Question-   Competitor Analysis: Understand Your Opponents

Solution-

CompetitorAnalysis

 

 

Understand YourOpponents

 

 

 

 

 

 

Key Topics Covered inThis Chapter

 

 

•  Identifying  competitors

 

•  Sizing up competitors

 

•  Understanding the fiveforces thatmake markets  attractive or unattractive

 

 

 

 

 

 

 

A

s Geo r ge  D ay ,a professor at the Wharton School, has perceptively written, “One  of the primary issues facing managers in formulating competitive strategy is

 

definingthe arena of competition. Where are you competing? Who are your competitors? How attractive is the competitive arena?”1Noeffectivemarketing program is complete without a thoughtful analy- sis of competitors and the competitive arena.

You surely know who your competitors are. They are the ones your salespeople wrestle with every day in closing key sales. They are the companies that aim to steal your best customers. Yes, you know who they are, but how much do you know aboutthem—their strengths and weaknesses? Some are ready and able to pounce on you if you invade a market segment they dominate; others will act slowly and perhaps ineffectually. Are you aware of emerging arenas of com- petition? And what about the competitors who will appear in the months and years ahead?

Some arenas of competition are relatively static, particularly in mature, capital-intensive industries. Before the 1970s, the steel industry could be defined as static. A handful of large competitors were slugging it out, each trying to lower unit production costs and capture a larger slice of the market at the expense of its rivals. This situation changed dramatically with the appearance of offshore producers and the rise of “mini-mills.”

 

 

 

Competitor  Analysis                                                3

 

Other industries are more dynamic. Entertainment is a prime example. Fifty years ago, people in the United States had limited op- tions for entertainment: three or four network television stations, a public television station, and one or two local stations, along with movie theaters and live performances. Today, TV viewers can still watch network channels, but they can also access hundreds of cable channels. The movie theaters are still there, but thousands of movies are now available through VHS, DVD, cable, and pay-per-view out- lets. Because many of these entertainment services are vulnerable to substitution by others, vendors are scratching their heads and asking, “What strategy will help us carve out a profitable niche in this dynamic marketplace? And what’s coming next that might render our product obsolete?”

A dynamic market has these hallmarks:

 

• Numerous products and services addressing a similar need (e.g., land line phones, cell phones, Internet phone service, instant messaging, e-mail)

 

• A diversity of competitors (e.g., TV networks, cable compa- nies, video rental shops, live venues)

 

• Few insurmountable barriers to entry

 

• Market fragmentation

 

How well do you understand the competition in the market you aim to serve? Few areas of research provide greater dividends for the business strategist than this one. This chapter will help you assess the competition.

 

 

 

WhoAre Your Competitors?

 

The starting point of competitive analysis is the identification of your competitors. Who are they? If that question seems simple- minded, remember that your real competition—the ones that can kill your business—may not come from the handful of established

 

 

 

4                                               Marketer’s Toolkit

 

companiesyou wrestle with every day. It may come instead from an unanticipated source.

If you doubt that, consider the photographic imaging business of twenty years ago. Camera makers such as Minolta, Canon, Olym- pus, and Nikon were busily fighting each other for the various seg- ments of the picture-taking market. On the photo materials side, giants Kodak and Fuji were contending with each other for the sale of film, paper, and processing. All contenders understood the uni- verse of competition.

Enter Sony in the early 1980s. Sony, a consumer electronics company better known for its radios, TVs, Walkman cassette players, and core competencies in microelectronics, unveiled the first consumer camera based on digital imaging. Twenty years later, digital cameras have upset the competitive applecart of the industry. Suddenly, newcomers like Hewlett-Packard, Gateway, and Casio—electronics companies like Sony—are players in a market once dominated by firms that understood optics and light-sensitive coated film. The point here is that when you think about competitors, you must recognize that you have both existing andpotential competitors. How do you identify your firm’s main potential and existing competitors? Here’s an easy rule of thumb: a competitoris any company that aims to satisfy the same customer needs that you do. This means that you must consider companies that offer substitutes for your products or services. For example, suppose you sell word-processing soft- ware. Your customer’s need isn’t for software, but for the ability to create documents quickly and conveniently. That need can be satisfied in many different ways: by pencils, pens, typewriters, “slate” PCs, and any other writing tool that innovative enterprises can dream up. Thus your company actually has more competitors than you might think.

Similarly,a manufacturer of photocopying machines aims to satisfy the need to duplicate documents. But a firm that offers document- duplicating services,  such as Kinkos or the independent print shop down the street, may satisfy that need just as well. The service company is just as much your competitor as is another manufacturer of photocopy machines.

 

 

 

Competitor Analysis                                                 5

 

Asyou list your competitors, consider the following:

 

• Other players offering products similar to yours

 

• Companies that make substitutes for your products

 

• The ease with which customers comparison-shop and switch suppliers

 

• Your own suppliers’ ability to raise their prices or reduce the quantity of their offerings

 

 

 

 

Characteristics forAnalysis

 

Once you’ve identified your potential and existing competitors, an- alyze them in terms of their ability to capture parts of the market.

 

 

Strategies andObjectives

 

Your competitors may be following different strategies and pursuing different objectives. Consider this example.

 

The strategy of company A, an investment management company, is to provide a full range of services for high-net-worth clients: financial planning, retirement planning, tax planning and preparation, insurance, and portfolio management. It aims to establish long-term client rela- tionships with a small but wealthy pool of customers. Rival company B, on the other hand, is transaction oriented. It aims to be the low-cost provider of similar services, but for a wider market of customers. Its strat- egy is based on selling a high volume of computer-generated financial plans for less than $200.

 

Also consider objectives. What objectives are your competitors pursuing? Profit maximization? Dominant market share? Is a com- petitor trying to break out of the segment it currently occupies and move into others? If these objectives are much different from yours, you may not need to worry about them. Your company may have effectively divided the market. But if competitors’  objectives put

 

 

 

6                                               Marketer’s Toolkit

 

them in head-to-head competition with you, you must either pre- pare yourself for a slugfest, find a way to differentiate your offer, or move into another market segment.

 

 

Positioning

 

Usually, competitors  in a market position themselves differently, both in terms of the segments they address and how they try to be perceived by customers. Figure 5-1 is a positioning map of the mar- ket for men’s watches. It indicates roughly how the leading brands have positioned themselves in terms of two dimensions: sporty ver- sus fashion, and upscale precision versus affordable.

Creating a similar map for your own industry will give you a better idea of the competition and will show where each company concentrates its product development and marketing efforts. For good measure, ask knowledgeable  associates to go through the same

exercise,and then compare results.

 

 

 

FIGURE 5-1

 

Competitor positioning, men’s watches

 

 

Upscale precision

 

 

 

 

Breitling

 

Michele

 

Cartier

 

 

 

Baume & Mercier

 

 

Seiko

 

 

 

Gucci

 

 

Sporty                                                                                                          Fashion

 

 

 

 

Casio

 

Timex

 

 

 

Swatch

 

 

Citizen

 

 

 

Affordable

 

 

 

Competitor  Analysis                                                7

 

 

Strengths andWeaknesses

 

Some companies have great products and prices but poor distribu- tion. Others  have great distribution but lackluster products. And then there are the competitors you should fear most: the ones who are strong in many areas. As you inventory your competition, make a systematic list of relative strengths like the one in table 5-1.

You can obtain such ratings through a brainstorming session among company personnel—in particular, the marketing manager, experienced salespeople, and customer service employees. Employee views on strengths and weaknesses may lack objectivity and suffer from incomplete knowledge. So if you adopt this method, be sure to bring in the voices of defectors from rival companies as well as consultants, customers, dealers, and others who know the industry well. Make use of any survey data your market research has gathered. What you want is an unvarnished assessment of where your company is strong and weak relative to key competitors.

 

TABLE  5-1

 

Rate relative strengths

 

 

Company 1

Company 2

Company 3

Our company

 

New-productdynamism

 

8 ↓

 

4 →

 

5 →

 

9 →

Product quality

8 ↓

9 →

4 ↑

7 ↑

Distribution

6 →

10 →

6 →

5 →

Customerservice

3 ↑

7 →

5 ↑

5 →

Customersatisfaction

7 ↓

6 →

5 ↑

7 ↑

 

Strength 1–10; 10 is best

 

→ No change

↑ Getting better

↓ Getting worse

 

 

 

8                                               Marketer’s Toolkit

 

This assessment gives you a snapshot of the situation as it exists at the moment. The competitive marketplace, however, is always in flux. Your own company, for example, may be getting progressively better in terms of product quality. So it’s wise to establish a trajectory for the competitive factors that matter most—thus, the arrows pointing upward, downward, or sideways in the table. By adding these trajectories, we can see that company 1, which has high over- all ratings, is sliding in its competitive stance, whereas company 3 is coming up on most dimensions of competitive strength. By under- standing where these competitors are headed, you’ll have a better sense of the competitive situation you will confront in the months and years ahead. The current situation is less important.

 

 

The AggressionFactor

 

Some companies are more aggressive than others in attacking new markets or defending their turf. You’d have to count Dell as an ag- gressive company. Having conquered much of the personal com- puter terrain among individuals, businesses, and government, it has turned its sights on the $43 billion per year printer market now dominated by Hewlett-Packard. Storage systems and servers are also in Dell’s sights. As of late 2005 it remains to be seen how Hewlett- Packard will respond to Dell’s threat to its lucrative printer business.

As you analyze your competitors, try to develop a systematic understanding of how they react to threats and opportunities. A matrix like the one shown in table 5-2 can help you think through and record your sense of the aggression factor. By understanding allthese characteristics of your competitors, you can design marketing strategies that will increase your chances of coming out on top.

One way to understand how another company will respond to your actions is through role-playing. This involves studying the rival’s past behavior and then assigning a team to play its part in a simulation. The military does this all the time. For example, during the cold war era, the U.S. Army’s armored divisions trained in mock combat against aggressor units of soldiers schooled in the methods and doctrine of Soviet armored warfare. More recently, both ar- mored and infantry units slated for service in Iraq were sent to a

 

 

 

Competitor  Analysis                                                9

 

TABLE  5-2

 

How we and competitors react

 

 

Company 1

Company 2

Company 3

Our company

 

Aggressive offense

 

 

 

 

Aggressive defense

 

 

 

Slow in defensive response

?

 

Willing to cut prices to attack or defend

 

 

Will match promotions

 

 

 

mock-up of a Middle Eastern city, where they engaged in war gam- ing against other soldiers who had adopted the methods of the Iraqi insurgency—ambushes, roadside bombs, and so forth.

Marketers can learn much from similar gaming, and a number of computer-based products are available for that purpose.

 

 

 

Porter’s Five ForcesFramework

 

No discussion of the competitive environment would be complete without some discussion of Michael Porter’s five forces framework. First articulated in 1979 in an award-winning Harvard Business Re- viewarticle, “How Competitive Forces Shape Strategy,” Porter’s framework remains a useful tool for getting an analytical grasp on the state of competition and the underlying economics within an industry.2  It also encourages the strategist—and the marketer—to look outside the small circle of current competing rivals to other actors and influences that determine potential profitability and growth.

Porter identified five forces that govern industry competition

(seefigure 5-2):

 

• The threat of new entrants

 

• The bargaining power of suppliers

 

• Jockeying for position among current competitors

 

 

 

10                                             Marketer’s Toolkit

 

FIGURE 5-2

 

Porter’s five forces

 

 

 

Threat of new entrants

 

 

 

 

 

 

Bargainingpower of suppliers

 

The industryJockeying for position

among current

competitors

 

 

Bargainingpower of customers

 

 

 

 

 

Threat of substitute products or services

 

Source:Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review,

March–April 1979, 141. Reproduced with permission.

 

 

 

• The bargaining power of customers

 

• The threat of substitute products or services

 

“The collective strength of these forces,” Porter writes, “determines the ultimate profit potential of an industry.” Owing to these factors, the profit potential will vary from industry to industry. Today, for example, sectors of the telecommunications industry are faced with weak profit potential because many factors conspire against ex- isting providers: industry participants are continually fighting to grab their rivals’ customers, often by cutting prices and extending services; customers can switch easily; and many communications options are available, including land lines, cell phones, e-mail, instant messaging, and Internet phone service. Meanwhile, the rapid pace of technological change is forcing the existing players to spend heavily to remain on the cutting edge. Participants in other industries, in contrast, may confront a much more favorable combination of the five forces.

 

 

 

Competitor  Analysis                                             11

 

The key to growth and survival, according to Porter, is to use one’s knowledge of these five forces to “stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitute goods.” Such a position, he argues, can be gained by solidifying relationships with profitable customers, by differentiating the product (through either redesign or marketing), by integrating operations, or by gaining technical leadership.3

A complete discussion of the five forces framework is beyond the scope of this book. We encourage you to obtain the article and apply its concepts to your own industry.

 

 

Failingto recognize and realistically assess competitive forces is per- haps the biggest sin that a marketer can commit. Managers who give insufficient attention to competitive analysis are usually blindsided or outflanked by rivals. Don’t let this happen to you. Make a habit of studying your competitors and understanding them as well as you understand your customers. Keep your eyes open for indications of changing tactics on their part, and for the emergence of new competitors and substitutes. Test their responsiveness periodically on different fronts to see how they react: a promotional offer here, an ad blitz there.

 

 

 

SummingUp

 

• The starting point of competitive analysis is the identification of competitors—tomorrow’s as well as today’s.

 

• Determine the strategies and objectives of your competitors.

 

• To better understand where key competitors are concentrating their product development and marketing efforts, create a posi- tioning map.

 

• Develop a “relative strengths” table to rate the strengths and weaknesses of each competitor on key market dimensions

 

 

 

12                                             Marketer’s Toolkit

 

(quality,distribution, etc.). Be sure to indicate the apparent trajectory of these market players on these dimensions.

 

• Determine how each key competitor reacts to moves by you and other firms. Is it slow to react? Is it aggressive in the offense? Will it fight hard to defend its turf?

 

 

 

Notes                                                           13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 5

 

1.  George Day and David J.  Reibstein, Wharton on Dynamic

Competitive Strategy(New York: John Wiley & Sons, 1997), 23.

2.  Michael E. Porter, “How Competitive Forces Shape Strat- egy,” Harvard Business Review, March–April 1979, 113–135.

3.  Ibid.

 

 

 

 

 

 

 

 

 

 

 

Harvard Business Essentials

 

The New Manager’s Guideand Mentor

 

 

The Harvard Business Essentials series is designed to provide com- prehensive advice, personal coaching, background information, and guidance on the most relevant topics in business. Drawing on rich content from Harvard Business School Publishing and other sources, these concise guides are carefully crafted to provide a highly practi- cal resource for readers with all levels of experience, and will prove especially valuable for the new manager. To assure quality and accu- racy, each volume is closely reviewed by a specialized content adviser from a world-class business school. Whether you are a new manager seeking to expand your skills or a seasoned professional looking to broaden your knowledge base, these solution-oriented books put re- liable answers at your fingertips.

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