Competition analysis Porter's 5 forces model for competitive environment,

Benchmarking exercise, understanding competitive moves and postures

Defining an industry
An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).

Industry Structure
When the number of firms active in a market is large , there is a good chance that one of the firms may aggressively seek an advantageous position. If only few firms constitutes an industry there is usually little doubt about industry leadership.

Homogeneity of the market

When the entire market represents one large homogenous unit ,the intensity of competition is much greater than when market is segmented.

COMPETITION
It arises whenever at least two parties strive for a goal which cannot be shared or which is desired individually but not in sharing and cooperation. Competition occurs naturally between living organisms which co-exist in the same environment. The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms

Three levels of economic competition have been classified:

The most narrow form is direct competition, where products which perform the same function compete against each other. For example, one brand of pick-up trucks competes with several other brands of pick-up trucks. The next form is substitute or indirect competition, where products which are close substitutes for one another compete. For example, butter competes with margarine, mayonnaise and other various sauces and spreads. The broadest form of competition is typically called budget competition. Included in this category is anything on which the consumer might want to spend their available money. For example, a family which has Rs. 20,000 available may choose to spend it on many different items, which can all be seen as competing with each other for the family's expenditure. This form of competition is also sometimes described as a competition of "share of wallet".

ECONOMIC MODELS OF COMPETITION

The intensity of competitive interaction is rooted in in market structure. There are three types of competitive markets : Perfect competition Pure monopoly Imperfect competition.

Perfect Competition'
A market structure in which the following five criteria are met: All firms sell an identical product. All firms are price takers. All firms have a relatively small market share. Buyers know the nature of the product being sold and the prices charged by each firm. The industry is characterized by freedom of entry and exit. Sometimes referred to as "pure competition".

Pure monopoly
Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. Examples are public utilities and professional sports leagues, Characteristics A single seller: the firm and industry are synonymous. Unique product: no close substitutes for the firms product. The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied. Entry or exit is blocked.

Imperfect Competition
A type of market that does not operate under the rigid rules of perfect competition. Perfect competition implies : An industry or market in which no one supplier can influence prices, Barriers to entry and exit are small, All suppliers offer the same goods, There are a large number of suppliers and buyers, and Information on pricing and process is readily available. Forms of imperfect competition include monopoly, oligopoly, monopolistic competition, monopsony and oligopsony.

The Impact of Competition

Competition, when used in a business sense, means a rivalry between companies that sell similar products or services. Competitive impact means the ability to effectively compete with other businesses.

Competition and Private Enterprise

Competition is a very necessary part of private enterprise. If a private enterprise system is to serve the people efficiently, there must be competition among those who produce the products and among those who sell them.

Similar Products and Services

Competitors offer similar products or services for sale.

Multiple Buyers and Sellers

If there is to be competition within an economic system, there must be many buyers and many sellers. When these conditions exist in a market, no individual or business can exert undue pressure. Multiple buyers and multiple sellers ensure competition by offering choices. Choices, in turn, help keep prices at fair levels.

Freedom to Enter or Exit Business

Competition in private enterprise means that a new business can start at any time. It also means that a company or an individual can stop doing business at any time.

Monopoly
A monopoly is a business environment in which a single company, by controlling a specific supply of products or services, sets prices, prevents other businesses from entering the market, and controls the available supply of the product or service. Because these practices are anticompetitive, the government does not approve of them. The only monopolies the government allows are those in industries in which the product or service offered necessitates one supplier. This is often the case with local utilities.

FACTORS AFFECTING COMPETITIVE INTENSITY

Coping with cutthroat price competition is one of the central element of a marketing strategy. economists have identified the important factors affecting competitive intensity. Those factors were codified & popularized by Michael Porter According to Porter intense competition in an industry is neither coincidence nor bad luck.

 The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. The five forces model by Michael Porter provides another analysis tool to identify opportunities and risks when entering untapped territory in any industry or market.

 Porters five forces model, other than a SWOT analysis, provides clear action and thus does not rely solely on subjective judgment. If the actions that derived from the five forces model are synchronized with business requirements and goals it can become a substantial business driver in the competitive environment.

Competitor Analysis
Competitor analysis in marketing assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats.

Competitor Profiling
The raw material of competitive advantage consists of offering superior customer value in the firm's chosen market. Customer value is defined relative to rival offerings making competitor knowledge an intrinsic component of corporate strategy. Customer profiling can reveal strategic weaknesses in rivals that the firm may exploit.

 The proactive stance of competitor profiling will allow the firm to anticipate the strategic response of their rivals to the firm's planned strategies, the strategies of other competing firms, and changes in the environment. This proactive knowledge will give the firms strategic agility. Offensive strategy can be implemented more quickly in order to exploit opportunities and capitalize on strengths. The defensive strategy can be employed more deftly in order to counter the threat of rival firms from exploiting the firm's own weaknesses

COMPETITOR ANALYSIS:
It is required for formulating right strategy determining right positioning for the firm in the industry. Competitor analysis seeks to find answers to following questions Who are the competitors? Which are the current strategies of the competitor? What are the future goals& likely strategies? What drives the competition? When the competitor is vulnerable How the competitors are likely to respond to the strategies of others?

What strategic moves are rivals likely to make?

Unless a company pays attention to what competitors are doing, it ends up flying blind into competitive battle. A company cannot plan its moves without monitoring competitors actions, understanding their strategies & anticipating what moves they are likely to make next. Competitive intelligence is about strategies rivals are deploying, their latest moves, their resources, strengths, & weakness & the plans they have announced is essential to anticipating the actions they are likely to take next & what bearing their moves might have on a companys own best strategic moves.

Monitoring Competitors Strategies:

The best source of information about a competitors strategy comes from examining what it is doing in the marketplace & from what its management is saying about the companys plans. Addition to this what competitor is up to & its future strategy can be achieved by considering the competitors geographic arena, strategic intent, market share objectives, position on the industry strategic group map & willingness to take risks, further it is important to know whether the competitors recent moves are mostly offensive or defensive.

Good sources include The companys annual report. Recent speeches by its managers The reports of security analyst Articles in business media Companys press release Information at companys website Exhibits at international trade show Conversation with rivals customers & former employees .

The concept of Driving Forces:

It is important to judge what growth stage an industry is in , there is more analytical values in identifying the specific factors causing fundamental industry & competitive adjustment. Industry & competitive conditions change because forces are in motion that create incentive or pressure for change. The most dominant force s are called driving forces, because they influence the kinds of changes that will take place in the industrys structure & competitive environment.

COMPETITIVE FORCES
An organisation in any industry area directly affected by at least five forces. They are Competitors Potential entrants Substitutes Suppliers Buyers The combined strength of these forces affects long-term profitability of a firm

What is the Five Forces analysis?

Five forces industry analysis helps to assess and manage the long-term attractiveness of an industry. It is designed to explain the relationship between the five dynamic forces that affect an industry's performance; these are the: Intensity of competitive rivalry; Threat from new entrants; Threat from substitutes; Bargaining power of buyers; Bargaining power of suppliers.

 The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps

Rivalry Among Existing Competitors

Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability. Rivalry is usually stronger when demand for the product is growing slowly. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume.

Rivalry Among Existing Competitors (continued)

Rivalry is stronger when the cost to customers of switching brands is low. Rivalry is stronger when one or more competitors is dissatisfied with its market position and launches moves to bolster its standing at the expense of rivals. Rivalry increases in proportion to the size of the payoff from a successful strategic move.

Rivalry Among Existing Competitors (continued)

Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete. Rivalry becomes more volatile and unpredictable when competitors are more diverse in terms of their strategies, personalities, corporate priorities, resources, and countries of origin.

Rivalry Among Existing Competitors (continued)

Rivalry increases when strong companies outside the industry acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired businesses into major market contenders.

Threat of Entry by New Competitors

What are the barriers to entering the new market? What will be the reaction to your new company by businesses already actively operating there?

Barriers to Entry
Size Special technologies Training Patents Experience Brand loyalty Start-up expenses associated with buildings, equipment, and supplies Access to product and/or equipment vendors

Competitive Reaction
How will firms already doing business in the industry react to a new start-up? Will they ignore the new entrant as an insignificant competitor, or will they wage all-out war? Will the competitors put pressure on their vendors not to sell to the new business? Will they create promotional campaigns aimed at solidifying brand loyalty? Will they send secret shoppers into the new business?

Pressure from Substitute Products

Are substitute products readily available in a sufficient quantity and at a price that might cause your potential customers to switch? How do you plan to deal with substitute products? What about the danger from substitute distribution channels?

Bargaining Power of Suppliers

Are the suppliers in a position to withhold supplies of needed products? Can they extort a higher price because supply is either limited or closely controlled? What can interrupt the flow of raw materials, inventory, and supplies? If the flow is interrupted, what are the alternatives?

Bargaining Power of Buyers

Are there a few large buyers that control the industry? If so, are they in a position to exert undue price and/or quality pressure on the new company? What should the entrepreneur look for in relation to buyers? How do you plan for an industry in which buyers have a great deal of bargaining power?

Types of Competition
Direct competition refers to businesses that derive the majority of their profits from the sale of products or services that are the same as or similar to those sold by another business. Indirect competition is competition from businesses that derive only a small percentage of their profits from the sale of products or services that are the same as or similar to those sold by another business.

Chapter 7

Slide 43

Geographic Customer Distribution

Where do your potential customers live? How far will they travel to do business with you?

Competitive Analysis
A competitive analysis is defined as the identification and examination of the characteristics of a specific competing firm. A business-specific competitive analysis provides you with the information you need to pinpoint strengths and weaknesses, both yours and the competitions.

Analysis of Competitors Who Have Failed

Not only should all the identified direct and indirect competitors be analyzed, so should any that have recently gone out of business. It is important to include them in your analysis so that you can benefit from their mistakes.

Analysis of Direct and Indirect Competition

Five factors should be analyzed: Price Location Facility Competition type Rank

Sources of Information about Competitors

Yellow Pages Promotional brochures Promotional advertisements Competitors customers Competitors vendors Trade associations Competitors web sites Competitors employees News stories about competitors Shop the competition

Competitive Intelligence
Competitive intelligence (CI) is a systematic and ethical program for gathering, analyzing, and managing external information that can affect a companys plans, decisions, and operations.