MOD 4
COMPETITIVE ANALYSIS: It is a system for understanding your business' standing in the
marketplace in relation to your competition. It is a strategy for gathering intelligence and putting
that information to use. With a thorough competitive analysis as part of your initial business plan,
you'll be positioned to outshine your rivals and draw loyal customers.
PURPOSE OF COMPETITOR ANALYSIS: (1) To predict and forecast organization’s demand
and supply. (2) To formulate strategy. (3) To increase the market share. (4) To study the market
trend and pattern. (5) To develop strategy for organizational growth. (6) When the organization is
planning for the diversification and expansion plan. (7) To study forthcoming trends in the
industry. (8) Understanding the current strategy strengths and weaknesses of a competitor can
suggest opportunities and threats that will merit a response. (9) Insight into future competitor
strategies may help in predicting upcoming threats and opportunities.
COMPETITOR RESPONSE PROFILE: The competitor response profile seeks to predict the
competitor’s offensive moves and defensive capabilities. Competitor’s response profile answers
to critical questions such as: What moves or developments will provoke the competitor and how
is the competitor likely to respond or retaliate?
(1)Future Goals: As Porter observes, “a knowledge of goals will allow predictions about whether
or not each competitor is satisfied with its present position and financial results and, thereby, how
likely that competitor is to change strategy and the vigour with which it will react to outside events
or to moves by other firms?”
(2)Assumptions: It is critical to understand. The competitor’s assumptions about itself and the
competitor’s assumptions about the industry and the other companies in it. A firm may perceive
itself as a socially conscious organisation, the industry leader, quality conscious firm, highly
ethical etc. Such assumptions will, obviously, guide the way the firm behaves, including reactions
to competitors’ moves.
(3)Current Strategy: Identification of the current strategies of the competitors is a very important
component of competitor analysis. “A competitor’s strategy is most usefully thought of as its key
operating policies in each functional area of the business and how it seeks to inter-relate the
functions.”
(4)Capabilities: The ability of a firm to accomplish its goals and to respond to competitor’s moves
depends on its strengths and weaknesses. Analysis of the strengths and weaknesses of the
competitors is, therefore, very important.
PORTER'S FIVE FORCES: Understanding Competitive Forces to Maximize Profitability.
Porter's Five Forces is a simple but powerful tool for understanding the competitiveness of your
business environment, and for identifying your strategy's potential profitability. This is also
considered as a powerful tool for industry analysis. This is useful, because, when you understand
the forces in your environment or industry that can affect your profitability, you'll be able to adjust
your strategy accordingly. For example, you could take fair advantage of a strong position or
improve a weak one, and avoid taking wrong steps in future.
UNDERSTANDING PORTER'S FIVE FORCE
The tool was created by Harvard Business School professor Michael Porter, to analyze an
industry's attractiveness and likely profitability. Since its publication in 1979, it has become one
of the most popular and highly regarded business strategy tools. Porter recognized that
organizations likely keep a close watch on their rivals, but he encouraged them to look beyond the
actions of their competitors and examine what other factors could impact the business
environment. He identified five forces that make up the competitive environment, and which can
erode your profitability. These are:
(1) Competitive Rivalry: This looks at the number and strength of your competitors. How many
rivals do you have? Who are they, and how does the quality of their products and services compare
with yours? Where rivalry is intense, companies can attract customers with aggressive price cuts
and high-impact marketing campaigns. Also, in markets with lots of rivals, your suppliers and
buyers can go elsewhere if they feel that they're not getting a good deal from you. On the other
hand, where competitive rivalry is minimal, and no one else is doing what you do, then you'll likely
have tremendous strength and healthy profits.
(2) Supplier Power: This is determined by how easy it is for your suppliers to increase their prices.
How many potential suppliers do you have? How unique is the product or service that they provide,
and how expensive would it be to switch from one supplier to another? The more you have to
choose from, the easier it will be to switch to a cheaper alternative. But the fewer suppliers there
are, and the more you need their help, the stronger their position and their ability to charge you
more. That can impact your profit.
(3) Buyer Power: Here, you ask yourself how easy it is for buyers to drive your prices down. How
many buyers are there, and how big are their orders? How much would it cost them to switch from
your products and services to those of a rival? Are your buyers strong enough to dictate terms to
you? When you deal with only a few savvy customers, they have more power, but your power
increases if you have many customers.
(4) Threat of Substitution: This refers to the likelihood of your customers finding a different way
of doing what you do. For example, if you supply a unique software product that automates an
important process, people may substitute it by doing the process manually or by outsourcing it. A
substitution that is easy and cheap to make can weaken your position and threaten your
profitability.
(5) Threat of New Entry: Your position can be affected by people's ability to enter your market.
So, think about how easily this could be done. How easy is it to get a foothold in your industry or
market? How much would it cost, and how tightly is your sector regulated? If it takes little money
and effort to enter your market and compete effectively, or if you have little protection for your
key technologies, then rivals can quickly enter your market and weaken your position. If you have
strong and durable barriers to entry, then you can preserve a favourable position and take fair
advantage of it
PORTER'S GENERIC COMPETITIVE STRATEGIES
If the primary determinant of a firm's profitability is the attractiveness of the industry in which it
operates, an important secondary determinant is its position within that industry. Even though an
industry may have below-average profitability, a firm that is optimally positioned can generate
superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that
a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope, three generic strategies result: cost
leadership, differentiation, and focus. These strategies are applied at the business unit level. They
are called generic strategies because they are not firm or industry dependent.
(1) cost leadership strategy: This generic strategy calls for being the low cost producer in an
industry for a given level of quality. The firm sells its products either at average industry prices to
earn a profit higher than that of rivals, or below the average industry prices to gain market share.
In the event of a price war, the firm can maintain some profitability while the competition suffers
losses. Even without a price war, as the industry matures and prices decline, the firms that can
produce more cheaply will remain profitable for a longer period of time. The cost leadership
strategy usually targets a broad market. Some of the ways that firms acquire cost advantages are
by improving process efficiencies, gaining unique access to a large source of lower cost materials,
making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether.
If competing firms are unable to lower their costs by a similar amount, the firm may be able to
sustain a competitive advantage based on cost leadership. Firms that succeed in cost leadership
often have the following internal strengths: (a) Access to the capital required to make a
significant investment in production assets; this investment represents a barrier to entry that many
firms may not overcome. (b) Skill in designing products for efficient manufacturing, for example,
having a small component count to shorten the assembly process. (c) High level of expertise in
manufacturing process engineering. (d) Efficient distribution channels.
(2) differentiation strategy: A differentiation strategy calls for the development of a product or
service that offers unique attributes that are valued by customers and that customers perceive to be
better than or different from the products of the competition. The value added by the uniqueness
of the product may allow the firm to charge a premium price for it. The firm hopes that the higher
price will more than cover the extra costs incurred in offering the unique product. Because of the
product's unique attributes, if suppliers increase their prices the firm may be able to pass along the
costs to its customers who cannot find substitute products easily. Firms that succeed in a
differentiation strategy often have the following internal strengths: (a) Access to leading
scientific research. (b) Highly skilled and creative product development team. (c) Strong sales
team with the ability to successfully communicate the perceived strengths of the product. (d)
Corporate reputation for quality and innovation.
(3) focus strategy: The focus strategy concentrates on a narrow segment and within that segment
attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the
group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys
a high degree of customer loyalty, and this entrenched loyalty discourages other firms from
competing directly. Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing
a differentiation-focused strategy may be able to pass higher costs on to customers since close
substitute products do not exist. Firms that succeed in a focus strategy are able to tailor a broad
range of product development strengths to a relatively narrow market segment that they know very
well. Some risks of focus strategies include imitation and changes in the target segments.
Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to
compete directly.
BLUE OCEAN STRATEGY
Blue oceans strategy is the approach that suggests a company is better off searching for ways to
play in uncontested market places instead of engaging with competition in existing marketing
spaces. It is the idea of trying to find market spaces that are free of competitors by creating and
capturing new demand, making the competition irrelevant. Blue Ocean is a market without
competitors or even customers. Blue ocean is not a monopoly per se, but rather a market that is yet
to be discovered by a wide audience. Its slogan is “Create. Don’t compete”. It is blue because
there’s nobody there, the ocean is crystal clear. An example of a blue ocean strategy is Netflix.
Netflix created uncontested marketing space by selling TV shows over the internet which no one
else was currently doing. By doing this they made the competition irrelevant, creating and capture
new demand for a service not currently available on the market. By doing this they were able to
break the value-cost trade off by providing better value than cable TV (because you could watch
any show you wanted at any time, without commercials) at a lower cost than cable TV. By entering
a blue ocean they were able to pursue low cost and differentiation leadership compared to the
alternatives to their product.
CHARACTERISTICS: (1) New unknown market (2) There is no competition as there are no
competitors (3) Simultaneously use differentiation and low price strategies (4) Seeking for
potential customers (5) Demand development is required (6) Defining the (yet) non-existent needs
(7) Giving innovation a sense of purpose.
FOUR ACTION FRAMEWORKS: (1) Eliminate: Which of the factors that the industry takes
for granted should be eliminated? (2) Reduce: Which factors should be reduced well below the
industry’s standard? (3) Raise: Which factors should be raised well above the industry’s standard?
(4) Create: which factors should be created that the industry has never offered?
SIX PRINCIPLES OF BLUE OCEAN STRATEGY
I. Formulation principles:
(1) Reconstruct Market Boundaries: (a) Looks across alternative industries (b) Looks across
strategic group within industry (c) Redefines the industry buyer group. (d) Looks across to
complementary product and service offerings (e) Participates in shaping external trends over time
(2) Focus on the big picture, not the numbers: The Four Steps of Visualizing Strategy: (a) Visual
Awakening: Compare the business with your competitor’s by drawing “as is” strategy canvas (b)
Visual Exploration: See which factors you should eliminate, create or change (c) Visual Strategy
Fair: Draw your “to be” strategy canvas based on insights from field observations. (d) Visual
Communication: distribute your before-and-after strategic profiles on one page for easy
comparison.
(3) Reach Beyond Existing Demand: First tier: "Soon to be" non-customers who are the edge of
your market, waiting to jump ship. Second tier: "Refusing" non-customers who consciously
choose against your market. Third tier: "Unexplored" non-customers who are in markets distant
from yours.
(4) Get The Strategic Sequence Right: The sequence are: Buyer Utility, Price, Cost, Adoption.
II. Execution principles:
(A) Overcome Key Organizational Hurdles:
• Cognitive Hurdle (status quo): (a) Ride the "Electric Sewer" (b) Meet with Disgruntled
Customers
• Resource Hurdle: (a) Redistribute resources to your hot spots (b) Redirect resources from
your cold spots (c) Engage in horse trading.
• Motivational Hurdle: (a) Zoom in on Kingpins (key influencers) (b) Place kingpins on a
fishbowl. (c) Atomize to get the organization to change itself.
• Political Hurdle: (a) Secure a consigliore on your top management team. (b) Leverage your
angels and silence your devils.
(B) Build Execution Into Strategy: Fair Process of Strategy
• Strategy Formulation Process: Fair Process - Engagement, Explanation, Expectation
clarity
• Attitudes: Trust and Commitment-"1 feel my opinion counts
• Behavior: Voluntary Cooperation "I will go beyond the call of duty"
• Strategy Execution: Exceeds Expectation self initiated
GENERIC STRATEGIES AND INDUSTRY FORCES: These generic strategies each have
attributes that can serve to defend against competitive forces. The following table compares
some characteristics of the generic strategies in the context of the Porter's five forces.
Industry Generic Strategies
Force
Cost Differentiation Focus
Leadership
Entry Ability to cut Customer loyalty can Focusing develops core
price in retaliation discourage potential competencies that can act as
Barriers
deters potential entrants. an entry barrier.
entrants.
Buyer Ability to offer Large buyers have Large buyers have less
Power lower price to less power to power to negotiate because
powerful buyers. negotiate because of of few alternatives.
few close alternatives.
Supplier Better insulated Better able to pass on Suppliers have power
Power from powerful supplier price because of low volumes, but
suppliers. increases to a differentiation-
customers.
Focused firm is better able
to pass on supplier price
increases.
Threat of Can use low price to Customer's become Specialized products & core
Substitutes defend against attached to competency protect against
substitutes. differentiating substitutes.
attributes, reducing
threat of substitutes.
Rivalry Better able to Brand loyalty to keep Rivals cannot meet
compete on price. customers from rivals. differentiation-focused
customer needs.
RED OCEAN STRATEGY BLUE OCEAN STRATEGY
Compete In Existing Market Space Create Uncontested Market Space
Beat The Competition Make The Competition Irrelevant
Capture More Of Existing Demand Create And Capture New Demand
Make The Value/Cost Trade-Off Disprove The Value/Cost Trade-Off
Align the whole system of a firm's activities Align the whole system of a firm's activities
with its strategic choice of differentiation or in pursuit of differentiation and low cost
low cost