Competitive Analysis

1
Competitive Analysis
2
Michael Porters five forces describe the
characteristics of an industry that influence how
profitable firms in the industry will be.
3
The five forces are

• (1) rivalry among existing firms in the industry
• (2) potential entrants and barriers to entry
• (3) substitute and complementary products
• (4) the bargaining power of clients/customers
• (5) the bargaining power of suppliers

4
In general, a firm is likely to be more
profitable

• the less intense is the rivalry in its industry
• the less danger of potential entrants the
  higher the barriers to entry
• the less numerous and less aggressive the firms
  that sell substitute products, and the more
  numerous and more aggressive the firms that sell
  complementary products
• the weaker the bargaining power of
  clients/customers and
• the weaker the bargaining power of suppliers.

In industry and competitive analysis, firms
examine their positions along these lines and
seek ways to change conditions to be more
favorable to the firm.
5
(1) Rivalry

• Good rivals, in terms of industry profits, are
  rivals who are restrained in their competition.
• They are willing to following your firms lead.
• In markets that are segmented into different
  groups of buyers, good rivals are satisfied with
  taking care of their groups and letting you take
  care of yours.

6
(2) Potential Entrants Barriers to Entry

• Since industry profits encourage new firms to
  enter, firms in a profitable industry remain
  profitable to the extent that barriers to entry
  keep out potential entrants.

7
Types of Entry Barriers

• Tangible barriers anything that would put a
  potential entrant at a competitive disadvantage
  after entry.
• Psychological barriers beliefs on the part of
  potential entrants that, if they enter, firms
  already in the business will react aggressively,
  and are even willing to incur short-term losses,
  to force out the new entrant.

8
Tangible barriers - examples

• scale-based cost advantages when fixed costs
  are high the efficient scale is large
• scope-based cost advantages when fixed costs
  can be shared among different products (Operation
  may be cheaper for firms that are already
  producing other products with connected fixed
  costs.)
• knowledge-based cost advantages when experience
  is an important factor in knowing how to do
  things efficiently

9
Tangible barriers examples contd

• 4. financial resources when firms are able to
  fight off new entrants by cutting prices as a
  result of having significant financial resources
  available
• 5. favored access to particular resources when
  existing firms control resources that are useful
  or essential to efficient operation (For example,
  airlines may control landing slots at favorable
  times.)
• 6. favored access to distribution channels
  when existing firms can more easily reach the
  customers

10
Tangible barriers examples contd

• 7. customer goodwill and reputation when a
  firm has built up a loyal customer base, but new
  entrants have to win those loyal customers away
  or convince new customers who were not buying the
  product to do so
• customer lock-in when customers tend to
  continue with the original firm because of issues
  such as compatibility with existing equipment,
  economies in maintenance repair, etc.
• legal political restrictions when firms are
  protected against entry by legal restrictions
  such as government certification or licenses
  (Existing firms may also encourage the government
  to ban foreign competitors from entering the
  industry.)

11
Creating Psychological Barriers

• Fighting off an entrant or two is one way for a
  firm to gain a reputation for being willing
  able to fight off new entrants.
• Maintaining excess capacity for production or
  distribution can also deter entry.
• Keeping patents products on the shelf ready for
  use if needed can also send a strong signal.

12
(3) Substitutes Complements

• If there are many good substitutes for a product,
  the elasticity of demand for that product will be
  high.
• This will limit the ability of the firm to raise
  prices and will consequently lower potential
  profits.
• Suppose in addition, that a firm raises its
  prices. If firms producing substitute goods
  would take advantage of the opportunity to
  actively entice away customers, the profitability
  of the original firm would be limited.

13
Strong complements can increase the profitability
of a good.

• For example, disposable diapers (as opposed to
  cloth diapers) are strongly complementary with
  travel. So when the travel industry is booming,
  the disposable diaper industry is better off.

14
(4) Bargaining power of clients/customers

• Factors that tend to make a client/customer
  more powerful
• The client industry is highly concentrated. (The
  firms buying the product are in an industry in
  which there are just a few companies and they are
  large.)
• One particular client industry buys a very large
  share of the products of the selling industry.
• The item is not essential to the clients there
  are lots of good substitute inputs in the
  clients production process.
• The cost of the item is a large fraction of the
  clients costs/budget. The client is then likely
  to resist attempts to push up prices.

15
(5) Bargaining power of suppliers

• Factors that tend to make a supplier more
  powerful
• The supplier has a franchise or patent on a
  particular item that is required by firms in the
  industry.
• The supplier is not restrained by any close
  substitutes for its product.
• The supplier industry is concentrated (there are
  very few firms) and the firms are not aggressive
  rivals with each other.

16
Competitive Advantage
A firm's relative position within its industry
determines whether a firm's profitability is
above or below the industry average. The
fundamental basis of above average profitability
in the long run is sustainable competitive
advantage.
17
Strategies are based on a combination of
Competitive Advantage and Competitive Scope.
18
There are two types of competitive advantage a
firm can possess lower cost or differentiation.
19
The firm can seek to achieve these advantages for
a broadly or narrowly focused scope of activities
or customers.
20
Combining the two types of competitive advantage
with the scope of activities or customers leads
to four strategies. The two narrowly focused
strategies are often considered a single focus
strategy with two variants.
21
Overall Low-Cost Producer

• The sources of cost advantage depend on the
  structure of the industry.
• if a firm can maintain overall cost leadership,
  then it will be an above average performer in its
  industry, provided it can command prices at or
  near the industry average.

22
Some of the major drivers of cost

• Economies of scale,
• Learning and experience curve effects,
• High percentage of capacity utilization,
• Sharing opportunities with other business units
  within the enterprise,
• Vertical integration with suppliers or buyers,
• Timing considerations associated with first-mover
  advantages and disadvantages, and
• Locational factors such as differences in wage
  levels, tax rates, energy costs, and shipping
  costs.

23
Characteristics of the overall low-cost
leadership strategy
Production emphasis Nobody does it
cheaper. Marketing emphasis Budget Prices and
Good Value. Standardized products only a few
models and limited optional features. No Frills
operating culture lean and mean
reputation. Lower prices leads to higher volume
and greater market share which leads to lower
costs due to experience effects. Higher
productivity per employee. Cost-cutting
innovations. Accept low profit margins in return
for high volume.
24
Differentiation

• The firm selects one or more attributes that many
  buyers in an industry perceive as important, and
  uniquely positions itself to meet those needs.
• It is rewarded for its uniqueness with a premium
  price.

25
Areas that tend to lead to longer-lasting
competitive advantage are differentiation based
on

• Technical superiority
• Quality
• More support services
• More value for the money

26
Differentiation strategies work best in
situations where

• There are many ways to differentiate the product
  or service and these differences are perceived by
  some buyers to have value,
• Buyers needs and uses of the item are diverse,
  and
• Not many rival firms are following a
  differentiation strategy.

27
Characteristics of the broadly focused
differentiation strategy
Production emphasis Nobody makes it
better. Marketing emphasis Ours is better
than theirs. Many frills different models,
options, features, and services. One or more
points of difference. Frequent innovation. Premium
pricing to cover cost of differentiation. Intensi
ve advertising and sales efforts.
28
Focus

• The firm selects a segment or group of segments
  in the industry and tailors its strategy to
  serving them to the exclusion of others.
• The focus strategy uses differences between a
  target segment and other segments in the
  industry.

29
cost focus strategy

• The production and delivery system that best
  serves the targeted customers differs from that
  of other industry segments.
• The cost focus strategy exploits the cost
  differences.

30
differentiation focus strategy

• The targeted customers must have unusual needs.
• The differentiation focus strategy exploits those
  special needs.

31
A focused strategy may be appropriate when

• There are distinctly different groups of buyers
  who either have different needs or else utilize
  the product in different ways,
• No other rival is attempting to specialize in the
  target segment,
• The firms resources do not permit it to go after
  a wide segment of the total market, and
• Industry segments differ widely in size, growth
  rate, profitability, and intensity of the five
  competitive forces, such that some segments are
  much more attractive than others.

32
Characteristics of the narrowly focused
strategies
Production emphasis Made especially for
you. Marketing emphasis Ours meets your needs
better. Specialization for buyer segments,
geographic areas or end-use applications. Competit
ive advantage depends on being the low-cost
leader in the target segment, or doing something
particularly appealing to the targeted customers.