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

2. 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!

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

4. 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.

5. 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

6. 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

7. Evaluating Existing Competitors: Form Competitive Matrix

8. 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 -
Data base search

9. Electronic Data Bases –One Source

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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

21. 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

22. 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

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

24. 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

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