Marketing 05 Handout 1 PDF

BM2207 DEALING WITH COMPETITION Porter’s Five (5) Forces 1. Threat of suppliers’ growing bargaining power (Supplier power.) This force analyzes how suppliers...

BM2207 DEALING WITH COMPETITION Porter’s Five (5) Forces 1. Threat of suppliers’ growing bargaining power (Supplier power.) This force analyzes how suppliers can easily influence price increases. This is driven by the following factors: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another. 2. Threat of buyers’ growing bargaining power (Buyer power). This force analyzes how buyers can easily influence price decreases. This is driven by the number of buyers in the market, the importance of each buyer to the organization, and the cost to the buyer of switching from one supplier to another. For instance, a few powerful business buyers can often dictate terms. 3. Threat of intense segment rivalry (Competitive rivalry). This force examines the intensity of competition in the marketplace. This is driven by the number and capability of competitors in the market. Rivalry competition is high when there are few businesses equally selling a product or service, when the industry is growing, and when consumers can easily switch to a competitor's product for a cheaper cost. When rivalry among competitors is intense, advertising and price wars can ensue, negatively impacting the business in the long run. 4. Threat of substitute products (Threat of substitution). This force is threatening for market leaders when buyers can easily find substitute products with attractive prices or better quality, and when buyers can switch from one product or service to another with little cost. For example, switching from coffee to tea does not cost anything, unlike switching from car to bicycle. 5. Threat of new competitors (Threat of new entrants). This force determines how easy or difficult it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. Existing organizations need to create high barriers to entry to deter new entrants. Industry Competition A. Perfect Competition Perfect competition exists when many consumers buy a standardized product from numerous small businesses. Because no seller is big enough or influential enough to affect price, sellers and buyers accept the market price determined by supply and demand. Example: When a commercial fisher brings his fish to the local market, he has little control over the price he gets and must accept the market price. B. Monopolistic Competition In monopolistic competition, there are still many sellers as perfect competition. However, they do not sell identical products. Instead, they sell differentiated products that differ somewhat or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in several ways, including quality, style, convenience, location, and brand name. 05 Handout 1 *Property of STI  [email protected] Page 1 of 9  BM2207 Example: Some people prefer Coke over Pepsi, even though the two (2) products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch, at least temporarily. C. Oligopoly Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low. These companies have some control over the prices they charge. Because products are fairly similar, others are often forced to follow suit to remain competitive when one company lowers prices. Example: When Cebu Pacific Airlines announces a fare decrease, Philippine Airlines, and Air Asia Airlines do likewise. When one offers a special deal, its competitors usually come up with similar promotions. D. Monopoly In a monopoly, however, there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. Example: Manila Electric Company is the only electric power distributor and holds the power distribution franchise for 22 cities and 89 municipalities, including the whole National Capital Region and the communities that form Mega Manila. Analyzing Competitors Value chain represents a firm's internal activities when transforming inputs into outputs. Value Chain Analysis (VCA) is a process that involves identifying the primary and support activities of a particular organization or industry and capitalizing on these activities to reduce costs or increase differentiation. Figure 1. Porter's Value Chain Model Source: https://strategicmanagementinsight.com/tools/value-chain-analysis.html Primary Activities Inbound logistics. It involves raw materials handling and warehousing. Operations. It involves machining, assembling, and testing. 05 Handout 1 *Property of STI  [email protected] Page 2 of 9  BM2207 Outbound logistics. It involves warehousing and distribution of finished products. Marketing and sales. It involves advertising, promotion, and pricing channel relations. Service. It involves installation, repair, and parts. Secondary Activities Firm infrastructure. It involves general management, accounting, finance, and strategic planning. Human resource management. It involves recruiting, training, and development. Technology development. It involves research and development and product or process improvement. Procurement. It involves purchasing raw materials, machines, and supplies. Growth An important function of marketing is to drive growth in sales and revenue for a company. Marketing is especially adept at doing so for a new product with many competitive advantages and potential. Good marketing can help to induce trial and promote word of mouth and diffusion. Marketing in more mature markets can be more challenging. In some cases, fighting over market share is less productive than expanding the market size. Although many different growth strategies are available to firms, some of the best opportunities come from growing the core, focusing on their most successful existing products and markets. Marketers must avoid thinking the “grass is always greener” and overestimating the upside of new ventures that stretch the company into uncharted territory. Growing the core can be less risky than expanding into new product categories. It strengthens a brand’s credentials as a source of authority and credibility and yields economies of scale. Growing the core through improved revenues and lower costs can also lead to greater profits. Below are the following examples: 1. Make the core of the brand as distinctive as possible. 2. Drive distribution through both existing and new channels. 3. Offer the core product in new formats or versions. Competitive Strategies for Market Leaders A Market Leader has the largest market share and usually leads in price changes, new product introductions, distribution coverage, and promotional intensity. Although marketers assume well-known brands are distinctive in consumers’ minds, they must maintain constant vigilance unless a dominant firm enjoys a legal monopoly. Powerful product innovation may come along, a competitor might find a fresh marketing angle or commit to a major marketing investment, or the leader’s cost structure might spiral upward. To stay number one, the firm must: A. Expand Total Market Demand. When the total market expands, the dominant firm usually gains the most. The market leader should generally look for new customers or more usage from existing customers. Example: If Heinz can convince more people to use ketchup, or use ketchup with more meals, or use more ketchup on each occasion, the firm will benefit considerably because it already sells ketchup to almost two-thirds of American consumers. 05 Handout 1 *Property of STI  [email protected] Page 3 of 9  BM2207 B. Protecting Market Share While expanding the total market size, the dominant firm must actively defend its current business through continuous innovation. The front-runner should lead the industry in developing new products and customer services, distribution effectiveness, and cost-cutting. Comprehensive solutions increase competitive strength and value to customers, so they feel appreciative or even privileged to be a customer instead of feeling trapped or taken advantage of. 1. Proactive Skills. Responsive and creative anticipation of devising innovative solutions. Note that responsive anticipation is performed before a given change, while reactive response happens after the change occurs. 2. Defensive Marketing. Even when it does not launch offensives, the market leader must do anything legally and ethically to reduce competitors’ ability to launch a new product, secure distribution, and gain consumer awareness, trial, and repeat. In any strategy, speed of response can make an important difference to profit. Figure 2. Six Types of Defensive Strategies Source: Marketing Management (4th European Edition) p.565 Position defense: It means occupying the most desirable position in consumers’ minds, making the brand almost impenetrable. Example: Procter & Gamble “owns” the key functional benefit in many product categories, with Tide detergent for cleaning, Gillette for razors and skin care, and Pampers diapers for dryness. Flank defense: The market leader should erect outposts to protect a weak front or support a possible counterattack. Flanking strategy is another name for identifying shifts in market segments that are causing gaps to develop, then rushing in to fill the gaps and develop them into strong segments. Example: Samsung developed several product line (Note Series, A Series, M Series, etc.) to capture the segment when their flagship/high-end products (Galaxy S Series) are underperforming. 05 Handout 1 *Property of STI  [email protected] Page 4 of 9  BM2207 Preemptive defense: A more aggressive maneuver is to attack first, perhaps with guerrilla action across the market—hitting one competitor here, another there—and keeping everyone off balance. Another is to achieve a broad market envelopment that signals competitors not to attack. Example: If Microsoft announces plans for new product development, smaller firms may concentrate their development efforts in other directions to avoid head-to-head competition. Counteroffensive defense: In a counteroffensive, the market leader can meet the attacker frontally and hit its flank or launch a pincer movement so the attacker will have to pull back to defend itself. Another form of counteroffensive is the exercise of economic or political clout. Example: Technology leaders like Apple, Intel, and Microsoft have aggressively defended their brands in court for patent infringement lawsuits. Mobile defense: In mobile defense, the leader stretches its domain over new territories through market broadening and market diversification. Market broadening shifts the company’s focus from the current product to the underlying generic need. Example: When U.S. tobacco companies such as Reynolds and Philip Morris acknowledged the growing curbs on cigarette smoking, instead of defending their market position or looking for cigarette substitutes, they moved quickly into new industries such as beer, liquor, soft drinks, and frozen foods Contraction defense: Sometimes, large companies can no longer defend all their territory. In planned contraction (also called strategic withdrawal), they give up weaker markets and reassign resources to stronger ones. Example: P&G sold Pringles to Kellogg, an American Multinational Food Manufacturing Company, for almost $2.7 billion when it decided to get out of the foods business to focus on its core household and consumer products. C. Increasing Market Share No wonder competition has turned fierce in so many markets. However, gaining an increased share does not automatically produce higher profits, especially for labor-intensive service companies that may not experience many economies of scale. Much depends on the company’s strategy. Because the cost of buying a higher market share through acquisition may far exceed its revenue value, a company should consider four (4) factors first: The possibility of provoking antitrust action. Frustrated competitors are likely to cry “monopoly” and seek legal action if a dominant firm makes further inroads. Microsoft and Intel have had to fend off numerous lawsuits and legal challenges around the world due to what some feel are inappropriate or illegal business practices and abuse of market power. 05 Handout 1 *Property of STI  [email protected] Page 5 of 9  BM2207 Economic cost. The cost of gaining further market share might exceed the value if holdout customers dislike the company, are loyal to competitors, have unique needs, or prefer dealing with smaller firms. And the costs of legal work, public relations, and lobbying rise with market share. Pushing for higher share is less justifiable when there are unattractive market segments, buyers who want multiple sources of supply, high exit barriers, and few scale or experience economies. Some market leaders have even increased profitability by selectively decreasing market share in weaker areas. The danger of pursuing the wrong marketing activities. Companies successfully gaining share typically outperform competitors in three (3) areas: new-product activity, relative product quality, and marketing expenditures. Companies that attempt to increase market share by cutting prices more deeply than competitors typically do not achieve significant gains because rivals meet the price cuts or offer other values, so buyers do not switch. The effect of increased market share on actual and perceived quality. Too many customers can strain the firm’s resources, hurting product value and service delivery. Charlotte-based FairPoint Communications struggled to integrate the 1.3 million customers it gained in buying Verizon Communications’ New England franchise. A slow conversion and significant service problems led to customer dissatisfaction, regulator’s anger, and eventually short-term bankruptcy. Other Competitive Strategies Some, such as Colgate, Nissan, Sharp, Avis, and PepsiCo, are quite large in their own right. These firms can adopt one of two postures. They can attack the leader and other competitors in an aggressive bid for further market share as market challengers, or they can play ball and not “rock the boat” as market followers. 1. Market-Challenger Strategies Many market challengers have gained ground or even overtaken the leader. Challengers set high aspirations, while market leaders can fall prey to running the business as usual. Challengers can also tap into public perceptions that they are the underdog. A. Defining the strategic objectives and opponent(s). A market challenger must first define its strategic objective, which is usually to increase market share. It then must decide whom to attack: It can attack the market leader. It can attack firms its own size that are not doing the job of satisfying customers' needs and wants, and are underfinanced. It can attack small local and regional firms. It can attack the status quo. 05 Handout 1 *Property of STI  [email protected] Page 6 of 9  BM2207 B. Choosing a general attack strategy. Attack strategies, also known as Offensive Strategies, are used to gain an edge over competitors. Such an attack may eliminate the Market Leader or reduce its market share. The Market Challenger must identify market segments where the Market leader is vulnerable. The General Attack Strategies are the following: Figure 3. General Attack Strategies Source: Marketing Management (4th European Edition) p.565 Frontal attack. The attacker matches its opponent’s product, advertising, price, and distribution in a pure frontal attack. Example: Xerox seized the copy market from 3M by developing a better copying process. Later, Canon grabbed a large chunk of Xerox’s market by introducing desk copiers. Flank attack. The attacker intends to attack the competitor's weak points or blind spots, especially the market leader or direct competitor. Example: Steve Jobs attacked BlackBerry, a technological innovator with market dominance, by developing iPhone. He assembled an integrated circuit, and customers loved it because of the amazing ease of use and range of applications offered Encirclement attack. Encirclement attempts to capture a wide slice of territory by launching a grand offensive on several fronts. It makes sense when the challenger commands superior resources. Example: In making a stand against archrival Microsoft, Sun Microsystems licensed its Java software to hundreds of companies and millions of software developers for all consumer devices. As consumer electronics products began to go digital, Java started appearing in a wide range of gadgets 05 Handout 1 *Property of STI  [email protected] Page 7 of 9  BM2207 Bypass attack. Bypassing the enemy altogether to attack easier markets instead offers three (3) lines of approach: diversifying into unrelated products, diversifying into new geographical markets, and leapfrogging into new technologies. Example: When Haier, China’s home appliance company, entered the United States, it knew it could not compete for head-on with General Electric and Whirlpool. Instead, Haier entered the U.S. market by catering to college students with small-sized refrigerators that can be fitted into cramped college dorm rooms. This bypass strategy worked as it allowed Haier to leverage its market leadership in the small- and medium-sized refrigerators market to establish a foothold in the large refrigerator market slowly. Guerrilla attack. Guerrilla attacks consist of small, intermittent attacks, conventional and unconventional, including selective price cuts, intense promotional blitzes, and occasional legal action, to harass the opponent and eventually secure permanent footholds. Example: Red Bull is no stranger to guerilla marketing stunts. In 2012, they pulled off a major coup by sponsoring the first successful Stratos jump from space. The jump generated a lot of publicity for the brand and was watched by millions of people worldwide. C. Choosing a specific attack strategy. Any aspect of the marketing program can be the basis for an attack, such as lower-priced or discounted products, new or improved products, services, a wider variety of offerings, and innovative distribution strategies. A challenger’s success depends on combining several more specific strategies to improve its position over time. Once successful, a challenger brand must retain a challenger mentality even if it becomes a market leader, highlighting how it does things differently. 2. Market-Follower Strategies It has been argued that a strategy of product imitation might be as profitable as a product innovation strategy. Although “innovative imitation” may not overtake the leader, the follower can achieve high profits because it does not bear any innovation expense. Followers must define a growth path, but one that does not invite competitive retaliation. Three (3) broad strategies were distinguished: A. Cloner: The cloner emulates the leader’s products, name, and packaging with slight variations. Technology firms are often accused of being cloners: Similar-sounding knockoffs copy mobile- messaging app maker WhatsApp’s products, and Berlin-based Rocket Internet has copied competitors’ business models and attempted to out-execute them. B. Imitator: The imitator copies some things from the leader but differentiates on the packaging, advertising, pricing, or location. The leader does not mind if the imitator does not attack aggressively. C. Adapter: The adapter takes the leader’s products and adapts or improves them. The adapter may choose to sell to different markets, but often it grows into a future challenger, as many Japanese firms have done after improving products developed elsewhere. 05 Handout 1 *Property of STI  [email protected] Page 8 of 9  BM2207 3. Market-Nicher Strategies An alternative to being a follower in a large market is to be a leader in a small market or niche. Smaller firms normally avoid competing with larger firms by targeting small markets of little or no interest to the larger firms. Over time, those markets can sometimes become sizable in their own right. Example: David Tran’s Sriracha hot chili sauce is known as the “rooster sauce” for the distinctive rooster (Tan’s astrological sign) on its green-capped squeeze bottle. A unique combination of locally sourced jalapeño peppers, vinegar, sugar, salt, and garlic created a taste that his packaging suppliers thought would be too spicy. The product tastes so good that NASA has supplied it to its astronauts in space to help stave off dulled taste buds. It has never been advertised, has no Facebook page and no Twitter account, and at one point had not updated its Web site in years. However, because of Sriracha’s popularity, it has become one of the fastest-growing products. Success has attracted imitators, but the firm’s revenues continue to grow yearly. References Kotler, P., Keller, K. L, Ang S.W., Tan C.T., Leong S.W. (2018). Marketing Management 7th Edition: An Asian Perspective. Pearson Education Limited. Kotler, P., Keller, K.L., Brady M., Goodman, M., Hansen T. (2019). Marketing Management 4th European Edition. Peason Education Limited. The Manila Times (2014) Meralco, abuse of power: A case of monopoly, rightly or wrongly. https://www.manilatimes.net/2014/02/06/featured-columns/columnists-business/meralco-abuse- of-power-a-case-of-monopoly-rightly-or-wrongly/73684 05 Handout 1 *Property of STI  [email protected] Page 9 of 9