Chapter 9 Dealing with the Competition Dr. S. Borna MBA 671

There is nothing more exhilarating than to be shot at without result. Winston Churchill Induce your competitors not to invest in those products, markets and services where you expect to invest the most … that is the fundamental rule of strategy. Bruce Henderson, Founder of BCG

1. Identify relevant Industry and specify strategic groups Industry and competitor analysis process 1. Identify relevant Industry and specify strategic groups 2. Industry structure analysis

3. Examine bases of Competition 4. Individual competitor analysis

Industry attractiveness or unattractiveness and a What is the benefit (s) of industry and competitor analysis? Industry attractiveness or unattractiveness and a firm’s competitive position within an industry have profound impact on strategy formulation.

What do we mean by the term “industry”? “Soft drink” industry

A Definition of Industry Firms that produce similar products (product substitution)

1. Generic competition 2. Form competition 3. Industry competition Four Levels of Competition Based on the Degree of Substitutability 1. Generic competition 2. Form competition 3. Industry competition 4. Brand competition

Socializing Exercising Eating . What desire do I What do I want want to satisfy? What do I want to eat? Generic competition Desire Competition Socializing Exercising Eating . Potato chips Candy soft drink .

What type of candy? Hershey Nestle Mars . Which brand do I want? Form competition Brand competition Chocolate bars Licorice Sugar drops . Hershey Nestle Mars .

A strategic group consists of firms pursuing similar Identification of Strategic Groups A strategic group consists of firms pursuing similar strategies, i.e., employing a similar mix of strategy elements.

How to classify firms? H ? quality L D I ? Markets served

Strategic Groups in the Major Appliance Industry High Low Quality Vertical Integration Group A Narrow line Lower mfg. cost Very high service High price Group C Moderate line Medium mfg. cost Medium service Medium price Group B Full line Low mfg. cost Good service Medium price Group D Broad line Medium mfg. cost Low service Low price

Bases for classification: (Strategic groups) 1. Markets served: BMW Mercedes-Benz etc. 2. Products: full line, limited line etc. Coke and Pepsi, 7 up 3. Distribution channels Goodrich vs. Dunlop (own retailers vs indp’t R.)

Identification of Potential Competitors 1. Firms expanding their geographical markets examples: Wal-mart, Meijer

Example, IBM entering the PC market Firms expanding their Product line Example, IBM entering the PC market S P W R Firms integrating Forward And backward A supermarket manufacturing its own private labels

Firms seeking merger or buyout Hicks and Hass Acquiring Dr. Pepper, Seven-up, and A&W

Michael Porter’s Model INDUSTRYSTRUCTURE ANALYSIS Michael Porter’s Model

Five Forces Determining Segment Structural Attractiveness Potential Entrants (Threat of Mobility) Suppliers (Supplier power) Industry Competitors (Segment rivalry) Buyers (Buyer power) Substitutes (Threats of substitutes)

Experience effect (economies of Capital requirements Potential Competitors And Industry attractiveness Experience effect (economies of scale and experience effect) Capital requirements Product differentiation Distribution channels (Retailer reluctance, Mature products etc.) Switching costs (ex. new software for new computers)

Present Competitors Investment intensity Product differentiation Switching Costs Industry growth Industry structure Exit barriers

Investment Intensity By investment intensity, we mean the amount of fixed and working capital required to produce a dollar sales.

Monopolistic competition Pure competition (in pure competition there A Note on Industry Structure Monopoly Oligopoly Monopolistic competition Pure competition (in pure competition there is no competition!)

Less differentiated an industry less attractive is that industry! Switching costs, or the costs of changing suppliers- inhibit competition.

Threat of Substitute Products Actual or potential substitute product ELECTRICITY BUTTER GLASS GAS MARGARINE PLASTIC

Bargaining Strength of Suppliers Supplier product is a large SUPPLIER CONCENTRATION NO. OF suppliers Supplier product is a large part of buyer’s value added SWITCHING COSTS

Suppliers Cont. SUBSTITUTE RAW MATERIALS (soft drink:sugar cans etc) THREAT OF FORWARD INTEGRATION

Threat of backward integration Product importance Buyer profitability Bargaining Power of Buyers Buyers Concentration Threat of backward integration Product importance Buyer profitability Substitutes Switching costs (e.g. food, beer, soft-drink & metal cans)

Analyzing Competitors Objectives Competitor Actions Strategies Strengths & Weaknesses Reaction Patterns

Individual Competitor Analysis Competitor Characteristics Competitor Objectives Competitor Strategy Competitor Success Today Competitor Strength and weakness Competitor Future Behavior

Competitor Characteristics Information related to: Size of Sales Profitability Market Share Growth Relation of SBU to the parent Company, etc.

Competitor Objectives Market Growth Objectives Price Objectives Product Technology Objectives Human Resource Objectives etc.

Competitor’s Strategy Review of past and present strategies Company’s current marketing mix strategy (BIC as an example: strategy of low cost, mass produced and disposable products)

Competitor’s Strengths and Weaknesses Marketing: Product Quality Brand Names Distribution Promotion skills Salesforce cont.

Innovation: R&D Technologies New Product Capabilities Management: Quality of top management Loyalty-turnover Quality of Middle- management

How to Develop a Response Policy?

The laid-back competitors The selective competitors Estimating the Competitors’ Reaction Patterns The laid-back competitors The selective competitors The tiger competitors The Stochastic competitors

Designing the Competitive Intelligence System 1. Setting up the system What type of information? What is the best source of information? Who will manage the system?

2. Collect Information Sales force Channel members Trade association etc.

Other sources of Information 1. Company Financial: 10-k, annual reports Moody’s, State Filing Published articles 2. Company Background Standard & Poor’s F & S Indexes Newspaper Index

College alumni association 3. Management Personnel Who’s who Local Newspapers College alumni association 4. Foreign Information Consulates Embassies International Trade Commission

3. Evaluate and analyze the information check validity and reliability of the information

4. Dissemination and Response

Review Identifying Competitors Evaluating Competitors Competitive Intelligence Systems Competitive Strategies (not discussed) Customer vs. Competitor Orientation