Fuqua School of Business Competitive Strategy Professor Joel Huber Marketing 360 Marketing Management Fuqua School of Business

Coke and Pepsi in Thailand Competition is everywhere: It is what drives us forward P+G in the 80’s and GM in the 60’s were so dominant that they had to create competition within the company!

Agenda Introduction Competitive Analysis Competitive Strategy Strengths and Weaknesses Behaviors Competitive Strategy Game Theory Porter’s 5 Forces Framework

Industry Competition An industry is … Competition in an industry ... Group of firms whose offerings are close substitutes for each other Competition in an industry ... Drives down rate of return on invested capital toward that earned in “perfect competition” The gravity metaphor is useful…think of the competitors forming a ground which draws the entire industry to zero profits. Your job is to rocket above them, but unlike in physics, there is no escape velocity. Eventually every business will come to have low profits.

Competitive Analysis and Strategy Competitive analysis answers … What is driving competition in this industry or industries the firm may consider joining? What actions are competitors likely to take, and what are the best responses? How will the industry evolve? … in order to set strategy, which answers How should the firm be positioned to compete in the long-run? Joining is key. By your moves you signal which business or competitive group you seek to be part of…Kiwi Airlines

Competitive Analysis Current position and strategy Ability to Market share and sales Target market and positioning Marketing mix (4 P’s) Manufacturing and R&D Financial strength Ability to Design new products Manufacture Market Finance Manage Future Goals Product portfolio Share or profit Product Differentiation or Cost Leadership Similar to a SWOT analysis on your competition

Evaluating Existing Competitors: Form Competitive Matrix

Competitive Analysis: Competitive Intelligence Where do you get information on competitors? Sales literature Published documents (Annual Reports, SEC filings, Patent filings) Stock market analyst reports CEO/CFO/VP interviews Internet (company website, hiring trends - www.monster.com, Data base search

Electronic Data Bases –One Source

Dow Jones Interactive Go into Fuqua Library electronic data bases  Dow Jones Interactive  Publications Library  Search by Word: Angiomax  all publications  sorted most recent first

Competitive Strategy: Porter’s Five Forces Model Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Michael Porter was trained in Industrial Organization, a branch of economics whose goal is to make businesses become purely competitive…advise justice on anti-trust procedures He then joined Harvard by reversing the question: How can a company select and alter industries to avoid competitive melt down of profits? His 5-forces model has been extremely influential. Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

Existing Rivalry More Intense If: Numerous or equally balanced competitors Slow industry growth High fixed costs Low customer loyalties or switching costs Added capacity comes in large increments Diverse competitors High strategic stakes High exit barriers Specialized assets, emotional barriers, government and social restrictions (e.g., concerns for job losses, etc)

Using Game Theory to Predict Existing Rivals’ Response Brandenberger and Nalebuff 1995 (HBR) UA Regular Price Discount Price AA=$100m UA=$100m AA=$80m UA=$130m Regular Price If both firms can gain in the short run by hurting the other—look out! This is called a prisoner’s dilemma game. What does UA do? Lowers its price What does AA do? Lowers its price---Brandenberger and Nalebuff example of TWA’s creating custom class and lessening overcapacity AA AA=$130m UA=$80m AA=$90m UA=$90m Discount Price

Reaction Functions (Regression) to Predict Reactions In short run the two competitors run promotions when the other does not. However, in the long term a general rise in price by one will be matched by the other We can estimate a reaction function and determine what will happen to competitors prices as a result of a change in ours. Correlation in short-term is large and negative Correlation in long-term is large and positive

Anticipating New Competitive Response Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

Threat of New Entry Depends on Barriers to Entry Economies of scale Brand loyalties Capital requirements Switching costs independent of loyalties Access to distribution Cost disadvantages independent of scale All of these have been lowered by technology since Porter wrote his article

Threat of New Entry also Depends on Expected Reactions Conditions that signal strong retaliation Firms with history of retaliation to entrants Firms with substantial resources Cash and unused debt and/or equity capacity Excess productive capacity High leverage with channels or customers Firms with commitment to industry and high levels of idiosyncratic assets employed in it Slow industry growth

The Entry Deterring Price Structure of prices that just balances ... the potential rewards from entry that are forecast by the potential entrant with the expected costs of overcoming structural barriers to entry and costs of retaliation If prevailing prices exceed the entry deterring price, entry will occur This was relevant to the Medicine Companies price. A high price umbrella encourages competition.

Anticipating New Competitive Response Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

Bargaining Power of Customers Customers “compete” with the industry by trying to force prices lower Customers tend to be powerful when … They represent a large portion of the firm’s sales Offerings represent large portion of their expenditures Offerings are undifferentiated Switching costs are low They pose a credible threat of backward integration Quality of offerings is not important to them They have full information

Anticipating Supplier Power Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

Bargaining Power of Suppliers Suppliers “compete” with the industry by trying to force costs higher Suppliers tend to be powerful when … They are concentrated There are few substitutes to their offerings The industry is not an important customer of theirs’ Their offerings are important inputs to the firm’s Their offerings are differentiated or there are high switching costs They pose a credible threat of forward integration They have full information Cisco was the last of the internet revolution to fall…they provide routers…like picks and shovels in the SF gold rush

Customer or Competitor Orientation? Focus on competitors Aggressive and alert for changes Focus on customers Align resources to customer needs Which is better?

Agenda: Key Take Aways Identify Competitors Engage a Competitive Analysis Strengths and Weaknesses Behaviors Determine Competitive Strategy Game Theory Porter’s 5 Forces Framework Competition is more than existing set

Some Good Advice “Keep your friends close, but your enemies even closer.” Don Vito Corleone