Not all companies are investing enough to keep tabs on their competitors. Some believe they know them because they simply compete with them, without perceiving the need for a formal competitive intelligence system. Others believe that they will never be able to know competitors enough, so why worry? However, companies with sensitivity design systems to obtain continuous information from competitors.
Knowing your competitors is crucial to effective marketing planning. The company must constantly compare products, prices, channels and promotion with those of nearby competitors. Thus, it is possible to identify areas of competitive advantage or disadvantage. Precise attacks can be launched against competitors as well as effective defenses against theirs can be prepared.
Companies must know five things about competitors:
- Who are they? What are their strategies? What are their goals? What are their strengths and weaknesses? What are their reaction patterns?
Identification of the company's competitors
In general, identifying competitors seems to be a simple task for the company. Corporations must avoid "the myopia of competition."
Example: Eastman Kodak, in his film reel division, has been concerned about Fuji's increased competition. But Kodak faces a much greater threat due to the invention of the "roll-free camera." This camera, which is sold by Sony and Canon, takes still pictures of video that can be viewed on a TV, made copies, and even erased. What greater threat to a film reel business than a filmless camera!
It is possible to distinguish four levels of competitors, based on the degree of product substitution:
- Brand competition: A company may consider its competitors to be firms that offer similar goods and services to the same customers and at similar prices. Industry competition: A company perceives as its competitors all companies that manufacture the same product or type of products. Competition of form: A company can consider as competitors all the manufacturers of products that provide the same service. Generic competition: A company can consider as competitors all companies that compete for the same consumption value.
More specifically, it is possible to identify the company's competitors from the point of view of the industry and the market.
Industrial concept of competition: An industry is defined as a group of companies that offers a product or type of products that are close substitutes to each other. Economists define proxies for those with high cross-elasticities of demand. If by increasing the price of one product the demand for the other is caused to rise, both products are close substitutes.
Figure 1 explains the dynamics of the industry. You must start by understanding the fundamental conditions of supply and demand, these conditions influence the industrial structure. The industrial structure in turn influences the industrial pipeline, in areas such as product development, pricing and advertising strategy. So, the industrial pipeline gives rise to industrial performance, such as the efficiency, growth and employment of the industry.
Figure 1. An industrial organization analysis model
Source: Adapted from FM Scherer, Industrial Market Structure and Economic Performance, 2nd ed. (Boston: Houghton-Mifflin, 1980), p. 4
Number of sellers and degree of differentiation: The starting point to describe an industry is to specify if there are one, few or many sellers and if the product is homogeneous or highly differentiated. These characteristics give rise to five types of industrial structure (see table "Marketing Concepts and Tools").
The competitive structure of an industry can change over time. Consider when other companies offered versions with slight product differences, leading to a monopolistic competitive structure. As demand growth slows, a "moderate recession" occurs, which could become a "differentiated oligopoly". In the long run, it could happen that buyers receive similar offers whose only differentiation is price, so the industry becomes virtually a pure oligopoly.
Barriers to entry and movement: Ideally, firms should be free to enter industries that demonstrate attractive profits. Their income would lead to greater supply and, ultimately, a reduction in profits to a normal rate of return.
The main barriers to entry include large capital needs, economy of scale, patent and permit requirements, shortage of locations, materials or distributors, need for prestige, etc. Some barriers are intrinsic to companies involved. Even after entering an industry, a firm could face mobility barriers, trying to penetrate more attractive market segments.
Barriers to exit and contraction: Ideally, companies should be free to leave industries whose profits are unattractive to them, but often encounter barriers to exit. Barriers to exit include legal or oral obligations to customers, creditors, and employees; government restrictions, the low value of asset recovery for being highly specialized or obsolete; the lack of opportunities and alternatives; high vertical integration; emotional barriers, etc.
Cost structure: Every industry will have a certain mix of costs that will drive much of its strategic behavior. Companies will pay the greatest attention to the highest costs and "strategize" to reduce these.
Vertical integration: In some industries, companies would discover the advantage of integrating backward, forward, or both ways. A good example is the oil industry, where major producers explore, drill, refine, and manufacture petrochemicals as part of their operations. Many times, the effect of vertical integration is a reduction in costs and also greater control over the flow of value added. Furthermore, these companies are able to manipulate their prices and costs in different segments to obtain profits where taxes are lower. Companies that are unable to integrate vertically operate at a disadvantage.
Global Research: In global industries, companies need to compete on a global basis if they are to establish economies of scale and stay current on the latest technological advances.
Marketing concept of the competition: Instead of paying attention to companies that manufacture the same product (industrial approach) it is possible to consider those that satisfy the same customer need or that serve the same group of customers.
The key to identifying competitors is to link industry and market analysis by charting the product / market battlefield. Figure 2 illustrates this battlefield in the toothpaste market, according to product types and age groups of customers.
Figure 2. Diagram of the product and market battlefield for toothpaste
Source: William A. Cohen Winning on the Marketing Front: The Corporate Managers Game Plan (New York: John Wiley & Sons, Inc. 1986), p. 63.
It is observed that P&G and Colgate-Palmolive occupy nine segments, Lever, three, Beechman, two and Topol, two. If Topol wanted to enter other possibilities, objectives and strategies of the competitors, as well as the entry barriers in each segment.
Identification of the strategies of the competitors: The closest competitors of a company are those that pursue the same target market with the same strategy. A strategic group is a set of firms that follow the same strategy in a given market. Suppose a company wants to enter the home appliance industry and that the two most important strategic dimensions are quality image and vertical integration as well. (See diagram 3). The company develops the diagram and discovers that there are four strategic groups. From these groups some deductions arise as: 1) the height of the barriers against entry is different for each strategic group. 2) If the company successfully enters any of the groups, its members will become its strategic competitors, therefore,if you intend to be successful, you must enter with some competitive advantage.
Figure 3. Strategic groups in the home appliance industry
Figure 3 uses only two dimensions to identify strategic groups within the industry. Other dimensions would include the degree of technological complexity, the geographical field of action, the production methods, etc. In fact, it is necessary to have a more complete profile of each competitor than that suggested by these two dimensions. Each company has a different strategy and consequently attracts different customer segments. A company needs even more detailed information about each competitor. You must know the quality of the competitor's product, its characteristics and product mix, customer services, pricing policy, distribution coverage, sales force strategy, advertising programs, sales promotion, research and development, production, acquisitions, finance,etc.
Clearly, companies must be alert to the changes customers want and how customers review their strategy to meet these new desires.
Determination of the objectives of the competitors
Once the main competitors and their strategies have been identified, the question must be asked, what does each competitor look for in the market ?, and what drives the behavior of each one of them?
One assumption is that competitors strive to maximize their profits.
They set goals for profits and are satisfied when they reach them, even when higher profits could be produced through other strategies and efforts.
An alternate hypothesis is that each competitor has a mix of objectives. It would be good to establish the relative weight that each competitor gives to current profitability, growth in market share, cash flow, technological and service leadership, etc. Knowing the weighted mix of your objectives allows you to know if you are satisfied with your current financial results, how you would react to different types of competitive attack, etc.
Many aspects make up the competitor's objectives, including size, history, current administration, and economy. Tothschild argues that the most difficult competitor to attack is one for which your business is unique or primary and which has a global operation. In the market battlefield diagram (figure 4) it would not make sense to attack IBM in the microcomputer sector because it is a specialized multinational firm, while Zenith would be an easier target to do so because it is not one of its businesses and operates only in the local market.
Figure 4. Diagram of the battlefield of the microcomputer market
Source: William Rothschild, How to Gain (and Maintain) the Competitive Advantage (New York: McGraw-Hill, 1984), p. 72
Furthermore, a company must monitor the expansion of its competitors (figure 5). Dell (which today sells PCs to home users, plans to add hardware accessories and sell to business and commercial users. Therefore, its competitors are forewarned and are expected to be able to defend themselves in advance.
Figure 5. Expansion plans of a competitor
Assessment of the strength and vulnerability of the competition.
Can the various competitors carry out their strategies and achieve their goals? It depends on the resources and capacity of each one of them. The company must identify strengths and weaknesses of each competitor and gather key information from each competitor such as sales, market share, profit margin, return on investment, cash flow, new investments and use of capacity. Much of this information will be difficult to obtain, although it is valid to know it through the use of secondary information, personal experience and testimonials, and you can increase this source through primary market research with customers, suppliers and distributors.
There are three additional variables that must be tracked competitively: 1) Market share, 2) Mind share, and 3) Heart share (preference).
Estimation of competition reaction patterns
The objectives, strengths and weaknesses of a competitor represent a good part of probable reactions to the movements of the company with price reductions, promotional projects or the introduction of a new product. It is necessary to know the mentality of a certain competitor thoroughly to be able to predict their reactions.
There are some more common reaction profiles among competitors:
- The laggard competitor does not react quickly to changes in its competitors. The selective competitor: reacts only to certain types of attacks. The tiger competitor: reacts quickly to any intrusion into its domains. The random competitor: does not have a predictable pattern of reaction..
Some industries are characterized by the relative harmony between their competitors and others by the constant struggle between them.
Some industries are characterized by harmony between their competitors, while others are characterized by the constant struggle between them. Henderson believes that harmony depends on the competitive balance of the industry. Some relationships about the probable state of competitive relationships are:
- If the competitors are almost identical and make a living in the same way, their competitive balance is unstable. If a single important factor is critical, the competitive balance is unstable. If several factors may be critical, each competitor may have some advantage and different attractions for some clients. The more factors that can provide an advantage, the greater the number of competitors that can coexist. All competitors have a competitive segment defined by the preference towards the exchange factor it offers. The fewer competitive variables are critical, the lower the number of their competitors. A ratio of 2 to 1 in market share between any two competitors,it seems to be the point of balance in which there is no convenience or advantage for any of the competitors to increase or decrease their participation.
Competitive intelligence system design
The main types of information that decision makers need to know their competitors were described. Such information must be collected, interpreted, disseminated, and used. The company must design its competitive intelligence in a cost effective way, there are four main steps:
- Establish the system: identify vital types of information, sources and people who will manage the system and its services. Data collection: how they will be obtained without violating legal or ethical standards. Evolution and analysis: verify validity and reliability and their interpretation and Proper organization Dissemination and responses: Key information should be sent to the relevant decision makers.
Selection of competitors to attack and avoid
If managers receive adequate information, it will be easier for them to formulate strategies and they will get to know those who compete better. The manager must decide which competitor to compete with more energy and his choice will be supported by an analysis of customer values, which will reveal the strengths and weaknesses of the companies with respect to various competitors.
- Strong vs. weak competitors: Almost all companies focus their batteries on weak competitors since they have fewer resources and time per point of participation earned. Close vs. distant competitors: The companies, for the most part, will compete with those who resemble them the most. Good vs. Bad Competitors: Good competitors play by the industry rules, set reasonable pressures, limit themselves to a portion or segment of the industry. Bad competitors break the rules: they try to buy share rather than capture, they take big risks, invest in excess capacity, and upset the industrial balance.
Balance of customer and competitor orientations
The question is: is it possible to invest a lot of time and energy in keeping track of competitors to the detriment of a customer orientation? The answer is yes.
A company focused on competition is one whose movements are basically dictated by the actions and reactions of the competition. The firm loses a lot of time in following the movements of its competitors. This type of strategic planning has its pros and cons. On the positive side, the company develops a fighting orientation. It trains marketing specialists to be on constant alert, observing their own weaknesses and that of their competitors. On the negative side, the company samples a reactive standard instead of targeting the customer, determines its movements based on those of competitors. As a result, it does not move in the direction of its own objectives, it does not know where it will end as it depends on what its competitors decide to do.
Clearly, the customer-centric company can identify new opportunities and set a strategic course that makes sense in the long term. By looking at the development of customer needs, you can decide which customer groups and which needs are the most important to serve, based on your resources and goals.
Today's companies must observe customers and competitors, taking care that the observation of the competitor does not blind them to the customer focus.
In practice, in a first stage, little attention is paid to customers or competitors since companies are product-oriented. In a second stage, you start paying attention to customers. In the third stage, attention is begun to the competitors and, in the current stage, attention must be balanced in both directions so that the company is oriented towards the market.
Source
Marketing direction. Essential concepts. Philip Kotler. Pearson Education, 2003
