Competitve Space

Markets and Competitive Space

Chapter 2

Chapter Road Map

• Interrelationship between markets and strategies

• Determination of product-market scope and structure

• Description and analysis of buyers• Process of competitor analysis • Guidelines for developing strategic vision about

scope and composition of markets in the future• Estimation of market size

Markets and Strategies

• Markets and Strategies are Interlinked• Market changes often require altering business and marketing strategies Managers who do not understand their markets and how they will change in

future may find their strategies inadequate because: Buyers value requirements change New products become available that better satisfy buyers’ requirements Many forces are causing this change: The transformation of industries Changing the structure of markets, and competitive space These influences create: Both opportunities and threats Altering the nature and scope of products, markets, and competitive space Market-Driven companies proactively alter their strategies to deliver superior

value to existing and new customers


• Thinking outside the Competitive Box There is a tendency for executives to think in terms of stable “competitive

Box” around their businesses defined by technology, geography , competitors, and existing customer base

This frame of reference enables: Analytical tools to be successfully applied Applied research to be carried out Plans to be made This traditional perspective is logical in stable markets but fails to address

the reality that real threats and opportunities may be present outside the competitive box

Increasingly new markets , new types of competition are emerging that: Fuel market growth Cannibalize the existing base of incumbent markets

Markets and Strategies Effective processes for understanding markets and

competitive space and guiding the strategic initiatives appropriate for market requirement require thinking outside the competitive box

PepsiCo shows impressive performance in understanding and catering to changing tastes in beverage and snack market, rather than trying to change and adapt products to them.

To capitalize on the growing market for new age herbal enhanced beverages. PepsiCo acquired SoBe beverages, extended brand into energy drink for the school age market.

PepsiCo defines its mission as serving the consumer, not protecting the existing brand

Thinking outside the Competitive BoxThe competitive Box

Conventional Value Proposition

Existing Customer Base

New Customer Base(s)

New Types of Competition

New Customers

New Business Model

New Customer

Traditional Competitors


• An Array of Challenges1. Disruptive Innovation May impact various technologies and industries Indications of these new threats to existing firms can be identified

through perspective market sensing outside the competitive box Complacency and management hesitancy to consider options beyond the

core business focus are core problems Examples of disruptive innovations Amazon.com on traditional bookstores Digital photography on cameras and film Steel mini-mills on integrated mills Disruptive innovations may meet the needs of new segments or entire

markets


2. Commoditization Threats When modularization( products composed of standardized components) occurs product

became commodities, making it difficult to earn anything more than subsistence returns When the personal computer market became commoditized the opportunity for profit

shifted to: Microprocessor (Intel) Operating system software (Microsoft) Commoditization was the key factor for IBM’s management in deciding in moving out of

PC market The potential effect of commoditization in markets highlights the importance of: Developing vision about how the market is going to change Deciding what business strategy initiatives to follow s Strategies to overcome commoditization threats may involve Competing at a different stage in the value chain Moving into different product category that provide attractive growth and profit

opportunity


3. Creating New Market Space Actions require finding and pursuing opportunities to offer

potential buyers value in markets and segments not being served The purpose is to target new opportunities where buyers’ value

requirements are not being satisfied Unit sales of camera phone were over four times digital camera

sales Cell phone users have access to digital photography because the

camera is subsidized by wireless carriers Creating new market space requires changing management’s

traditional strategic perspective of looking for market opportunities inside the competitive box

Markets and Strategies4. Fast-Changing Markets Fast changing markets require modification in management’s strategic

thinking Indications of change are signaled by: Shifting customer value requirements New technologies Changes in competitive space New business models Fast changing may sometimes be difficult to predict and strategy

initiatives may necessitate trial and error adjustments guided by market responses

Not acknowledging or responding to the threats and requirement of fast changing markets are real danger

Matching Needs with Product Benefits

The term product-market recognizes that a market exists only when:

Existence of buyers with needs Who have ability to purchase goods and services Products are available to satisfy the needs Competitive strength comes from putting customer needs at

the center of company’s operation The ability to buy and willingness to buy indicate that there is

demand for a particular product A product-market matches people with needs to the product

benefits that satisfy those needs

Matching Needs with Product Benefits

A product-market combines the benefits of a product with the needs that motivate people to express demand for that product

Markets are defined in terms of : needs substitutability among different product and by different ways in which people choose to satisfy their needs A product-market is the set of products: judged to be substitute within those usage situation in which similar pattern of benefits are sought by groups of customers By determining how a firm’s specific product or brand is positioned within the product

market : Management can monitor and evaluate changes in the product-market Decide whether alternate targeting and positioning strategies and product offering are

needed When defining product-market, it is essential to establish boundaries that are broad

enough to contain all of the relevant product categories which are competing for the same buyer needs

Determining Product-Market Boundaries and Structure

• Product-Market Structure A company’s brand competes with other companies brands in generic,

product type, product variant market• The Generic product-market Includes a broad group of product that satisfy a general yet similar

need The starting point in determining product-market boundaries is to

identify the particular need or want that is being satisfied Since people with similar need may not satisfy the need in the same

manner, generic product markets are often heterogeneous, containing different end-user groups and several type of related product

Several classes of or types of products can be combined to form the generic product market for kitchen appliances

Determining Product-Market Boundaries and Structure

• Product-type product market (product class) Includes all brands of a particular product type (ovens) for

use in food preparation by consumers The product type is a product category or product

classification that offers a specific set of benefits intended to satisfy a customer need or want in specific way

Differences in the product within a product-type product-market may exist, creating product variants (product form)

Electric, gas, microwave ovens all provide heating functions but employ different technologies

Defining and Analyzing Product-Markets Determining the

Boundaries and structure of the Product-Market

Form the product-Market

Describe and Analyze End

Users

Analyze Competition

Forecast Market Size and Rate of

Change

Guidelines for Definition

• In identifying the product market, it is helpful to indicate

1. The basis for identifying buyers in the product-market of interest (geographical area, consumer business)

2. The market size and characteristics3. Brand and or product categories competing

for the needs and wants of the buyers included in product-market

Determining The Composition Product-Market

Start with the generic need satisfied by the product category of interest to

management

Identify the product categories(types) that can satisfy the generic need

Identify the specific product-markets within the generic

product-market

A B C D

SUPER MARKETS

MICROWAVEOVENS

CONVENIENCESTORES

TRADITIONAL RESTAURANTS

Illustrative Fast-Food Product-Market Structure

FAST-FOOD MARKET

Forming Product-Markets for Analysis

• Purpose of Analysis When different products satisfy the same need, the

product-market boundaries should contain all relevant products and brands

Product-market boundaries should be determined in a manner that will facilitate strategic analysis and thinking, enabling management to capitalize on existing and potential opportunities and to avoid possible threats

The photography product market should include digital cameras, related equipment and services, smart phones, and services


I. Changing Composition of Markets Product market structure may change as: New technologies become available New competition emerges Industry classification often do not clearly define product-market

boundaries Industry-based definitions do not consider alternative ways of

meeting the needs Industry classification typically have a customer supply rather

than demand orientation People may meet their need for food with products from several

industries


II. Extent of Market ComplexityThree characteristics of markets capture a large

portion of the variation in their complexity1. The functions or uses of product needed by the

customer2. The technology used in the product to provide

the desired function3. The different customer segments using the

product to perform a particular function


1. Customer function: Value provided to the customer The function provides the capability to satisfy the

value requirements of the customers In case of personal computer, the functions provided

may be: Entertainment provided for the household Information search Internet purchasing Performance of various business functions


2. Different technology: May satisfy the use situation of the customer Steel and aluminum materials meet a similar need in various

situations The technology consists of the materials and designs

incorporated into products In the case of service , technology relates to how the service is

rendered Voice calls can be sent via: Internet Traditional phone lines Wireless phones


3. Customer segments Recognizes the diversity of the needs of customers in a particular

product-market A specific brand and model will not satisfy all buyers’ needs and

wants It is important to focus on the end user of the product when defining the market the end user drives demand for the

product When end users’ needs and wants change the market changes Even though a producer considers the distributor to be the

customer the market is defined by the consumer who purchase the product for consumption

Illustrative Product – Market Structure

•Generic Product Class

•Product Type

•Variant A

Regular•Variant B

•Brands

Food and beveragesfor breakfast meal

Cereals

Ready to eat

NaturalPre-sweetened

Life

Nutritional

Special KProduct 19

Identifying andDescribing Buyers

HowBuyersMake

Choices

BuildingCustomerProfiles

EnvironmentalInfluences

DESCRIBINGAND

ANALYZINGEND-USERS

Describing and Analyzing End-Users

• Illustrative buyer characteristics in consumer markets:

Family size, age, income, geographical location, sex, and occupation

• Illustrative factors in organizational markets: Type of industry Company size Location Type of products


BUYING DECISION PROCESS:

1. Problem recognition

2. Information search

3. Alternative evaluation

4. Purchase decision

5. Post-purchase behavior


• External factors influencing buyers’ needs and wants: Government, social change, economic

shifts, technology etc.• These factors are often non-controllable

but can have a major impact on purchasing decisions


• Building Customer Profiles• Start with generic product – market

• Move next to product- type and variant profiles >> increasingly more specific

• Customer profiles guide decision making (e.g. targeting, positioning, market segmentation etc.)

ANALYZING COMPETITION

1. Define the competitive arena for generic, specific, and variant product-markets

2. Identify and Describe Key Competitors

5. IdentifyNew

Competitors

3. Evaluate Key

Competitors

Analyzing Competition

4. Anticipate Actions by

Competitors

ANALYZING COMPETITION

• Defining Competitive Arena Competition often includes more than the firms that direct

competitors( Coke and Pepsi) The product variant is the most direct type of competitions Other product categories also compete for buyers A complete understanding of the competitive arena helps to

guide strategy design and implementation Since competition often occurs within specific industries, study of

the industry structure is useful in: The competitive arena Recognizing that more than one industry may be competing in

the same product-market Digital photography product-market includes traditional camera

and film competitors and electronic industry competitors

Examples of Levels of Competition

Diet-RiteCola

Diet PepsiDiet Coke

Product from competition:

diet colas

Regular colas

Diet lemonlimes

Lemon limes

Fruitflavored

colas

Product categorycompetition:

soft drinks

Bottlewater

Wine

Beer

Coffee

Juices

Generic competition:beverages

Baseballcards

FastFood

VideoGames

IceCream

Budget competition:food & entertainment

Industry Analysis

• Industry size, growth, and composition

• Typical marketing practices

• Industry changes that are anticipated (e.g. consolidation trends)

• Industry strengths and weaknesses

• Strategic alliances among competitors

Analysis of the Value-Added chain

Industry FormIndustry EnvironmentCompetitive Forces Value

AddedChain

SUPPLIERS

PRODUCERS

WHOLESALERS/ DISTRIBUTORS

RETAILERS/DEALERS

CONSUMER/ ORGANIZATIONAL END USERS

Figure 3.3: The Five Forces Model of Competition

3-36

Analyzing the Five Competitive Forces: How to Do It

Step 1: Identify the specific competitivepressures associated with each ofthe five forces

Step 2: Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak?

Step 3: Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits

Threat of New Entrants/ Entry BarriersFactors HUF

AMUFA

Neutral MFA HFA comment

Economies of scaleCapital require redAccess to distribution channelsExpected retaliationDifferentiationBrand LoyaltyExperience CurveGovt. Action

small

Low

Ample

LowLow

Low

InsignificantLow

large

High

Restricted

High High

High

Significanthigh

Exit Barriers

• Exit BarriersFactors HUA MUA Neutr

alMA HA Comments

Specialized AssetsFixed Cost of ExitStrategic interrelationshipGovernment Barriers

Hi

Hi

Hi

Hi

LOW

Low

Low

Low

Entry Barriers

Exit Barrierslow high

high

low Low, stable returns

Low, risky returns

High, stable returns

High, risky returns

Barriers and profitability

Competitive PressuresAmong Rival Sellers

• Usually the strongest of the five forces

• Key factor in determining strength of rivalry

– How aggressively are rivals using various weapons of competition to improve their market positions and performance?

• Competitive rivalry is a combativecontest involving

– Offensive actions

– Defensive countermoves

Competitive Rivalry

Factors HUFA

MUFA

Neutral

MFA HFA

Comment

Composition of CompetitorsMkt. Growth rateScope of competitionFixed storage CostCapacity Increase

Degree of differentiation

Strategic Stake

Equal Size SlowGlobal

High

Large

Commodity

High

Unequal SizeHighDomesticLow

Small

High

Low

Competitive Pressures from Substitute Products

Concept

Substitutes matter when customersare attracted to the products of

firms in other industries

Examples

Sugar vs. artificial sweeteners

Eyeglasses and contact lens vs. laser surgery

Newspapers vs. TV vs. Internet

How to Tell Whether SubstituteProducts Are a Strong Force

• Whether substitutes are readilyavailable and attractively priced

• Whether buyers view substitutesas being comparable or better

• How much it costs end usersto switch to substitutes

Threat Of Substitute Product

Factors HUFA

MUFA N MFA HFA Comment

Threat of Obsolescence of Industry’s productAggressiveness of substitute products in promotionSwitching CostPerceived price/ value

Hi

Hi

Low

Hi

Low

Low

High

Low

Competitive Pressures From Suppliersand Supplier-Seller Collaboration

• Whether supplier-seller relationships represent a weak or strong competitive force depends on

– Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor

– Nature and extent of supplier-sellercollaboration in the industry

Power of Supplier

Factors HUFA

MUFA N MFA HFA comment

# of important SuppliersSwitching cost

Availability of substitutesThreat of forward integrationImportance of Buyer industry to supplier’s profitQuantity purchased by the industry of supplier’s product Suppliers product an important input to the buyer’s business

Few

High

low High

small

low

Highly Important

Many

Low

high Low

large

High

Less important

Power Of Buyer

Factors HUFA MUFA N MFA HFA Comment

Number of Important buyersThreat of Backward integrationProduct suppliedSwitching cost% of buyer’s costProfit earned by buyerImportance to final quality of buyers Pr.

Few

High

Commodity

lowHigh

Low

High

Many

Low

Specialty

highLow

High

low

Overall Industry attractiveness

Factors Unfavorable

Neutral Favorable

Entry BarriersExit BarriersRivalry among existing firmsPower of buyersPower of SuppliersThreat of substitutes

Strategic Implications ofthe Five Competitive Forces

• Competitive environment is ideal froma profit-making standpoint when

– Rivalry is moderate

– Entry barriers are highand no firm is likely to enter

– Good substitutesdo not exist

– Suppliers and customers arein a weak bargaining position

Coping With theFive Competitive Forces

• Objective is to craft a strategy to

– Insulate firm fromcompetitive pressures

– Initiate actions to producesustainable competitive advantage

– Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry

Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability

• As a rule, the stronger collective impact of the five forces, the lower the combined profitability of industry participants

• Fierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levels

• An industry can be competitively unattractive even when not all five forces are strong

• Intense competitive pressure from just two or three forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business

Key Competitor Analysis

• Business scope and objectives• Management experience, capabilities, and

weaknesses• Market position and trends• Market target(s) and customer base• Marketing program positioning strategy• Financial, technical, and operating

capabilities• Key competitive advantages (e.g., access to

resources, patents)

Extent of Market Coverage

CustomerSatisfaction

CurrentCapabilities

PastPerformance

Competitor Evaluation

Identifying New Competitors• New competitors may come from four major sources1. Companies competing in related product-market2. Companies with related technologies3. Companies already targeting in similar customer groups with other

products4. Companies competing in other geographical markets with similar products• Market entry by a new competitor is likely under one or more of these

conditionsI. High profit margins are being achieved by market incumbentsII. Future growth opportunities in the market are attractiveIII. No major market-entry barriersIV. Competition is limited to one or few competitorsV. Gaining an equivalent ( or better) competitve advantage over the existing

firm(s) serving the market is feasible

MARKET SIZE ESTIMATION

UnrealizedPotential

CompanySales

Forecast

IndustrySales

Forecast

Market PotentialEstimate

Product-Market Forecast Relationships (area denotes sales in $’s)

Market Size Estimation

• Market PotentialThe upper limit of sales that can be achieved

from a defined product-market during specified time period

It includes the total opportunities for sales by all the firms serving the product-marketing

Actual industry sales in a specified year fall somewhat below market potential

Market Size Estimation

• Sales forecast The sales-forecast indicates the expected sales for a defined

product-during a specified time period The industry sales forecast is the total volume of sales expected by

all firms serving the product market The sales forecast can be no greater than market-potential and

typically falls short of potential

• Market Share Company sales divided by the total sales of all firms for a specified

product-market determines the market share of a particular firm Market share can be used to forecast future company sales and to

compare actual market position among competing brands

DEVELOPING A STRATEGIC VISION ABOUT THE FUTURE

Industry Boundaries Blurring and Evolving

Competitive Structure and Players Changing

Value Migration Paths

Product Versus Business Design Competition

Firms are Collaborating to Influence Industry Standards

Source: C. K. Prahalad, Journal of Marketing, Aug. 1995, vi.

Competitve Space

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