CHAPTER 3 ANALYZING COMPETITORS

Prepared by: Mulugeta G/Medhin

(Strictly for limited circulation at AAUCC)
Learning Objectives

Upon completion of this chapter a student will be able to:

 Describe Michael porter’s five forces model and evaluate the attractiveness of an
industry.
 Identify competitors using the industry concept approach or the marketing concept
approach.
 Analyze competitor’s strategies, objectives, strengths, and weaknesses.
 Analyze competitors competitive position in a target market
 Analyze competitor’s reaction patterns.
 Design competitors intelligence system
 Classify competitors and select competitors to attack and avoid

3.1 Michael Porter’s Five Forces Model

This chapter explains the role competition plays and how companies position themselves relative
to competitors. Michael Porter identified five forces that determine the intrinsic long - run profit
attractiveness of a market or market segment:
1. Industry competitors,
2. Potential entrants,
3. Substitutes,
4. Buyers, and
5. Suppliers.

1. Threat of intense segment rivalry

A segment is unattractive:
a) if it already contains numerous, strong, or aggressive competitors.
b) if the segment is stable or declining,
c) if fixed costs are high,
d) if exit barriers are high, or
e) if competitors have high stakes in staying in the segment.

These conditions will lead to frequent price wars, advertising battles, and new-product
introductions and will make it expensive to compete.
2. Threat of new entrants
A segment's attractiveness varies with the height of its entry and exit barriers. The most
attractive segment is one in 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 entry and exit barriers are both low,
firms easily enter and leave the industry, and the returns are stable and low. The worst case is
when entry barriers are low and exit barriers are high: here firms enter during good times but
find it hard to leave during bad times. The result is chronic.

3. 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 the profits that a segment can earn the company has

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 to monitor the price trends in the substitutes closely. If technology advances or competition
increases in these substitute industries, prices and profits in the segment are likely to fall.
4. Threat of buyers' growing bargaining power
A segment is unattractive if the buyers possess strong or growing bargaining power. Buyers
will try to force prices down, demand more quality or services, and set competitors against
each other, all at the expense of seller profitability. Buyers' bargaining power grows:
a) When they become more concentrated or organized,
b) When the product represents a significant fraction of the buyers' costs,
c) When the product is undifferentiated,
d) When the buyers' switching costs are low,
e) When buyers are price sensitive because of low profits, or
f) When buyers can integrate upstream.
To protect themselves, sellers might select buyers who have the least power to negotiate or
switch suppliers. A better defense consists of developing superior offers that strong buyers
cannot refuse.
5. Threat of suppliers' growing bargaining power
A segment is unattractive if the company's suppliers are able to raise prices or reduce
quantity supplied. Suppliers tend to be powerful:
a) When they are concentrated or organized,
b) When there are few substitutes,
c) When the supplied product is an important input,
d) When the costs of switching suppliers are high, and the suppliers can integrate down
stream.
The best defenses are to build win-win relations with suppliers or use multiple supply sources

Today, competition is not only rife but also growing more intense every year. Multinational and
transnational companies are setting up production in lower-cost countries and bringing cheaper
goods to market. These developments explain the current talk about "marketing warfare," and
"competitive intelligence systems." Because markets have become so competitive, understanding
customers is no longer enough. Companies must pay keen attention to their competitors.
Successful companies design and operate systems for gathering continuous intelligence about
competitors.

3.2 Identifying Competitors

In order to identify competitors; a firm can follow the following two approaches:

1. The industry concept approach

2. The market concept approach

1. The Industry Approach

In order to identify competitors firms should first define the industry under which they are
operating. An industry is a group of firms that offer a product or class of products that are close
substitutes for each other. Industries are classified according to:
 Number of sellers
 Degree of product differentiation
 Presence or absence of entry, mobility, exit barriers
 Cost structure
 Degree of vertical integration
 Degree of globalization
The market approach

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According to the market approach, competitors are companies that satisfy the same customer
needs targeting the same type of customers.

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3.3 Analyzing Competitors

Once a company identifies its primary competitors, it must ascertain their characteristics,
specifically their strategies, objectives, strengths and weaknesses, and reaction patterns.

3.3.1 Strategies
A group of firms following the same strategy in a given target market is called a strategic group.
A firm shall identify the strategic group where it belongs

3.3.2 Objectives

Once a company has identified its main competitors and their strategies, it must ask: What is
each competitor seeking in the marketplace? What drives each competitor’s behavior? One
useful initial assumption is that competitors strive to maximize profits. However, companies
differ in the weights they put on short-term versus long-term profits. Most firms operate on a
short-run profit-maximization model, largely because their current performance is judged by
stockholders who might lose confidence, sell their stock, and cause the company’s cost of capital
to rise. Other firms operate largely on a market-share-maximization model. An alternative
assumption is that each competitor pursues some mix of objectives:
 current profitability,
 market-share growth,
 cash flow,
 technological leadership, and
 service leadership.
Knowing how a competitor weighs each objective will help the company anticipate its reactions.
Many factors shape a competitor’s objectives, including size, history, current management, and
financial situation. If the competitor is a division of a larger company, it is important to know
whether the parent company is running it for growth or milking it. Finally, a company must
monitor its competitors’ expansion plans.

3.3.3 Strengths and Weaknesses

Whether competitors can carry out their strategies and reach their goals depends on their
resources and capabilities. A company needs to gather information on each competitor’s
strengths and weaknesses. According to the Arthur D. Little consulting firms, a firm will occupy
one of six competitive positions in the target market.

1. Dominant: this firm controls the behavior of other competitors and has a wide choice of
strategic options.
2. Strong: this firm can take independent action without endangering its long-term position
and can maintain its long-term position regardless of competitors’ actions.
3. Favorable: this firm has an exploitable strength and a more-than-average opportunity to
improve its position.
4. Tenable: this firm is performing at a sufficiently satisfactory level to warrant continuing
in business, but it exists at the sufferance of the dominant company and has a less-than-
average opportunity to improve its position.
5. Weak: this firm has unsatisfactory performance, but an opportunity exists for
improvement. The firm must change or else exit.
6. Nonviable: this firm has unsatisfactory performance and no opportunity for
improvement.

This assessment helps companies to decide whom to attack in the programmable controls market.
In general, a company should monitor three variables when analyzing each of its competitors:
 Share of market: the competitor’s share of the market either in absolute or relative
terms.
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  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.”
 Share of heart: The percentage of customers who named the competitor in respondent
to the statement “Name the company from whom you would prefer to buy the product.”

Companies that make steady gains in mind share and heart share will invariably make gains in
market share and profitability. To improve market share, many companies have begun
benchmarking their most successful competitors. The technique and its benefits are described in
the Marketing Insight box, “How Benchmarking Helps Improve Competitive Performance.’

In searching for weaknesses, we should identify any assumptions competitors hold that are no
longer valid. Some companies believe they produce the best quality in the industry when they do
not. May companies mistakenly subscribe to conventional wisdom like “Customers prefer full-
line companies,” “The sales force is the only important marketing tool,” and “Customers value
service more than price.” If we know that a competitor is operating on such a wrong assumption,
we can’t take advantage of it.

3.3.4 Reaction Patterns

Each competitor has a certain philosophy of doing business, a certain internal culture, and certain
guiding beliefs. Most competitors fall into one of four categories:

1. The laid-back competitor: A competitor that does not react quickly or strongly to a
rival’s move. Reasons for slow response vary. Laid-back competitors may feel:
 their customers are loyal;
 they may be milking the business;
 they may be slow in noticing the move;
 they may lack the funds to react.
Rivals must try to assess the reasons for the behavior.

2. The selective competitor: A competitor that reacts only to certain types of attacks.
It might respond to price cuts, but not to adverting expenditure increases. Knowing,
what a key competitor reacts gives its rivals a clue as to the most feasible lines of
attack.

3. The tiger competitor: A competitor that reacts swiftly and strongly to any as
assault.
4. The stochastic competitor: A competitor that does not exhibit a predictable reaction
pattern. There is no way of predicting the competitor’s action on the basis of its
economics situation, history, or anything else. Many small businesses are stochastic
competitors, competing on miscellaneous fronts when they can afford it.
Some industries are marked by relative accord among the competitors, and others by constant
fighting. Bruce Henderson thinks that much depends on the industry’s “competitive
equilibrium.” Here are his observations:
1. If competitors are nearly identical and make their living in the same way, then their
competitive equilibrium is unstable. Perpetual conflict characterizes industries where
competitive differentiation is hard to maintain, such as steel or newsprint. The
competitive equilibrium will be upset if any firm lowers its price to relieve overcapacity.
Price wars frequently break out in these industries.
2. If a single major factor is the critical factor, then the competitive equilibrium is
unstable. This is the case in industries where costs-differentiation opportunities exist
through economies of scale, advanced technology, or experience. Any company that
achieves a cost break though can cut its price and win market share at the expense of

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 other firms, which can defend their market shares only at great cost. Price wars
frequently break out in these industries as a result of cost breakthroughs.
3. If multiple factors may be critical factors, then it is possible for each competitor to
have some advantage and be differentially attractive to some customers. The more
factors that may provide an advantage, the more competitors who can coexist.
Competitors all have their competitive segment, defined by the preference for the factor
trade-offs that they offer. Multiple factors exist in industries that can have different
values on these factors, and then many firms can coexist through specialization.
4. A ratio of 2 to 1 in market share between any two competitors seems to be the
equilibrium point at which it is neither practical nor advantageous for either competitor
to increase or decrease share. At this level, the costs of extra promotion or distribution
would outweigh the gains in market share.

3.4 Designing the Competitive Intelligence System

There are four main steps in designing a competitive intelligence system:

1. Setting up the system
2. Collecting the data
3. Evaluating and analyzing the data
4. Disseminating information and responding to queries.
1. Setting up the System

The first step calls for identifying vital types of competitive information, identifying the best
sources of this information, and assigning a person who will manage the system and its services.
In smaller companies that cannot afford to set up a formal competitive intelligence office, specific
executives should be assigned to watch specific competitors. A manager who used to work for a
competitor would closely follow that competitor and serve as the in-house expert on that
competitor. Any manager who needs to know about a specific competitor would contract the
corresponding in-house expert.

2. Collecting the Data

The data are collected on a continuous basis from the field (sales force, channels, suppliers,
market research firms, trade associations), from people who do business with competitors, from
observing competitors, and from published data. In addition, a vast store of data on both
domestic and overseas companies is available via CD-ROM and on-line services.

The Internet is creating a vast new arsenal of capabilities for those skilled at gathering
intelligence on competitors’ moves. Now companies place volumes of information on their Web
sites, providing details to attract customers, partners, suppliers, or franchisees.

3. Evaluating and Analyzing the Data

The data collected are checked for validity and reliability interpreted, and organized.

4. Disseminating Information and Responding

Key information is sent to relevant decision makers, and managers’ inquires are answered. With
a well-designed system, company managers receive timely information about competitors via
phone calls, bulletins, newsletters, and reports. Managers can also contact the market intelligence
department when they need help interpreting a competitor’s sudden move, when they need to
know a competitor’s weaknesses and strengths, or when they want to discuss a competitor’s
likely response to a contemplated company move.

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3.5 Selecting Competitors to Attack and to Avoid

With good competitive intelligence, managers will find it easier to formulate their competitive
strategies.

3.5.1 Customer Value Analysis

Very often, mangers conduct a customer value analysis to reveal the company’s strengths and
weaknesses relative to various competitors. The major steps in such an analysis are:

1. Identify the major attribute customer’s value. Customers are asked what attributes
and performance levels they look for in choosing a product and vendors.

2. Assess the quantitative importance of the different attributes. Customers are asked
to rate the importance of the different attributes. If customers diverge too much in their
ratings, they should be clustered into different customer segments.

3. Assess the company and competitors’ performances on the different customer

values against their rated importance. Customers describe where they see the
company and competitors’ performances on each attribute.

4. Examine how customers in a specific segment rate the company’s performance

against a specific major competitor on an attribute-by-attribute basis. If the
company’s offer exceeds the competitor’s offer on all important attributes, the company
can charge a higher price (thereby earning higher profits), or it can charge the same price
and gain more market share.

5. Monitor customer values over time. The company must periodically redo its studies of
customer values and competitors’ standings as the economy, technology, and features
change.

3.5.2 Classes of Competitors

After the company has conducted its customer value analysis, it can focus it attack on one of the
following classes of competitors:

1. Strong versus weak competitors

2. Close versus distant competitors
3. “Good” versus “bad” competitors.

1. Strong versus Weak.

Most companies aim their shots at weak competitors, because this requires fewer resources per
share point gained. Yet, in attacking weak competitors, the firm will achieve little in the way of
improved capabilities. 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.

2. Close versus Distant.

Most companies compete with competitors who resemble them the most. At the same time, the
company should avoid trying to destroy the closest competitor.

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3. “Good” versus “Bad.”

Every industry contains “good” and “bad” competitors. A company should support its good
competitors and attack its bad competitors. Good competitors:
 Play by the industry’s rules
 Make realistic assumptions about the industry’s growth potential
 Set prices reasonable in relation to costs; they favor a healthy industry;
 Limit themselves to a portion or segment of the industry
 Motivate others to lower costs or improve differentiation; and
 Accept the general level of their share and profits.

Bad competitors try to:

 Buy share rather than earn it
 Take large risks; they invest in overcapacity; and
 Upset industrial equilibrium.