Competition refers to rivalry among various firms operating in a particular market that satisfy the same customer needs. The industry structure affects long run profitability. Therefore, competitors should be understood and monitored. Their actions can spoil an otherwise attractive industry, their weaknesses can be a target for exploitation and their response to a firm’s marketing initiatives can have impact on its success.
Competitive information can be obtained from marketing research surveys, recruiting competitors’ employees (sometimes interviewing them is sufficient), secondary sources (trade magazines, distributors, stripping down competitors’ products and gathering competitors’ sales literature).
A company needs to answer five key questions:
Who Are the Competitors?
Competitive myopia prevails which is reflected in a narrow definition of competition resulting in too restricted a view of which companies are in competition. Only those companies who are producing technically similar products are considered to be the competition (paint companies). This ignores customers’ purchasing substitute products that perform similar functions (polyurethane varnish firms), and those that solve the same problem or eliminate it in a dissimilar manner (PVC double glazing company).
The actions of all these types of competitors can affect the performance of the firm and therefore need to be monitored. Their responses also need to be assessed as they will determine the outcome of any competitive move that the firm may wish to make.
What Are Their Strengths and Weaknesses?
A precise understanding of competitor strengths and weaknesses is an important prerequisite of developing competitor strategy. In particular, it locates areas of competitive vulnerability. Success is achieved when strengths of the firm are concentrated against the competitors’ weakness. Internal, market and customer information should be gathered.
Financial data concerning profitability, profit margins, sales and investment levels, market data relating to price levels, market share and distribution channels used, and customer data concerning awareness of brand names and perceptions of brand and company image, product and service quality and selling ability may be relevant.
Management needs to decide the extent to which each element of information is worth pursuing. The process of data gathering needs to be managed so that information is available to compare our company with its chief competitors on the key factors for success in the industry.
This is a three-stage process:
1. Identify key factors for success in the industry. This should be restricted to six to eight factors, otherwise analysis becomes too diffuse. There is some managerial judgement in their identification. The key success factors may be functional (financial strength or flexible production), or generic (ability to respond quickly to customer needs, capability to provide after sales service). Since these factors are critical for success, they should be used to compare the company with its competitors.
2. Rate one’s company and competitors on each key success factor using a rating scale.For instance, out of 5, how may points would accrue to one’s own company and competitors on parameters such as innovativeness, financial strength, product quality etc.
3. Consumer implications for competitive strategy: It is important to judge the implications of each of the key success factors on customer perceptions. For instance, how can the financial strength of a company be translated into better value delivery for customers? Would it translate into lower prices, hiring more competent personnel or improving technology to serve customers better, or improving product quality or introduce innovations?
What Are the Strategic Objectives and Thrusts of Competitors?
Companies may decide to build, hold or harvest products and SBUs. A build objective is concerned with increasing sales and market share, a hold objective suggests maintaining sales and market share, and harvest objective is followed when emphasis is on maximizing short term cash flow through slashing expenditure and raising prices whenever possible. It is useful to know what strategic objectives are being pursued by competitors because their response pattern depends on objectives.
If the firm is considering building market share of the product by cutting price, a competitor who is also building is almost certain to follow the price cut. The competitor who is content to hold market share is also likely to respond, but a company following a harvest objective is much less likely to reduce price because it is more concerned with profit margins than unit sales.
If the firm is considering a price rise, a competitor pursuing a build objective is not likely to follow. The price of a product subject to hold objective is now likely to rise in line with the increase, while a company using harvest objective will certainly take the opportunity to raise its products’ price, may be more than the firm that initiated the price increase.
What Are Their Strengths?
Competitor analysis will decide positioning strategy. This involves assessing the competitor’s target markets (for various products) and differential advantage. The marketing mix strategies (price levels, media used for promotion and distribution channel) may indicate target markets. Marketing research into customer perceptions can be used to assess relative differential advantage.
Companies and products need to be continuously monitored for changes in positioning strategy.
Strategies can also be defined in terms of competitive scope. Are competitors attempting to service the whole market, a few segments or a particular niche? If the competitor is a niche player, it is likely that it will be content to stay in that segment or use it as a precursor to move into other segments in the future.
What Are Their Response Patterns?
A major objective of competitor analysis is to be able to predict competitor response to market and competitive changes. Their past behavior is a guide as to what they might do. Market leaders try to control competitor response by retaliatory action. If the leader makes a price move and a competitor undercuts it, then he should be shown that this action had been noticed and will be punished. By punishing competitor moves, market leaders can condition competitors to behave in predicted ways, for instance, by not taking advantage of a price rise by the leader.
The history, traditions and managerial personalities of competitors also have an influence on competitive response. Some markets are characterized by years of competitive stability with little serious strategic challenges to any of the incumbents. This can breed complacency with predictably slow reactions to new challenges. For instance, innovation that offers superior customer value may be dismissed as a fad, not worthy of serious attention.
Another situation where competitors are unlikely to respond is where their previous strategies have restricted their scope for retaliation. An example of such a hemmed-in competitor was a major manufacturer of car number plates. A new entrant focused on one geographical base, supplying the same quality product but with an extra discount. The national supplier could not respond, since to give discount in this region would have meant granting the discount nationwide.