Chapter 8 - Competitive Analysis

Developing a competitive strategy is developing a broad framework for the business-how

is it going to compete; what are its objectives; and what policies will be needed to carry out its
objectives. The competitive strategy is a combination of ‘ends’ for which an organization is
striving and ‘means by which it is seeking to get there.
The exchange process between seller and buyer characterizes market. Seller has a product
to offer at a price and buyer has a need that can be satisfied by the product. In this sense, the
seller and buyer are major actors in the market.
Competition is said to exist when there is more than one seller and more than one buyer.
Thus, there are two views of competition.
 Economist’s view of competition form seller point of view
 Marketer’s view of competition from buyer point of view
The economists view of competition
Economists have taken the resource distribution through price mechanism as the keyhole
and viewed competition. They analyzed competition, therefore, from sellers’ point of view or the
industry structure. Industry is defined as a collection of sellers who offer similar or same product
to the same type of customers.
Take for example, toothpastes. There are several competitors. For instance, HUL (Close
up), Colgate (Colgate), and Dabur Balsara (Promise) are in the race along with many others.
Economists describe the industry or market structures based on demand and supply forces.
In this sense, even though ‘physical products may belong to different industries or
technologies, they become competitors to each other to satisfy a specific need or desire. This
ubiquitous view can be perceived as belonging to four types of competitors. Kotler(1988) has
labeled them as desire competitors, generic competitors, form competitors and brand
competitors.
1. Desire competitors the alternative suppliers of different products that can satisfy a
basic desire- the need expression of a consumer. For example, you desire to break
monotony. You have several options, and you choose to eat out.
2. Generic competitors the suppliers of a specific product/service category. In this
example, the next question is where and what? The physical product or service is
visualized here. You have again options by variety of foods and places. You decide,
say, in favor of restaurant.
3. Form competitors the suppliers of different product/service form. They are explored
here. Which form of restaurant? is the next choice problem. Say South Indian.
4. Brand competitors’ Different marketers of different brands of a particular product
form. The consumer now focuses on brand choices. Say India coffee house.
In the backdrop of this framework, the South Indian Restaurant owners will be myopic if
they focus only on their brand competitors. A challenge to any marketer is to expand the primary
demand and hence enhance the area of opportunities. To do this, the South Indian Restaurant
owners have to be concerned about the trends in the ‘eating-out’ environment. And this has been
done very successfully by some of the South Indian Restaurants in large cities. Having gained a
wide popularity amongst a large segment, they have also started offering Non-South Indian
dishes and have thus expanded their market size and fairly their opportunities.
This kind of a view provides a wide terrain to radar the competitive environment.
Theodore Leavitt’s classic article. “The Marketing Myopia”, is an excellent illustration of
shifting the focus from product to need to ensure long-term survival and growth of a firm.
Hyper Competition
Most industries today are facing an ever-increasing level of environmental uncertainty.
They are becoming more complex and more dynamic. Industries that used to be multi domestic
are becoming global. New flexible, aggressive, innovative competitors are moving into
established markets to erode rapidly the advantages of previously dominant firms. Distribution
channels vary from country to country and are being altered daily using sophisticated
information systems. Closer relationships with suppliers are being forged to reduce costs,
increase quality, and gain access to new technology. Companies learn to quickly initiate the
successful strategies of market leaders, and it becomes harder to sustain any competitive
advantage for very long. Consequently, the level of competitive intensity is increasing in most
industries. Richard D’Aveni (1994) contends that as this type of environmental turbulence
reaches more industries, competition becomes hyper competition.
According to D’Aveni
In hyper competition the frequency, boldness, and aggressiveness of dynamic movement
by the players accelerates to create a condition of constant disequilibria and change. Market
stability is threatened by short product life cycles, short product design cycles, new technologies,
frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of
market boundaries as diverse industries merge. In other words, environments escalate toward
higher and higher levels of uncertainty, dynamism, heterogeneity of the players and hostility.
In hyper-competitive industries such as computers, competitive advantage comes from an
up-to-date knowledge of environmental trends and competitive activity coupled with a
willingness to risk a current advantage for a possible new advantage. Exhibit 7-1 describes how
Microsoft is operating in the hyper competitive industry of computer software.
Hyper competition-The case of Microsoft
Microsoft is a hyper competitive firm operating in a hyper competitive industry. It has
used its dominance in operating systems (DOS and Windows) to move into a very strong
position in application programs like word processing and spreadsheets (Word and Excel). Even
though Microsoft held 90% of the market for personal computer operating systems in 1992, it
still invested millions in developing the next generation – Windows 95 and Windows NT.
Instead of trying to protect its advantage in the profitable DOS operating system, Microsoft
actively sought to replace DOS with various versions of Windows. Before hyper competition,
most experts argued against cannibalization of a company’s own product line because it destroys
a very profitable product instead of harvesting it like a “cash cow.” According to this line of
thought, a company would be better off defending its older products.
New products would be introduced only if it could be proven that they would not take
sales away from current products. Microsoft was one of the first companies to disprove this
argument against cannibalization.
Bill Gates, Microsoft’s Confounder, Chairman, and CEO realized that if his company
didn’t replace its own DOS product line with a better product, someone else would (such as IBM
with OS/2 Wrap). He knew that success in the software industry depends not so much on
company size but on moving aggressively to the next competitive advantage before a competitor
does. “This is a hyper competitive market,” explained Gates. “Scale is not all positive in this
business. Cleverness is the position in this business.” By 2000, Microsoft still controlled over
90% of operating systems software and had achieved a dominant position in applications
software as well.
Analysis for Developing a Competitive Strategy
Every business has a competitive strategy. However, some strategies are implicit, having
evolved over time, rather than having been explicit (evolved by deliberate planning process).
Implicit strategies lack focus, produce inconsistent decisions, and unknowingly become obsolete.
Without a well-defined strategy, organizations will be driven by current operational issues rather
than by a planned future vision. The broad considerations in an effective competitive strategy
can be extended into a generalized approach to the formulation of strategy. To do this, the
organization must be in a position to answer the following questions:
1. What is the current strategy, implicit or explicit?
2. What assumptions must hold for the current strategy to be viable?
3. What is happening in the industry, with our competitors, and in general?
4. What is our growth, size, and profitability goals? 5. What products and
services will we offer?
5. To what customers or users?
6. How will the selling/buying decisions be made?
7. How will we distribute our products and services?
8. What technologies will we employ?
9. What capabilities and capacities will we require?
10. Which ones are core?
11. What will we make, what will we buy, and what will we acquire through
alliance?
12. What are our options?
13. On what basis will be compete?
We will now discuss three analytical procedures given by Porter, McKinsey and Ohmae in that
order.
Porter’s five forces analysis of competition
A useful approach to formulating business strategies is based on Michael Porter’s
“competitive analysis”. Porter’s model provides a process to make your competitive strategy
explicit so it can be examined for focus, consistency, and comprehensive. Porter’s approach is
based on the analysis of five competitive forces (see Figure 7-2).
1. Threat of new entrants,
2. Bargaining power of suppliers,
3. Bargaining power of buyers,
4. Threat of substitute products,
5. Rivalry among existing firms.
Threat of New Entrants
Firms entering an industry bring new capacity and a desire to gain market share and
profits, but whether new firms enter an industry depends on the barriers to entry. ( A number of
these are shown in Figure7-2). In addition, established firms in an industry may benefit from
“experience curve” effects. That is, their cumulative experience in producing and marketing a
product often reduces their per-unit costs below those of inexperienced firms. Is general, the
higher the entry barriers, the less likely outside firms are to enter the industry.
Bargaining Power of Suppliers
Suppliers can be a competitive threat in an industry because they can raise the price of
raw material or reduce their quality. Powerful suppliers can reduce the profitability of an
industry if companies in the industry cannot pay higher prices to cover price increases that the
supplier imposes. Some determinants of supplier power are listed in Bargaining Power Buyers
Buyers compete with the industry by forcing prices down, bargaining for higher quality
or more services, and playing competitors off against each other all at the expense of industry
profitability.
Threat of Substitute Products
In a broad sense, all firms in an industry are competing with industries producing
substitute products. Substitutes limit the potential return in an industry by placing a ceiling on the
prices that firms in the industry can profitably chare. The more attractive the price-performance
alternative offered by substitutes, the tighter the lid on industry profits. For example, the price of
candy, such as Bassinettes chocolate-covered raisins, may limit the price Del Monte can charge
for “healthy snacks,” such as Strawberry Yogurt Raisins. Some determinants of the degree of
substitution threat are shown in Figure 7-2 Rivalry Among Existing Competitors Rivalry
determinants include industry growth, product differences and barriers. This is the conventional
type of competition in which firms try to take customers from one another. Strategies such as
price competition, advertising battles, new product introductions, and increased customer service
are commonly used to attract customers from competitors.
McKinsey’s 7- s Framework
This framework developed in the 1970’s by US based management consulting firm
McKinsey and Company has received attention from strategists. The framework rests on the
proposition that effective organizational change is best understood in terms of the complex
relationship between the seven S’s. as shown in Figure 7-3. Stated in general terms, the
proposition of the7-S model suggests that there are multiple factors which influence an
organization’s ability to change and its proper mode of change. Since the variables are
interconnected, significant progress cannot be made in one area (e.g., strategy) unless
corresponding progress is made in other areas too.
 McKinsey 7-s Framework
1. Structure refers to the authority relationships, the hierarchical arrangement of
positions in the organization.
2. Systems’ may be called the ‘infrastructure’ and include sub-systems relating to
production planning and control, cost accounting procedures, capital budgeting,
recruitment, training and development, planning and budgeting, performance
evolution, etc. Rules, regulations and procedures constitute ‘systems’ in the
framework, which complement the organizational structure
3. Strategy refers to the long-range plan of action with a set of goals for accomplishment
4. Staff’ carriers a specific meaning in the 7-S framework. It refers to the way
organizations induct young recruits into the mainstream of activities and the way they
manage their careers as the new entrants develop into managers.
5. Skills refer to the ‘distinctive competence’ which reflects the dominant skills of an
organization and may consist of competence in terms of engineering skills, or
competence in new product development, customer service, quality commitment,
market power, and so on.
6. Style is another variable, which may determine the effectiveness of organizational
change effort. According to the 7-S framework, the style of an organization becomes
evident through the patterns of actions of the top management team over a period, the
emphasis laid on aspects of business, reporting relationships and aspects of
organizational culture.
7. Shared values (or super ordinate goals) in the McKinsey model refer to the set of
values and aspirations that go beyond the formal statement of corporate objectives. In
other words, these are fundamental ideas around which a business is built, and which
constitute its main values. Typical examples are Hewlett-Packard’s “innovative
people at all levels in organization” as the dominant aspiration or value; A T & T’s
“universal services” goal; “customer service” which guides IBM’s marketing drive.
McKinney’s framework has significance in strategic planning.
The following points explain it:
 It provides a good framework of the seven ‘s’ and align them to energies and
executive strategies
 It is an excellent multivariate model of organizational change
 It provides a convenient means of checking whether an organization has the
necessary conditioning for implementing strategy
 Organizational capabilities (strengths and weaknesses may be evaluated along
each of the seven dimensions)
Ohmae’s Key factors for success
Ohmae suggests that in the event of limited resources, it may be wise to concentrate on
key functional or operating areas that are the determinants of success for a particular business.
This calls for identifying the key factors of success (KFS) for a given industry. There are two
approaches to identify the KPS.
1. The first is to dissect the market as imaginatively as possible to identify its key segments.
2. The other is to discover what distinguishes successful companies from losers, and then
analyze the differences between them.
The key factors for success of different industries may live in different functions, areas,
distribution, channels and so on. These can be identified along the various functional activities of
business starting from raw material to customer servicing. Table 7-2 provides the key factors for
success to increase profit and gain market share for various industries.

Table 7-2 Key Factors for Success

Competitive Strategies
We will now discuss the generic strategies given by Porter and the generally found
marketing warfare strategies.
Generic Strategies
According to Porter there are three potentially successful generic strategies to cope up with
the five competitive forces as well as gain advantage.
These are:
 Overall cost leadership
 Differentiation and
 Focus
Overall Cost Leadership
 In this strategy company makes all possible attempts to achieve the lowest costs in
production and marketing. The aim is to gain a large market share. Efficiency is the keyword
guiding all decisions to keep the costs low.

Differentiation
Here the aim is to achieve class leadership by creating something, which is perceived as
unique. Creating highly differentiated products and marketing programs-like design or brand
image, customer service or dealer network, or any other feasible dimension can achieve it.
Companies pursuing this strategy have major strengths in R&D design, quality control and
marketing. Chiragh Din Shirts, Bata Shoes, OTIS Elevators, Cini Fans are some examples where
this strategy seems to be the dominant guiding force.
Focus
The underlying assumption in ‘Focus’ is that a firm should be able to serve a narrow
strategic target effectively and efficiently. As a result, the firm achieves either differentiation
from meeting the need of a particular target, on both. Genteel’, a liquid detergent for expensive
clothes by Swastik, and Ponds Talcum Powder are some handy examples for this strategy.
The Offensive Warfare
‘Offensive’ warfare is almost like a mirror image of the defensive warfare. The numbers
twos of the industry are suggested to follow the offensive strategy by identifying a weakness in
leaders’ strength and at that point. The principles of ‘offensive warfare’ are:
1. The main consideration is the strength of the leader’s position,
2. Find a weakness in the leader’s strength and attack at that point.
3. Launch the attack on as narrow a front as possible.
The Flanking Warfare
According to Ries and Trout, ‘flanking’ the most innovative form of marketing warfare.
Over the years, most of the biggest marketing success has been flanking moves. It is
recommended to firms with limited resources. These firms cannot afford to fight the large firms
holding number one or two positions on the same battleground. Flanking can be achieved in any
manner such as flanking with low price, flanking with high price, flanking with small size,
flanking with large size, flanking with distribution, flanking with product form. The principles of
flanking warfare are:
1. A good flanking move must be made in an uncontested area
2. Tactical surprise ought to be an important element of the plan
3. Consider the pursuit as critical as the attack itself.
The Guerrilla Warfare
The last form is the guerrilla warfare. Most of the players in a marketing war would be
fighting in the marketplace like the guerrillas. According to Ries and Trout, “smaller companies
can be highly successful as long as they do not try to emulate the giants in their field, “Like
flanking form there can be many guerrillas, geographic guerrillas, demographic guerrillas,
industry guerrillas, product guerrillas and high-end guerillas. The principles of guerrilla warfare
are:
1. Find a segment of the market small enough to defend,
2. No matter how successful you become, never act like the leader
3. Be prepared to a buyout at a moment’s notice.