A company should support its good competitors and attack its bad competitors. i. Strong vs. Weak ❖ Most company prefers to compete with weak competitors. ❖ This require fewer resource and less time ❖ But firm may also gain little ❖ Firm should compete with strong competitors in order to sharpen its ability ❖ Even strong competitors have some weaknesses ❖ Succeeding against them provides them greater returns ii. Close vs. Distance ❖ Most company compete with close competitors ❖ Maruti compete with Hyundai and Tata motors not with Mercedes Benz ❖ Company should also recognize distance competitors ❖ Coke states that its no. 1 competitor is tap water not Pepsi. iii. Good vs. Bad ❖ Every industry contains good and bad competitors ❖ Good competitors should be supported and bad competitors should be attacked ❖ Good competitors: ▪ Play by industry rule ▪ They make realistic assumptions about industry growth potential ▪ They set prices in reasonable relation to costs ▪ They favor a healthy industry ▪ They limit themselves to a portion or segment of the industry ▪ They motivate others to reduce cost or improve differentiation ▪ They accept the general level of their share and profit ❖ Bad competitors: ▪ Bad competitors break the rules ▪ Try to buy shares rather than earn it ▪ They take large risk ▪ They invest in overcapacity ▪ They upset industrial equilibrium
- 5. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved5 DESIGNING COMPETITIVE STRATEGIES A company can gain further insight into its competitive position by classifying its competitors and itself according to the role each play as market leader, market challenger, market follower or market nicher. On the basis of the classification, the company can take specific actions in line with its current and desired roles. Hypothetical Market Structure Market Leader – The firm in an industry with the largest market share. Market Challenger – A runner up firm that is fighting hard to increase its market share in and industry. Market Follower - A runner-up firm that wants to hold its share in an industry with out rocking the boat. Market Nicher – A firm that serves small segments that the other firms in an industry overlook or ignore. Market-Leader Strategies ❖ Most industries contain an acknowledged market leader ❖ The leader has the largest market share in the relevant product market ❖ Usually leads the other firms in: • Price changes • New product introduction • Distribution coverage • Promotion spending ❖ The leader may or may not be admired or respected ❖ But other firms concede its dominance ❖ Competitors focus on the leader as a company to challenge, imitate or avoid. ❖ Some of the best known market leaders are: Company Product Company Product Wall-mart retailing Coca-cola Soft drinks General motors Autos Gillette Razor blades IBM Computers Visa Credit card Micro soft Software Surva Nepal Cigarettes A leader’s life is not easy. It must maintain a constant watch. Others firms keep challenging its strengths or trying to take advantages of its weaknesses. The market leader can easily miss a turn in the market and plunge into second or third place. A product innovation may come alone and hurt the leader. (Nokia’s and Ericsson’s digitals phones took the lead from Motorola’s analog’s model) The leader might spend conservatively where as a challenger spend liberally. The leader might misjudge its Market Leader 40% Market Challenger 30% Market Follower 20% Market Nicher 10%
- 6. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved6 competition and find itself behind. (As when Sears lost its leads to Wall-mart) The leader might look old fashioned against new peppier rivals. (As when Levi’s lost serious ground to more current or stylish GAP, DKNY, or Guess) (Pepsi portraying itself as the more youthful brand) The dominant firm’s cost might rise excessively and hurt its profit or a discount competitor undercut prices. To remain number one, leader firm can take any of the three actions: 1. They can find ways to expand total demand. 2. They can protect their current market share through good offensive and defensive actions. 3. They can try to expand their market share further, even if market size remains constant. Expanding the Total Demand (Market) The leading firm normally gains the most when the total market expands. Sony is the market leader in digital photography, thus: If Sony can convince more Americans • To take digital pictures • To take them on more occasions • To take more pictures on occasion It will benefit more than its competitors. Market leaders can expand the market by developing new users, new uses and more usage of its products. New Users: A company can search new users among three groups: 1. Those who might use it but do not – market penetration strategy 2. Those who have never used it – new market segment strategy 3. Those who live elsewhere – geographical expansion strategy New Uses: Marketers can expand markets by discovering and promoting new uses for the product. Use of computer for: • Desk top publishing • Entertainment • Communication Use of Dettol for : • Antiseptic • Anti dandruff More Usage: Market leaders can encourage more usage by increasing the level or quantity of consumption or increasing the frequency of consumption. Eg. Glucose twice a day, dabur honey twice a day etc. Defending the Market Share While trying to expand the size of the market, the leading firm must protect its current business against competitors’ attacks. What can the market leader do to protect its position? First it must prevent or fix weaknesses that provide opportunities for competitors. It must always fulfill its value promise. Its price must remain consistent. Best defense is good and best response is continuous innovation. The leader leads the industry in developing new product and customer service, distribution
- 7. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved7 effectiveness, cost cutting. It keeps increasing its competitive strength and value to the customer. How Caterpillar has become market leader in the construction-equipment industry? • Premium performance: high quality, reliability, and durability • Extensive and efficient dealership system: largest no. of dealers with complete line of Caterpillar equipment • Superior service: worldwide parts and service system • Full-line strategy – full line of construction equipment • Good financing – wide range of financial terms for customers In satisfying customer needs, a distinction can be drawn between responsive marketing, anticipative marketing, and creative marketing. Responsive marketing: A responsive marketer finds a stated needs and fills it. Anticipated marketing: An anticipated marketer looks ahead into what needs customers may have in the near future. Creative marketing: A creative marketer discovers and produces solutions customers did not ask for but to which they enthusiastically respond. Sony exemplifies creative marketing. It has introduced many successful new products that customers never asked for even thoughts were possible. Sony is a market driving firm, not just a market driven firm. Akio Morita, its founder, once proclaimed that Sony does not serve markets; Sony creates market. Walkman is the classic example which was introduced in late 1970s. By the twentieth anniversary of the walkman, sony had sold over 250 million in nearly 100 different models. Defense Strategies The aim of defensive strategy is to reduce the probability of attack, divert attacks to less threatening areas, and lessen their intensity. The defender’s speed of response can make an important difference in the profit consequences. A dominant firm can use the following strategies: 1. Position Defense – Position defense involves building superior brand power, and making brand almost impregnable. Under this a firms takes advantages of its corporate image and brand image. Image strengthening promotional campaign is used to defend its position. Fig: Position Defense Attacker Defender
- 8. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved8 Attacker 2. Flank Defense – Fig: Flank defense This strategy is concerned with protection of weak front of the company. Flanks can be defended by installing area offices in the weak geographical area. New segments are tapped. 3. Preemptive Defense A more aggressive maneuver is to attack before the enemy starts its offense. A company can launch a preemptive defense in several ways. It can wage guerilla action across the market – hitting one competitor here, another there – any keep everyone off balance. Fig: preemptive Defense 4. Counteroffensive Defense When attacked , most market leaders will respond with counterattack. In a counter offensive, the leader can meet the attacker frontally or hit its flank or launch a pioneer movement. An effective counterattack is to invade the attacker’s main territory so that it will have to pull back some of its troops to defend its territory. Eg, cutting prices for competitor’s price cuts, improving quality against competitor’s price improvement. Attacker Defender Defender Attacker Defender
- 9. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved9 Fig: Counteroffensive Defense 5. Mobile Defense In mobile defense, the leader stretches its domain over new territories that can serve as future centers for defense and offense through the market broadening and market diversification. Marketing broadening involves shifting focus from the current product to the underlying generic needs. The company gets involved in R & D across the whole range of technology associated with that need. Thus petroleum company sought to recast themselves into energy companies. Implicitly, this change demanded that they dip there research fingers into the oil, coal, nuclear, hydroelectricity and chemical industries. Market diversification involves shifting into unrelated industries. Cigarette Company enters into liquor or hydroelectricity. Its main objective is to grab mass market. Fig: Mobile Defense (mobile defense) 6. Contraction Defense Large companies sometimes recognize that they can no longer defend all of their territory. The best course of action then appears to be planned contraction. It is also called strategic withdrawal – giving up weaker territories and reassigning resources to stronger territories. Fig: Contraction defense (Strategic Withdrawal) Expanding Market Share Market leaders can improve their profitability by increasing their market share. In many markets, small market share increases mean very large sales increases. For example: in US digital camera market, one percent increase in market share is worth $60 million, in soft drinks $340 million. Generally, profitability rises with the increasing market share. Thus, many companies have sought expanded market shares to improve profitability. Attacker Defender DefenderAttacker
- 10. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved10 Gaining increased share in the served market, however, does not automatically produce higher profit – especially for labour-intensive service companies that may not experience many economies of scale. Company should consider following factors before pursuing increased market share. 1. Possibility of legal restrictions 2. Cost of increasing market share 3. Wrong marketing mix strategies 4. Low customer value and satisfaction Market Challenger Strategies A market challenger must first define its strategic objective. Most aim to increase market share. If attacking company goes after the market leader, its objectives might be to gain a certain market share. If the attacking company goes after small local company, its objective might be to drive that company out of existence. The challenger must decide whom to attack: It can attack the market leader – This is a high risk but potentially high-payoff strategy and makes good sense if the leader is not serving the market well. The alternative strategy is to out-innovate the leader across the whole segment. It can attack the firms of equal size – It can attack firms of its own size that are not doing the job and are under financed. These firms have aging products, are charging excessive prices or not satisfying customers in other ways. It is less risky strategy. It can attack the small firms – A large firm may attack small local firms, cripple them and finally force them to close down their business. Firms that follow this strategy may eventually take away all the share of the small firm. Broad Strategies for attack Given clear opponents and objectives, what attack options are available? We can distinguish among five attack strategies as follows: Frontal attack - In a pure frontal attack, the attacker matches its opponent’s product, advertising, price and distribution. The principle of force says that the side with the greater resources will win. A modified frontal attack, such as like opponents, can work if the market leader does not retaliate and if the competitor convinces the consumers that its product is equal to the leader’s. Fig: frontal attack Attacker Defender
- 11. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved11 Flank attack – An enemy’s weak spots are natural targets. A flank attack can be directed along two strategic dimensions – geographical and segmental. In geographical attack, challenger spots areas where the opponent is underperforming. The other flanking strategy is to serve uncovered market needs. 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. Flank attacks are particularly attractive to a challenger with fewer resources than its opponents and are much more likely to be successful than frontal attack. Fig.: Flank attack Encirclement attack – The encirclement attack is an attempt to capture a wide slice of the enemy’s territory through a blitz. It involves launching a grand offensive on several fronts. Encirclement makes sense when the challenger commands superior resources and believes a swift encirclement will break the opponent’s will. Fig: Encirclement attack Bypass attack – The most indirect assault strategy is the bypass. It means bypassing the enemy and attacking easier markets to broaden one’s resource base. This strategy offers three lines of approach: • Diversifying into unrelated products • Diversifying into new geographical markets • Leapfrogging into new technologies to supplant existing products. Attacker Defender Attacker Defender Attacker Defender
- 12. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved12 Fig: Bypass attack Guerilla attack – Guerrila warfare consists of waging small, intermittent attacks to harass and demoralize the opponent and everntaually secure permanent footholds. Guerilla challenger uses both conventional and unconventional means of attacks. These include selective price cuts, intense promotional blitzes, and occasional legal actions. Normally guerilla attack is practiced by a smaller firm against a larger one. The small firm launches a barrage of attacks in random corners of he larger opponent’s market in a manner calculated to weaken the opponent’s market power. Fig: Guerilla attack Choosing a specific attack strategies Having chosen a broad attack strategy, the company must now develop more specific strategies, such as: 1. Price discount – The challenger can offer a comparable product at a lower price. This strategy works if (1) the challenger can convince buyers that its product and service are comparable to the leader’s; (2) Buyers are price sensitive; and (3) the leader refuses to cut price despite the competitor’s attack. Most of the Nepalese marketers use this tool by convincing the customers that they are providing a great opportunity of choosing similar products at lower prices. 2. Lower price goods – The challenger can offer an average or low quality product at a much lower price. This strategy is suitable for price sensitive market. Firms that use this strategy can be attacked by firms with even lower prices. This strategy can also spoil the image of the firm in long run. Cigarette companies in Nepal are using this strategy by offering low price products like gaida, deurali, cahutari, bijuli etc. 3. Prestige goods – A challenger can launch a higher quality product and charge more than the leader. Most of the established firms launch this strategy against the equal size or strong firms. Main target of this strategy is to make an attack on the up-market of a competitor. Bajaj pulsar, Yamaha enticer, TVS apache are some example of higher quality products at a higher price. 4. Product proliferation – The challenger can attack the leader by offering more product variety, giving buyers more choice. In this strategy, attacker introduces several products and brands and tries to flood the market with its several products’ versions. Samsung is challenging market leader Sony with a wide variety of consumer electronic products, Defender Attacker
- 13. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved13 including flat screen TVs, and lightweight laptop computers. Wai wai has introduced so many varieties of instant noodles. 5. Product innovation – The challenger can pursue product innovation. This strategy, particularly, attracts the pioneers and early adopters customers. Large firms use this strategy to bring something new products so that customers will be more attracted towards newly launched innovative product. 6. Improved services – The challenger can offer new or better services to consumers. These services may include longer warranty, credit facility, repair etc. Roomier leather seats and personal viewing screens with choice of 24 satellite TV channels offered by Jet- Blue is an example of improved services. 7. Distribution innovation – Some firms might develop a new distribution channel. Especially, challengers use this strategy to strengthen their marketing network. Vertical integration, adding stronger distributor, commencing online business, door to door selling etc. are some examples. 8. Manufacturing cost reduction – The challenger might achieve lower manufacturing costs than its competitors through more efficient purchasing, lower labor cost, and/or more modern production equipment. 9. Intensive advertising promotion – Some challengers attack the leaders by increasing their expenditures on advertising and promotion. This strategy can work if the challenger’s product or advertising message is superior. This strategy is very much popular in Nepalese +2 and private colleges. A challenger’s success depends on combining several strategies to improve its position over time. Market Follower Strategies Theodore Levitt has argued that a strategy of product imitation might be as profitable as a strategy of product innovation. The innovator bears the expense of developing the new product, getting it into distribution, and educating the market. The reward for all this work and risk is normally market leadership – even though another firm can then copy or improve on the new product. Although it probably will not overtake the leader, the follower can achieve high profits because it did not bear any of the innovation expenses. Many companies prefer to follow rather than challenge the leader. This pattern is common in industries such as steel and chemicals, where few opportunities exist for product differentiation and image differentiation, service quality is often comparable, and price sensitivity is high. Short run grabs for market share provoke retaliation, so most firms present similar offers to buyers, usually by copying the leader, this keeps market shares highly stable. Four broad strategies for market followers are: 1. Counterfeiter – The counterfeiter duplicates the leader’s product and package and sells it on the black market or through disreputable dealers. Medicines, cosmetics, music, spare parts are counterfeited in south Asian market. 2. Cloner – The cloner emulates the leader’s products, name and packaging, with light variations. For example, horpic and herpin, godrej, sodrej, podrej, Nepalese ad copied from Indian ad, vicks, visicks etc.
- 14. Gopal Thapa/Nepal Commerce Campus Copy Right Reserved14 3. Imitator – The imitator copies some things from the leader but maintains differentiation in terms of packaging, advertising, pricing and so on. The leader does not respond as long as the imitator does not attack the leader aggressively. 4. Adapter – The adapter takes the leader’s products and adapts or improves them. The adapter may choose to sell to different markets, but often the adapter grows into the future challenger, as many Japanese firms have done after adapting and improving products developed elsewhere. 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. For example, Logitech International expanded worldwide ($1.5 billion global success story) by making every variation of computer mouse imaginable. Even large companies are now setting up business units or brands for specific niches. Firms with low shares of the total market can be highly profitable through smart niching. The nicher achieves high margin, whereas the mass marketer achieves high volume. Nicher rate of return is averaged 27 percent because the market nicher ends up knowing the target customers so well that it meets their needs better than other firms selling this niche casually, As a result, the nicher can charge a substantial price over the costs. Nichers have three tasks: creating niches, expanding niches and protecting niches. Major risk in market niches is that may dry up or be attacked in future. Thus, by developing strengths in two or more niches, the company increases its chances for survival. The firm should stick to its niching but not necessarily to its niche. The key idea in successful nichemanship is specialization. Here are some possible niche roles: Niche Specialty Description End-user specialty The firms specializes in serving one type of end-user customer. Vertical level specialist The firm specializes at some vertical level of the production- distribution value chain. Customer-size specialist The firms concentrates on selling to either small, medium size or large customers. Specific-customer specialist The firm limits its selling to one or a few customers. Geographic specialist The firm sells only in a certain locality, region, or area of the world. Product or product- line specialist The firm carries or produces only one product line or product. Product-feature specialist The firm specializes in producing a certain type of product or product feature. Service specialist The firm offers one or more services not available from other firms. Channel specialist The firms specializes in serving only one channel of distribution.
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