A Business Strategy

Where to Compete
The product-market investment decision

A Business Strategy

How to Compete
Value proposition Assets & competencies Function area strategies and programs
Figure 1.1

Competitor Analysis
They came in groups, they measured, they sketched and they tape recorded everything they could. Their questions were precise. They were surprised how open the Americans were.

That was an account of Japanese efforts at competitor analysis in the 1960s in the U.S automobile industry. By the 1970s they were able to penetrate the US market successfully. They similarly studied the design approaches of European manufacturers. The best and fastest way to learn a sport is to watch and imitate a champion. ( Bruce Henderson, Founder of BCG)

In contrast ..
The Americans were late in even recognizing the competitive threat from Japan and never did well at analyzing Japanese firms or the new strategic imperatives created by the revised competitive environment

Clearly.

Competitor analysis was one big reason why the Japanese were able to succeed was that they were much better than US firms at competitor analysis

An Indian Fairy tale

In 1969, Karsanbhai Patel, a chemist at the Gujarat Government's Department of Mining and Geology manufactures phosphate free Synthetic Detergent Powder, and starts selling it locally. The new yellow powder is priced at Rs. 3.50 per kg, at a time when HLLs Surf is priced at Rs 15.

 Soon, there is a huge demand for Nirma in Ruppur (Gujarat), Patels hometown. He starts packing the formulation in a 10x10ft room in his house. Patel names the powder as Nirma, after his daughter Nirupama.

 Patel is able to sell about 15-20 packets a day on his way to the office on bicycle, some 15 km away. By 1985, Nirma washing powder has become one of the most popular, household detergents in many parts of the country.

 Nirma is the lowest- priced branded washing powder available in grocery stores. The middleclass housewife is happy as she can now choose a lower-priced washing powder against Surf, which is beyond her budget. Nirma also has an impact on upper-middleclass and higher income families, who choose Nirma for washing their inexpensive clothes.

 Starting as a one-product one-man outfit in 1969, Nirma becomes a Rs 17 billion company within three decades.
The company has multi-locational manufacturing facilities, and a broad product portfolio under an umbrella brand Nirma. The company's mission : to provide, "Better Products, Better Value, Better Living" contributes a great deal to its success. Nirma successfully counters competition from HLL and carves a niche for itself in the lower-end of the detergents and toilet soap market.

The belated response.

Hindustan Lever Limited (HLL)1 reacts in a way typical of many multinational companies. Senior executives are dismissive of the new product: "That is not our market", "We need not be concerned." But very soon, Nirma's success in the detergents market convinces HLL that it really needed to take a closer look at the low-income market.

The Giant awakens

Around 1984, HLL decides to take a fresh look at the market. In order to counter attack Nirma, HLL launches Sunlight (yellow), Wheel (green) and Rin (blue) detergent powders for different market segments. This strategy of segmenting the market helps HLL win back part of its lost market.

The goal of competitor analysis

To gain insights that will influence the product market investment decision or the effort to obtain or maintain a Sustainable Competitive Advantage( SCA)
Focus should be on the identification of threats, opportunities, or strategic uncertainties created by emerging or potential competitor moves, weaknesses , or strengths

Competitor Analysis
Commences with identifying current and potential competitors. 2 Approaches for this : a) Competitors are grouped according to the degree they compete for a buyers choice. The perspectives of customers who must make choices among competitors are examined.

b) Competitors are placed into strategic groups on the basis of their competitive strength.

After identifying competitors

The focus is on understanding them and their strategies. An analysis of the strengths and weaknesses of each competitor or strategic group is then done.

Structure for Competitor Analysis

Who are the competitors ? Against whom do we usually compete? Who are our most intense competitors? Less intense but still serious competitors? Makers of substitute products?

Can these competitors be grouped into strategic groups on the basis of their assets, competencies and /or strategies?

Who are the potential competitive entrants? What are their barriers to entry? Is there anything that can be done to discourage them?

Evaluating the Competitors

What are their objectives and strategies? Their level of commitment ? Their exit barriers?

What is their cost structure ? Do they have a cost advantage or disadvantage?

What is their image and positioning strategy?

Which are the most successful /unsuccessful competitors over time? Why?

What are the strengths and weaknesses of each competitor or strategic group?

What leverage points could competitors exploit to enter the market or become more serious competitors ?

Evaluate the competitors with respect to their assets and competencies. Generate a competitor strength grid.

Identifying Competitors
In most instances primary competitors are obvious Coke with Pepsi and other colas brands and private labels Citibank with Chase and BOA and other major banks NBC with CBS and Fox

 Businesses that compete most directly will often use the same business model and the same assumptions about customers. Usually focusing on price is the winning factor, with a resulting erosion of profitability.

Business Models are eroding

Owing to : Changing customer priorities
Indirect competitors becoming strategically relevant.

 Colas, Banks, TV networks are no longer as dominant as they were Coffee is bought and consumed differently
Coke ignored emerging submarkets in water, iced tea, fruit based drinks while focusing on Pepsi. Hence missed opportunity and has had to follow an expensive and difficult catch up strategy.

While major television networks struggle against each other ESPN, CNN have flourished.
Nintendo, the Internet, Home Shopping are competing for the leisure time of viewers.

With banks focusing on competing banks Mutual funds, insurers, brokers have cut into their traditional markets.

Thus, Competitive analysis will benefit from extending the perspective beyond the obvious direct competitors.
By taking indirect competitors into its purview the strategic horizon is expanded

In the real world the customer is never restricted to a firms direct competitors but is always poised to consider other options.

2 approaches to identifying competitors

Customer Choices : If not this product, what? If price of this brand increases what would you use? Product - use Associations : Specific use contexts or applications. List use situations and applications .How appropriate each product is for each use context? Eg. If Pepsi is appropriate for snack occasions it would compete primarily with products similarly perceived. This would also hold true in the case of several distinct applications.

Identifying competitors - Strategic groups

A group of companies following the same strategy in a given target market is called a strategic group. A strategic group is a group of firms that : Over time pursue similar competitive strategies Have similar characteristics ( eg, size, aggressiveness) Have similar assets and competencies

Potential competitors
Market entrants who might engage in : Market expansion ( Come into new territory) Product expansion ( eg. From shoes to apparel to the same customers) Backward integration ( A soup company making its own cans)

 Forward integration ( Opening up retail stores for ones products)

The export of assets and competencies ( A current small competitor with critical strategic weaknesses bought up by a company with muscle may pose a threat)

Retaliatory or defensive strategies (Firms that are threatened by a potential or actual move in the market might retaliate).

Understanding Competitors
Competitor actions are influenced by 8 elements : Financial performance : Size, growth and profitability Image and positioning strategy Competitor Objectives and Commitment

 Current and past strategies

Competitor Organization and Culture

Cost Structure Exit Barriers Assessing Strengths and Weaknesses

Understanding the Competitors

Size, Growth & Profitability Image and Positioning

Objectives and Commitment

Strengths and Weaknesses

Exit Barrriers

Competitor Actions

Current and Past Strategies

Organization and Culture

Cost Structure
32 Figure 4.3

Competitor Strengths and weaknesses

These are based on the existence or absence of assets.
For identifying competitor strengths and weaknesses it is necessary to identify the assets and competencies that are relevant to the industry.

5 questions to ask
Why are successful businesses successful and why are unsuccessful businesses unsuccessful? What are the key customer motivations?

What are the large cost components?

What are the industry mobility barriers? Which components of the value chain can create competitive advantage?

Value Chain
The Value Chain is a useful tool to identify significant value-added components.
Developed by Michael Porter it consists of two types of value creating activities and should be considered in assessing a competitor.

The Value Chain

Firm Infrastructure Human Resource Management Technology Development Procurement

Support Activities

Inbound Logistics

Marketing Operations Outbound & Logistics Sales

Service

Primary Activities
Figure 4.5
Source: Reprinted with permission 1985 Michael Porter

Primary Value Activities

Inbound Logistics Operations Outbound Logistics Marketing and Sales Service

Primary Value Activities

Inbound Logistics : Material Handling and Warehousing

Operations

: Transforming inputs into the final product

Outbound Logistics: Order processing and distribution

Marketing and Sales : Communication, pricing and channel management Service : Installation, Repair and parts

Secondary Value Activities

Procurement : Procedures and Information System Technology development : Improving the product and processes/system Human Resource Management : Hiring, Training and Compensation Firm Infrastructure : General management, Finance, Accounting, Govt. Relations ,Quality Management

Question to consider

Which components of the value chain can create most competitive advantage for a competitor either in terms of customer benefits or reduced cost?

Checklist of Competitive Strengths and Weaknesses

Innovation (Sony,3 M) Manufacturing ( L&T) Finance ( Reliance, Tatas, Birlas) Management ( GE, Sony, Disney) Marketing (HUL, ITC, Gatorade, Dell, BOA) Customer Base ( Cellular phone cos.)

Innovation
Technical product or service superiority New product capability R &D Technologies Patents

Manufacturing
Cost structure Flexible production operations Equipment Access to raw materials Vertical integration Workforce attitude and motivation Capacity

Finance Access to capital

From operations From net short term assets Ability to use debt and equity financing Parents willingness to finance

Management
Quality of Top and Middle Management Knowledge of business Culture Strategic Goals and Plans Entrepreneurial thrust Planning / Operation System Loyalty/Turnover Quality of Strategic decision making

Marketing
Product Quality reputation Product characteristics/Differentiation Brand name recognition Breadth of the product line systems capability Customer Orientation Segmentation/Focus

Distribution Retailer relationship Advertising/Promotion skills Sales Force Customer Service/ Product support

Customer Base

Size and loyalty Market share Growth of segments served

Technologies in the Value Chain

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT Information System Technology Planning and Budgeting Technology Office Technology Training Technology Motivation Research Information Technology Product Technology Computer-Aided Design Pilot Plant Technology Software Development Tools Information Systems Technology

PROCUREMENT Transportation Technology Material Handling Technology Storage and Preservation Technology Communication System Technology Testing Technology Information Technology

Information Systems Technology Communication System Technology Transportation System Technology Basic Process Technology Materials Technology Machine Tools Technology Materials Handling Technology Packaging Technology Testing Technology I/nformation Tech. Transportation Technology Material Handling Technology Packaging Technology Communications Technology Information Technology Multi-Media Technology Communication Technology Information Technology Diagnostic and Testing Technology Communications Technology Information Technology

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter., p. 167.

Figure 3-8

Obtaining Information on Competitors

Competitors Website
Strategic vision Values and culture Portfolio of businesses clue to priorities and strategies Assets such as plants, global access, brand symbols

Search Engines for articles and financials Databases Directories Government Reports Trade associations, magazines, and meetings Technical meetings and Journals Marketing Research

Competitive Strength Grid

Identify relevant assets and competencies. Scale your firm and the major competitors or strategic groups of competitors on those assets and competencies An SCA is almost always based on having a position superior to that of the target competitors in one or more asset or competence area that is relevant to the industry and strategy employed. A competency that all competitors have will not be the basis for an SCA.

Competitive Strength Grid

Model Model Model

( Company) ( Company)
Assets & Skills Key for Success 1 2 3 Secondary Importance 1 2 3

( Competitive)

Legend : Strong : 5 / Above Average 4 / Average 3 / Less than Average 2 / Weak 1

External Analysis - 2. The Competition

Competitive Strength Grid
America Cadillac Lincoln (GM) (Ford) Lexus (Toyota) Japanese Acura (Honda) Infiniti (Nissan) Benz European Volvo BMW Audi

Assets and Skills

Keys for Success New product capacity Product quality Cost Structure Product differentiation Deal satisfaction Market Share Secondary Importance Flexible production Financial capability Quality of management Sales force/distribution Brand name recognition Advertising/promotio n Quality of service Growth of target segment Legend Strong Above Average Average Less Than Average Weak
gl

2 1 3 2 1 5

3 2 5 2 3 5

5 5 4 3 5 2

3 3 3 2 4 2

4 4 4 3 5 2

3 5 1 5 4 3

1 3 1 4 2 1

2 2 1 5 2 1

1 2 2 4 1 1

3 3 5 5 5 5 3 3

4 5 5 5 4 5 3 3

5 4 3 3 3 3 5 5

4 2 3 3 3 2 4 5

5 3 2 3 3 2 5 5

1 2 3 4 4 3 1 2

1 1 2 2 1 1 2 1

1 3 3 3 3 3 1 2

1 1 1 1 1 1 1 1

5 4 3 2 1