IMM MARKETING 1 M.

MUDIMU

CHAPTER 3

ANALYZING THE COMPETITIVE SITUATION

Introduction

Business is all about competition as organizations make efforts to outcompete and outperform
each other. It is therefore important for an organization to have an understanding of the
competitive environment in which it operates in terms of the competitive structure of the
industry.

Perspectives / level of competition

It is important to identify competition in terms of the level which it occurs.

Level 1 (similarity of product / service)

Those competitors who provide similar products and services to the organization coke and Pepsi
compete at level 1

Level 2 (Those in the same product / service category

Those competitors who offer same product category. Schweppes Juice drink compete at level 2
with Pepsi.

Level 3 (Those products / services that compete to satisfy the same need)

Those competitors that offer products and services that compete to satisfy the same need. LG
mineral water compete with Pepsi.

Level 4 (Product and services that compete for the same spending power)

Where because of the same spending power consumers will be influenced to substitute one
product for another Pepsi compete with Bakers Inn Bread.

Structure of competition

There are four types of industry structures and these are:-

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a. The monopoly situation
Where there is only one suppliers or producer of a particular product or service.
Consumers are defenseless against products from such a supplier as they do not have
other alternatives
b. The monopolistic situation
Where there are many smaller to larger suppliers offering similar but not identical
products. The products are identical although each may have a small percentage of the
market. Consider fast food outlets in Zimbabwe.
c. The oligopoly situation
Where there are few, but large suppliers of a product or service. These companies try to
build a competitive advantage through product differentiation. Consider the producers of
cement in Zimbabwe.
d. The pure competition situation
This is where there is a large number of companies that offer a standardized product or
service that lacks differentiation consider the Petroleum retaining industry in Zimbabwe.

Competitive structure of an industry

Formulating and designing visible and sound strategies requires an understanding of the industry
and its competition. The state of competition in an industry depends on five basic forces namely:

a. Potential entrants (threats of new entrants)

b. Suppliers (bargaining power of suppliers)
c. Buyers (bargaining power of buyers)
d. Substitutes (threats of substitute products/ services)
e. Industry competition (rivalry among existing firms)

It is the collective strengths of these five forces which determine the ultimate profits potential of
an industry. The five forces are referred to as the Porter’s five factors/ Porter’s Model of
competitive forces and assist in explaining the competitive structure (character) of an industry.
The five factors are now looked at in detail.

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Porter’s 5 Forces model

Potential
Entrants

Threats of new entrants

Bargaining power
of suppliers Industry
Bargaining power
competitors of suppliers
Suppliers
Rivalry among Buyers
existing firms

Threats of substitute’s
products or service Substitute

1. Threat of new Entrants potential entrants

New entrains into an industry enhance competition, bring new capacity, the desire to gain
market share and new substantial resources. In Zimbabwe Net One was the first company
to provide Mobile communicating services. When ECONET (Electronic
Communications Networks) entered in Mobile communications Industry it created new
competition to existing firms such as Net-one.
The seriousness of the threat of entry depends largely on the barriers present and on the
reaction from existing competitors that the entrant can expect. Major sources of barriers
to entry are:-
a. Economies of scale
These determine entry in the industry as they force the new entrant either to come on
a larger scale or to accept cost advantages. Economies of scale include purchasing
financial, technical and risk bearing economics.
b. Cost advantage/ cost of entry
Where those already in the industry may have easy access to raw materials at lower
cost, superior production/ facilities, favourable location.

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c. Restricted access to distribution channels / channel crowding
A strong distribution position by those already to the industry will prevent new
entrants. Using the same channels also make it difficult to compete.
d. Government policy
The government can limit entry to industries through controls such as licenses and
laws and regulations. For example in Zimbabwe the cellphone industry is controlled
as there is need to obtain license and meeting other requirements. The Broadcasting
Industry is also controlled through the Broadcasting Act.
e. Product differentiation and benefit costs
Brand identification create a barrier by forcing new entrance to spend heavily to
overcome customer loyalty. It is therefore difficult to compete against products with
distinct and unique features.
f. Strong brand identify and customer loyalty
Building strong brand will make it difficult for competitors to enter the market coca
cola has build coke a very strong brand which has not been knocked off by any other
brand.
g. Network effects
A positive network effect occurs where there is an increasing number of consumers
buy a product, and this lead to increased demand. New entrants may not overcome
such network effects.
h. High capital requirements
When capital requirements to enter an industry are very high, this prevents new
entrants from entering into the industry.
2. Bargaining power of suppliers
If suppliers of raw materials, and inputs are strong they can depress the profits to be
earned in the industry. Suppliers are powerful under the following circumstances:
a. It is dominated by a few companies and there are many buyers (monopolistic)
b. The product is unique/differentiated and has few substitutes (quality of raw materials)
c. The industry is not an important customer to the suppliers group
d. Suppliers consider forward integration

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e. Buyers do not consider backward integration
3. Bargaining power of buyers
If buyers are strong they can force price down or demand a higher quality and they may
squeeze profits of producers. For example OK Z0ibabwe is a powerful buyer who may
force Olivine Industries to reduce prices. A buyer group is powerful if:-
a. It purchases in large volumes and the supply industry depends largely on it for a
large % of profits
b. The buyer pose a threat of integrating backward
c. When the buyers are large and few in number and the industry that suppliers consist
of many small companies.
d. The industry’s product is unimportant to the quality of the buyer’s products or
services
e. The products they buy are standard or undifferentiated and switching costs are low.
4. Threats of substitutes
An industry’s attractiveness is less if the product it produce can be substituted by
alternative products/ services. Suitable substitutes will limit the potential of the industry
by placing a ceiling on prices it can charge.
The threat of substitute products depend on the following:-
a. Buyers willingness to substitute the product e.g. an alcoholic drinker willing to
substitute clear bear with opaque beer
b. The relative price, quality and performance of the substitute (benefits)
c. The advantage the substitute brings in comparison to the industry’s product
d. How much is will it cost switch to substitutes
e. The images, reputation and identify of the substitute
f. Safety and security benefits offered by substitute products
g. Accessibility benefits-where substitutes products are easily accessible.
5. Intensity of Rivalry
Industry profitability is reduced if there is intense competition among competitors and
this takes the form of jockeying for position. The intense rivalry is related to the
presence of the following factors.

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a. Structure of competition (numerous competitors equal in size and power)
b. Exit barriers- these are economic, strategic and emotional factors that prevent
companies from leaving the industry and common barriers include:-
c. Investments in assets and equipment that no other alternative use
d. High cost of exist such as pension and benefits to employees
e. Economic dependence on an industry as the only source of revenue for the company
f. Degree of differentiation- differentiated and unique products that are difficult to cope
will reduce intensity of competition
g. Slow industry growth and fighting for market share between expansion-minded
members and this comes as a result of the level of industry demand.
h. Switching costs- where there are low switching costs, this increases intensity of
competition
i. Knowledgeable customers- customers that have sufficient knowledge about products,
tend to evaluate cost and quality and this increases rivalry.

Analyzing current competitors

An organization should also understand its current competitive market position, hence the
need to understand the following factors

a. Size, growth and profitability of the industry

A competitor with a strong market position will continuously achieve growth and
profitability and this also indicates growth in the industry.
b. Image and positioning strategy
An organization with a good image in the market, vis-à-vis competitors, the more
consumers are most like to purchase the company’s products
c. Objectives of the competitor
Analyzing the competitors objectives enable an understanding of how they may
respond to different competitive position
d. Strategies of competitors
An understanding of which strategies the competitor is using will enable formulation
of and implementation of better strategies

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e. Culture of competitors
The culture of the company in terms of values, norms provide an indication of the
types of customers they seek to target
f. Cost structure
There is need to analyse the cost structure of the industry i.e. cost machinery, cost of
raw materials labor and manufacturing

Analyzing potential competitors

Understanding the potential competitor’s position is also important hence the need to
analyse the activities of the potential competitors which include

a. Market expansion
Where a competitor goes beyond the current market served and these could be other
segments, regions or countries.
b. Product line extension
Where an organization add more new products to its product line
c. Backward integration strategy
Where an organisation has the ability to manufacture its own raw materials, component
parts and inputs used in the production of goods and services.

Analyzing industry key success factors (KSKs)

Key success factors are the make or break factors and these also differentiate between
strong companies and weak companies. There are three key steps in CSF analysis and
those are:

Step 1: Identify key factors in the industry

This involve the identification of the factors that a significant impact on the performance
of the company in that industry and these could be particular assets, skills or
competencies required to achieve success in the industry. Key questions to be addressed
when identifying KSF include:-

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- Why do some competitors succeed whilst others fail in the industry
- What motivates customers and what attributes do customers consider as important in the
product selection
- What value- chain activities create value-added benefits for customers?
- What are the factors that make it difficult for rival companies to enter the industry.

Innovativeness, extensive distribution networks, sales and marketing skills are other key
success factors

Step 2: Rate the company and competitors on each

This deals with rating the company and the competitors on each key success factor on a
scale of e.g. 1-5 from very poor to very good.

Step 3: Consider the implications for competitive strategy

The rating will indicate whether the company has strengths or weakness, it will also
indicate whether competitors have strengths or weaknesses. Such rating will therefore
influence the strategic choices and options of the organization.

Anticipating competitors actions

Once key success factors of the industry have been analysed. It is important to identify
likely reaction patterns of competitors. There are four categories of competitor profiles
and these are:-

a. Laid back competitors

Those that take time before they respond to a rivals move. They analyse the marketing
campaigns of their rivals before taking any action.
b. Selective competitors
Those competitors that respond to certain competitive actions that threaten their
competitive position in the industry
c. Tiger competitors
Those competitors that respond immediately to competitive threats. They have resources
and competitive capabilities to protect their market share

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d. Stochastic competitors
Those competitors that do not have clear, predictable reaction patterns and may not react
to competitive moves.

Direct rivalry among competitors

There is a greater need to understand whether the direct rivalry is strong weak. The
following factors assist in understanding the rivalry

a. The similarity of competitors

The more similar the competitors in an industry are, the more the instable the
competitive equilibrium that they have.
b. The competing factor
When there is a single critical factor to compete in an industry, then companies will have
unstable competitive equilibrium.
c. Multiple factors
Where companies compete based on factors such as quality, service, convenience they
will tend to enjoy the advantage of competing.

End

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