Competitive Environment

C. Harris

C. Harris
 Competitive Advantage
• Competitive advantage is the advantage of a firm
over its rivals, this advantage allows the firm to
generate higher sales and also retain more
customers than its rivals.
• The advantages include the cost, products,
distribution network and customer support provided.
• When a firm posses competitive advantage it is in a
position to generate great value for its stake holders
and that the more sustainable the competitive
advantage the more it becomes difficult for rivals to
neutralise these advantages.
 The Competitive Environment
• The competitive environment for
hospitality companies can be described as
dynamic, intense and turbulent, since most
markets have excess capacity.
• Competition is fierce, and knowing their
competitors is of crucial importance to
hospitality marketers.
• Although some hoteliers and restaurateurs
claim their product is so unique that
they ‘do not have any competitors’, the
reality is that all hospitality businesses
compete against a variety of different
types of competition.
• A broad distinction can be
made between macro-competition and
micro-competition.
 Macro-competition

• Macro-competition comprises all those industries that

are competing for the consumers’ disposable income,
including hospitality. Examples of these indirect
competitors include:
– Major household purchases – for example, a new bathroom or
motorcar – compete with luxury holidays in exotic hotels and on
the cruise ships
– Shopping for clothes and accessories competes with visits to
health and sports clubs
– Supermarket outlets, with their pre-prepared, easy-to-cook
meals, compete with restaurants and takeaway shops
– Shops that sell alcohol for consumption at home compete
against bars and pubs.
 Micro-competition

• Micro-competition comprises the branded and

independent hospitality units that
compete directly with a similar product and
similar price, and target the same customer
in the same location.
• This type of direct competition, which is normally
local depending upon the product category, is
also described as product form competition.
 Competitive Analysis
• First, a company needs to identify the
brands/establishments in its competitor set.
Criteria that can be used to define a competitor
set include competitors who are:
* Patronized by your target customers
* In the same product class
* Within a specified geographic area
* In a similar price category.
• An effective marketing research technique
adopted by the Marriott County Hall Hotel,
London, is to ask residents where they would be
staying tonight if the Marriott were full. The
customers’ replies help to establish which hotels
are in the competitor set.
• Desk research and local knowledge can
establish which businesses compete in the same
product, geographic and price set. Examples of
direct competition include:
* Five-star international hotels in Corfu
* Pubs and bars in a particular resort
* Restaurants clustered around Circular Quay in
Sydney Harbour.
• Once the competitor set has been established,
marketers need to carry out research by visiting their
competitors and evaluating their marketing offer.
• One of the best ways to analyze competitors is actually
to use their facilities as a paying customer, staying in the
bedrooms, having a drink in the bar and dining in the
restaurant. The desk and primary research should
include assessment of the following:
– The size, quality, décor and facilities of the bedrooms, public
area
– Food and beverage facilities
– The staff and their approach to customer service
– The price and value offered
– The marketing communications and the service promise in print
and advertising
– The image projected by the brand signage and physical
appearance.
 Porter’s Five Forces of Competition
• A business has to understand the dynamics of its
industries and markets in order to compete effectively
in the marketplace.
• Porter (1980) defined the forces which drive
competition, contending that the competitive
environment is created by the interaction of five
different forces acting on a business.
• In addition to rivalry among existing firms and the
threat of new entrants into the market, there are also
the forces of supplier power, the power of the buyers,
and the threat of substitute products or services.
• Porter suggested that the intensity of competition is
determined by the relative strengths of these forces.
 Main Aspects of Porter’s Five Forces
Analysis
• The original competitive forces model, as proposed by
Porter, identified five forces which would impact on an
organization’s behaviour in a competitive market.
These include the following:
– The rivalry between existing sellers in the market.
– The power exerted by the customers in the market.
– The impact of the suppliers on the sellers.
– The potential threat of new sellers entering the market.
– The threat of substitute products becoming available in the
market.
• Understanding the nature of each of these forces
gives organizations the necessary insights to enable
them to formulate the appropriate strategies to be
successful in their market.
 Force 1: The Degree of Rivalry

• The intensity of rivalry, which is the most obvious of

the five forces in an industry, helps determine the
extent to which the value created by an industry will
be dissipated through head-to-head competition.
• The most valuable contribution of Porter's “five
forces” framework in this issue may be its suggestion
that rivalry, while important, is only one of several
forces that determine industry attractiveness.
– This force is located at the centre of the diagram;
– Is most likely to be high in those industries where there is a
threat of substitute products; and existing power of
suppliers and buyers in the market.
 Force 2: The Threat of Entry

• Both potential and existing competitors influence average industry

profitability. The threat of new entrants is usually based on the market
entry barriers. They can take diverse forms and are used to prevent an
influx of firms into an industry whenever profits, adjusted for the cost of
capital, rise above zero. In contrast, entry barriers exist whenever it is
difficult or not economically feasible for an outsider to replicate the
incumbents’ position
• The most common forms of entry barriers, except intrinsic physical or
legal obstacles, are as follows:
– Economies of scale: for example, benefits associated with bulk purchasing;
– Cost of entry: for example, investment into technology;
– Distribution channels: for example, ease of access for competitors;
– Cost advantages not related to the size of the company: for example,
contacts and expertise;
– Government legislations: for example, introduction of new laws might
weaken company’s competitive position;
– Differentiation: for example, a certain brand that cannot be copied (The
Champagne)
 Force 3: The Threat of
Substitutes
• The threat that substitute products pose to an industry's
profitability depends on the relative price-to-performance
ratios of the different types of products or services to
which customers can turn to satisfy the same basic
need.
• The threat of substitution is also affected by switching
costs – that is, the costs in areas such as retraining,
retooling and redesigning that are incurred when a
customer switches to a different type of product or
service. It also involves:
– Product-for-product substitution (email for mail, fax); is based on
the substitution of need;
– Generic substitution (Video suppliers compete with travel
companies);
– Substitution that relates to something that people can do without
(cigarettes, alcohol).
 Force 4: Buyer Power

• Buyer power is one of the two horizontal forces that influence the
appropriation of the value created by an industry.
• The most important determinants of buyer power are the size and the
concentration of customers. Other factors are the extent to which the
buyers are informed and the concentration or differentiation of the
competitors.
• Kippenberger (1998) states that it is often useful to distinguish potential
buyer power from the buyer's willingness or incentive to use that power,
willingness that derives mainly from the “risk of failure” associated with a
product's use.
• This force is relatively high where there a few, large players in the market,
as it is the case with retailers an grocery stores;
• Present where there is a large number of undifferentiated, small suppliers,
such as small farming businesses supplying large grocery companies;
• Low cost of switching between suppliers, such as from one fleet supplier of
trucks to another.
 Force 5: Supplier Power

• Supplier power is a mirror image of the buyer power. As a

result, the analysis of supplier power typically focuses
first on the relative size and concentration of suppliers
relative to industry participants and second on the degree
of differentiation in the inputs supplied. The ability to
charge customers different prices in line with differences
in the value created for each of those buyers usually
indicates that the market is characterized by high supplier
power and at the same time by low buyer power (Porter,
1998). Bargaining power of suppliers exists in the
following situations:
– Where the switching costs are high (switching from one Internet
provider to another);
– High power of brands (McDonalds, British Airways, Tesco);
– Possibility of forward integration of suppliers (Brewers buying
bars);
– Fragmentation of customers (not in clusters) with a limited
bargaining power (Gas/Petrol stations in remote places).
• Any company must seek to understand the
nature of its competitive environment if it is to be
successful in achieving its objectives and in
establishing appropriate strategies.
• If a company fully understands the nature of the
Porter’s five forces, and particularly appreciates
which one is the most important, it will be in a
stronger position to defend itself against any
threats and to influence the forces with its
strategy.
• The situation is fluid, and the nature and relative
power of the forces will change. Consequently,
the need to monitor and stay aware is
continuous.