Competitive strategy


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Competitive strategy

  1. 1. Satya kurmi (competitive strategy) Page 14.67. E1: Competitive StrategyMODULE 1THE CORE CONCEPTS:The structural Analysis of Industries –The structure of an industry is determined by the key features, upon which the success andfailure of the companies engaged in competition, is based. So it is these features or structuralaspects that determine the profitability of any firm competing for the market space in a givenindustry. Knowledge of one’s company’s position with respect to other players in theindustry comes from a thorough dissection of the key features that define and have thepotential to alter the very structure of the industry. The first step in the process of analyzingthe industry structure is defining the industry. Unless there is clarity on where the boundarieslie, there cannot be any judgment or assessment on the key competitive forces that areshaping the industry without any ambiguity.5 Forces of Competition Competition drives the return down to that which would be earned by theeconomist’s ―perfectly competitive‖ industry. All five competitive forces jointly determine the intensity of industry competitionand profitability. Different from short-run factors that can affect competition and profitability in atransient way.5 Forces and Strategy The goal is to find a position in the industry where the company can best defenditself against these competitive forces or can influence them in its favor. Since the collective strength of the forces may well be apparent to all competitors,the key for developing strategy is to analyze the sources of each.
  2. 2. Satya kurmi (competitive strategy) Page 2Force 1. THREAT OF ENTRY Depends on extant barriers to entry, coupled with the expected reaction fromexisting competitors. Barriers of EntryEconomies of Scale.Product Differentiation.Capital Requirements.Switching Costs.Access to Distribution Channels.Cost Disadvantages Independent of Scale.Government Policy THE ENTRY DETERRING PRICE: the prevailing structure of prices (andrelated terms such as product quality and service) which just balances thepotential rewards from entry (forecast by the potential entrant) with the expectedcosts of overcoming structural entry barriers and risking retaliation. EXIT BARRIERS AND ENTRY BARRIERSlow entry barriers = low returns.high entry barriers = high returns.low exit barriers = stable returns.high exit barriers = risky returns.Force 2. INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS Firms are mutually dependent. Some forms of competition, notably price competition, are highly unstable andquite likely to leave the entire industry worse off from the standpoint ofprofitability. Intense rivalry is the result of interacting structural factors.o Numerous or Equally Balanced Competitors.o Slow Industry Growth.o High Fixed or Storage Costs.o Lack of Differentiation or Switching Costs.o Capacity Augmented in Large Increments.o Diverse Competitors.o High Strategic Stakes.o High Exit Barriers.Force 3. PRESSURE FROM SUBSTITUTE PRODUCTS Industry’s overall elasticity of demand. Limits profits in normal times and also reduce the bonanza an industry can reap inboom times. Position vis-à-vis substitute products may well be a matter of collective industryactions. Substitute products that deserve the most attention are those that (1) are subject totrends improving their price-performance tradeoff with the industry’s product, or (2)are produced by industries earning high profits
  3. 3. Satya kurmi (competitive strategy) Page 3Force 4. BARGAINING POWER OF BUYERS... is high if... The industry is concentrated or purchases large volumes relative to seller sales. The products it purchases from the industry represent a significant fraction of thebuyer’s costs or purchases. The products it purchases from the industry are standard or undifferentiated. It faces few switching costs. It earns low profits. Buyers pose a credible threat of backward integration. The industry’s product is unimportant to the quality of the buyers’ products orservices. The buyer has full information. Retailers can gain significant bargaining power overmanufacturers when they can influence consumers’ purchasing decisions,Force 5. BARGAINING POWER OF SUPPLIERS ... is high if Industry is is dominated by a few companies and is more concentrated than theindustry it sells to. Suppliers are not obliged to contend with other substitute products for sale to theindustry. The industry is not an important customer of the supplier group. Suppliers’ product is an important input to the buyer’s business. Supplier group’s products are differentiated or it has built up switching costs. Supplier group poses a credible threat of forward integration. BTW... labor must be recognized as a supplier as well,o The principles re the potential power of labor are similar to those of suppliers.The key additions are labors degree of organization, and whether the supplyof scarce varieties of labor can expand.Industry Structure & Buyers Needs,It has often been said that satisfying buyer needs is at the core of success in businessendeavor. How does this relate to the concept of industry structural analysis? Satisfyingbuyer needs is indeed a prerequisite to the viability of on industry and the firms within it.Buyer must be willing to pay a price for a product that exceeds its cost of production, or anindustry will not survive in the long run. Satisfying buyer needs may be a prerequisite forindustry profitability, but in itself is not sufficient. The crucial question in determiningprofitability is whether firms can capture the value they create for buyer, or whether thisvalue is completed away to others. Industry structural determines who capture the value. Thethreat of entry determines that new firms will enter an industry and compete away the value.Either passing it on to buyers in the form of lower prices it by raising the costs of competing.The power of buyers determines the extent to which they retain most of value created forthemselves, leaving firms in industry only modest returns. The power of suppliersdetermines the extent to which value created for buyers will be appropriated by suppliersrather than by firms in an industry finally, the intensity of rivalry acts similarly to the threatof entry. It determines the extent to which firms already in an industry will compete away
  4. 4. Satya kurmi (competitive strategy) Page 4the value they create for buyers among themselves. Passing it on to buyers in lower prices ordissipating it in higher costs of competing.Industry structure then determines who keeps what proportion of the value a product createsfor a lot of value, Structure becomes crucial. In some industries such as automobiles andheavy trucks, firms create enormous value for their buyers but on average, capture very littleof it for themselves through profits.Industry Structure & Supply / Demand BalanceIndustry profitability is that profits are a function of the balance between supply anddemand. if demand is greater than supply, this leads to high profitability. Yet, the long-termsupply/demand balance is strongly influenced by industry structure, as are the consequencesof a supply/demand imbalance for profitability. Hence, even though short-term fluctuationsin supply and demand can affect short-term profitability, industry structure underlies long-term profitability.Supply and demand change constantly, adjusting to each other. Industry structure determineshow rapidly competitors add new supply. The height of entry barriers underpins thelikelihood that new entrants will enter an industry and bid down prices. The intensity ofrivalry plays a major role in determines whether existing firms will expand capacityaggressively or choose to maintain profitability. Thus industry structure shapes thesupply/demand balance and the duration of imbalances.The consequences of an imbalance between supply and demand for industry profitabilityalso differ widely depending on industry structure. In some industries, a small amount ofexcess capacity triggers price wars and low profitability. These are industries where thereare structural pressures for intense rivalry or powerful buyers. In other industries, periods ofexcess capacity have relatively little impact on profitability because of favorable structure.In oil tools, ball valves and many other oil field equipment products, for example, there hasbeen intense price cutting during the recent sharp downturn.Generic Competitive Strategies –Competitive strategy is a firm’s relative position within its industry. Positioning determineswhether a firm’s profitability is above or below the industry average. A firm that canposition itself well may earn high rates of return even though industry structure isunfavorable and the average profitability of the industry is therefore modest.The fundamental basis of above-average performance in the long run is sustainablecompetitive advantage (without a sustainable competitive advantage, above-averageperformance is usually a sign of harvesting). Though a firm can have a myriad of strengthsand weaknesses vis-à-vis its competitors, there are two basic types of competitive advantagea firm can possess: low cost or differentiation. The significance of any strength or weaknessa firm possesses is ultimately a function of its impact on relative cost or differentiation. Costadvantage and differentiation in turn stem from industry structure. They result from a firm’sability to cope with the five forces better than its rivals.The two basic type of competitive advantage combined with the scope of activities for whicha firm seeks to achieve them lead to three generic strategies for achieving above-average
  5. 5. Satya kurmi (competitive strategy) Page 5performance in an industry: cost leadership, differentiation, and focus. The focus strategyhas two variants, cost focus and differentiation focus.The cost leadership and differentiation strategies seek competitive advantage in broad rangeof industry segments, while focus strategies aim at cost advantage (cost focus) ordifferentiation (differentiation focus) in a narrow segment.The five generic competitive strategies- A low cost provider strategy- striving to achieve lower overall costs than rivals andappealing to a broad spectrum of customers, usually by under pricing rivals. A broad differentiation strategy- seeking to differentiate the company’s productoffering from rivals in ways that will appeal to a broad spectrum of buyers. A best cost provider strategy- giving customers more value for their money byincorporating good-to-excellent product attributes at a lower cost than rivals: thetarget is to have the lowest (best) costs and prices compared to rivals offeringproducts with comparable attributes. A focused (or market niche) strategy based on low costs- concentrating on anarrow buyer segment and outcompeting rivals by having lower costs than rivals andthus being able to serve niche members at a lower price. A focused (or market niche) strategy based on differentiation- concentrating on anarrow buyer segment and outcompeting rivals by offering niche memberscustomized attributes that meet their tastes and requirements better than rivalsproducts.Cost Leadership strategy
  6. 6. Satya kurmi (competitive strategy) Page 6This strategy involves the firm winning market share by appealing to cost-conscious orprice-sensitive customers. This is achieved by having the lowest prices in the target marketsegment, or at least the lowest price to value ratio (price compared to what customersreceive). To succeed at offering the lowest price while still achieving profitability and a highreturn on investment, the firm must be able to operate at a lower cost than its rivals. Aiming to become Lowest Cost Producer The firm can compete on the price with every other industries and earn higher unitprofits. Cost reduction provides the focus of the organization’s strategy. Targets a broad market. Competitive advantage is achieved by driving down costs. A successful cost leadership strategy requires that the firm is the cost leader and isunchallenged in this position. Especially beneficial : where customers are price sensitiveA cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is available. A reputation as acost leader may also result in a reputation for low quality, which may make it difficult for afirm to rebrand itself or its products if it chooses to shift to a differentiation strategy infuture.Differentiation strategyA differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs whichare possibly under-served, and the firm has unique resources and capabilities which enable itto satisfy these needsA differentiation strategy calls for the development of a product or service that offers uniqueattributes that are valued by customers. Customers perceive the product to be different and better than that of rivals. The value added by the uniqueness of the product may allow the firm to charge apremium price for it. Differentiation can be based on product image or durability, after-sales, quality,additional features. It requires flair, research capability and strong marketing.Focus. Generic strategiesThis dimension is not a separate strategy per se, but describes the scope over which thecompany should compete based on cost leadership or differentiation. The firm can choose tocompete in the mass market (like Wal-Mart) with a broad scope, or in a defined, focusedmarket segment with a narrow scope. In either case, the basis of competition will still beeither cost leadership or differentiation.The focus strategy concentrates on a narrow segment and within that segment attempts toachieve either a cost advantage or differentiation.
  7. 7. Satya kurmi (competitive strategy) Page 7 The premise is that the needs of the group can be better serviced by focusing entirelyon it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and thisentrenched loyalty discourages other firms from competing directly. Because of their narrow market focus, firms pursuing a focus strategy have lowervolumes and therefore less bargaining power with their suppliers However, firms pursuing a differentiation-focused strategy may be able to passhigher costs on to customers since close substitute products do not exist.Organizations structureAn organizational structure consists of activities such as task allocation, coordination andsupervision, which are directed towards the achievement of organizational aims. It can alsobe considered as the viewing glass or perspective through which individuals see theirorganization and its environment.An organization can be structured in many different ways, depending on their objectives.The structure of an organization will determine the modes in which it operates and performs.Organizational structure allows the expressed allocation of responsibilities for differentfunctions and processes to different entities such as the branch, department, workgroup andindividual.Organizational structure affects organizational action in two big ways. First, it provides thefoundation on which standard operating procedures and routines rest. Second, it determineswhich individuals get to participate in which decision-making processes, and thus to whatextent their views shape the organization’s actionsStrategic planningStrategic planning is an organizations process of defining its strategy, or direction, and makingdecisions on allocating its resources to pursue this strategy. In order to determine the direction of theorganization, it is necessary to understand its current position and the possible avenues through which itcan pursue a particular course of action. Generally, strategic planning deals with at least one of three keyquestions:"What do we do?""For whom do we do it?""How do we excel?"In many organizations, this is viewed as a process for determining where an organization is going overthe next year or—more typically—3 to 5 years (long term), although some extend their vision to 20years.
  8. 8. Satya kurmi (competitive strategy) Page 8MODULE 2THE PRINCIPLES OF COMPETITIVE ADVANTAGE:five basic principles still apply:The secret to using advantage understands this particularity: No one has an advantage ateverything.For an advantage to be sustained, your competitors must not be able to duplicate it.Competitive advantage and financial gain are not the same because some advantages aremore interesting than others.A competitive advantage is interesting when one has insights into ways to increase itsvalue.The connection between competitive advantage and wealth is dynamic. Wealth increaseswhen the demand for the resources underlying competitive advantage increases.The Value Chain &Competitive advantage –Its economics will determine whether a firm is high or low cost relative to competitors. Howeach value activity is performed will also determine its contribution to buyer needs andhence differentiation. Comparing the value chains of competitors exposes difference thatdetermines competitive advantage.An analysis of the value chain rather than value added is the appropriate way to examinecompetitive advantage. Value added is not a sound basis for cost analysis, however, becauseit incorrectly distinguishes raw materials from the many other purchased inputs used in afirm’s activities.Identifying Value Activities –There are two type of value activity- Primary ActivitiesThe primary activities deal with the flow of the product or service through thebusiness, such as:■inbound logistics, which include receiving, warehousing, and inventory control of inputmaterials■Operations, which include machining, assembling, and all other activities that transforminputs into the final product■Outbound logistics, which include warehousing, order fulfillment, and other activitiesrequired to get the finished product to the customer.
  9. 9. Satya kurmi (competitive strategy) Page 9■Marketing and sales, which include channel selection, advertising, pricing, and otheractivities associated with getting buyers to purchase the product■ Service, which includes customer support, repair services, and other activities thatmaintain and enhance the product’s value to the customer Support ActivitiesThe support activities are the activities that support the primary value-chain activities,such as:■ Procurement, which includes purchasing raw materials, components, supplies, andequipment■ Technology development, which includes research and development, process automation,and other technology development■ Human resources management, which includes recruiting, hiring, training, development,and compensating employees■ Company infrastructure, which includes finance, legal, quality management,information systems, organizational structure, control systems, company culture, and so on.Defining Value chain –A value chain is a chain of activities that a firm operating in a specific industry performs inorder to deliver a valuable product or service for the market.Interlinked value-adding activities that convert inputs into outputs which, in turn, add to thebottom line and help create competitive advantage. A value chain typically consists of (1)inbound distribution or logistics, (2) manufacturing operations, (3) outbound distribution orlogistics, (4) marketing and selling, and (5) after-sales service. These activities are supportedby (6) purchasing or procurement, (7) research and development, (8) human resourcedevelopment, (9) and corporate infrastructure.
  10. 10. Satya kurmi (competitive strategy) Page 10The buyer’s Value ChainBuyers also have value chains, and a firm’s product represent a purchased input to thebuyer’s chain. Understanding the value chains of industrial, commercial, and institutionalbuyers is intuitively easy because of their similarities to that of a firm. Understanding house-holds’ value chains is less intuitive, but nevertheless important. House-holds engage in awide range of activities, and products purchased by households are used in conjunction withthis stream of activities. A car is used for the trip to work and for shopping and leisure, whilea food product is consumed as part of the process of preparing and eating meals. Though it isquite difficult to construct a value chain that encompasses every-thing a household and itsoccupants do, it is quite possible to construct a chain for those activities that are relevant tohow a particular product is used.A firm’s differentiation stems from how its value chain relates to its buyer’s chain. This is afunction of the way a firm’s physical product is used in the particular buyer activity in whichit is consumed as well as all the other points of contact between a firm’s value chain andbuyer’s chain.Competitive Scope & Value ChainCompetitive scope can have a powerful effect on competitive advantage, because it shapesthe configuration and economics of the value chain. there are four dimensions of scope thataffect the value chain. Segment scope:- the product varieties produced and buyers served. Vertical scope:- the extent to which activities are performed in-house instead of byindependent firms. Geographic scope:- the range of regions, countries, or groups of countries in which afirm competes with a coordinated strategy. Industry scope:- the range of related industries in which the firm competes with acoordinated strategy.Broad scope can allow a firm to exploit the benefits of performing more activitiesinternally.Narrow scope can allow the tailoring of the chain to serve a particular target segment,geographic area or industry to achieve lower cost or to serve the target in unique way.Segment scope,Differences in the needs or value chains required to serve different product or buyer segmentcan lead to a competitive advantage of focusing.Vertical Scope,Vertical integration defines the division of activities between a firm and its suppliers,channels, and buyers. Vertical integration tends to be viewed in terms of physical productsand replacing whole supplier relationships rather than in terms of activities, but it canencompass both.Geographic Scope,Geographic Scope may allow a firm to share or coordinate value activities used to servedifferent geographic areas. Canon develops and manufactures copiers primarily in japan, forexample, but sells and services them separately in many countries. Canon gains a cost
  11. 11. Satya kurmi (competitive strategy) Page 11advantage from sharing technology development and manufacturing instead of performingthese activities in each country.Industry Scope,Potential interrelationships among the value chains required to compete in related industriesare widespread. they can involve any value activity, including both primary and support.Interrelationships among business units are similar in concept to geographicinterrelationships among value chains.Interrelationships among business units can have a powerful influence on competitiveadvantage, either by lowering cost or enhancing desired by buyers. Entry barriers bear on thesustainability of various value chain configurations.The Value Chain & Industry StructureAlthough he did not develop the idea at the time, Porter also saw the concept of a valuechain as important in terms of how organizations are structured. Pointing out that structuresare formed around the grouping of certain activities (such as marketing or production) andthat the resultant departments then need co-ordination, Porter contends that in manyinstances such structures fail to optimize the linkages between activities or collect thenecessary information that would enable them to do so. He suggests, therefore, that a firmsco-ordination might be improved "by relating its organizational structure to the value chain,and the linkages within it and with suppliers or channels."MODULE 3THE COST ADVANTAGEThe Value Chain & Cost AnalysisOrganizations use the value chain approach to identify sources of profitability and to understandthe cost of their internal processes or activities.The principal steps of cost analysis are :1. Identify the firms value-creating processes. To identify a firms value-creatingprocesses, the firm must de-emphasize its functional structure.2. Determine the portion of the total cost of the product or services attributable toeach value-creating process. The next step of cost analysis is to trace or assigncost* and assets to each value-creating process identified.3. Identify the cost drivers for each process. The next step of cost analysis is toidentify the factor or cost determinants for each value-creating process.4. Identify the links between processes. While individual value activities areconsider separate and discrete, they are not necessarily independent. Mostactivities within a value chain are interdependent. Firms must not overlook valuechain linkages among interdependent activities that may impact their total cost.
  12. 12. Satya kurmi (competitive strategy) Page 125. Evaluate the opportunities for achieving relative cost advantage. : In manyorganizations, cost reductions are made across the board (e.g., "eliminate 10 percent from every department"). Because these firms do not reduce their costsstrategically, this effort usually fails. More often than not, across-the-board costreduction misconstrues the underlying problem.Cost BehaviorA firm’s cost position results from the cost behavior of its value activities. Cost behaviordepends on a number of structural factors that influence cost, which I term cost drivers.Several cost drivers can combine to determine the cost of a given activity. The importantcost driver or drivers can differ among firm in the same industry if they employ differentvalue chains. A firm’s relative cost position in a value activity depends on its standing vis-à-vis important cost drivers.Cost AdvantageUnder a cost-advantage strategy, a firm establishes a significantly lower cost structure thancompetitors and uses that advantage to provide equivalent benefits to customers ascompetitors, but at lower prices. Because the cost-advantage firm has a lower cost structure,it can price lower, yet achieve margins that equal or exceed those of competitors. Ifcompetitors wish to match the low price set by the cost-advantage leader, they must acceptlower margins on every sale due to their higher cost structures.To become the low-cost producer in its industry, a firm must configure its value chain insuch a way that dramatically lower costs result. This is different than merely reducing coststhrough tactical cost-reduction initiatives. In addition, a firm that uniquely configures itsvalue chain to become the lowest-cost producer in its industry renders itself relativelyimmune to imitation by competitors. Thus, the cost-advantage producer carries out differentactivities, or carries them out in different way, that cannot be readily imitated bycompetitors. Therefore, even if a competitor were to pursue radical cost-reduction activities,it could never replicate the low cost structure of the cost-advantage leader.MODULE 4DIFFERENTIATIONThe Sources of Differentiation,Three sources of differentiationThere are three sources of differentiation for any business: selling at the lowest cost, leadingthe market in product innovation, or becoming an integrator and customizer. The thirdstrategy is the most widely applicable to most businesses.The lowest cost/lowest price strategy is open to only one firm in an industry at any giventime. In my view, you must constantly pursue lower cost, just to stay in the game. But to be
  13. 13. Satya kurmi (competitive strategy) Page 13the winner, you need a new business model - a different approach from that of yourcompetitors (e.g., Wal Marts supply chain excellence). Mature firms are often stuck withlegacy costs that will make it impossible to achieve "lowest cost" position.Product innovation leadership can be open to more than one firm in an industry. Success atthis strategy requires a world class development process and adequate investment. Tosucceed as well as companies like Apple and 3M, innovation must be built into the DNA ofthe organization - not just an add-on. This is a tough strategy, with a fairly long paybackperiod.Integration and customization is about profitably delivering tailored offerings to individualcustomers or customer segments. Growing out of intense understanding of a few keycustomers, these offerings look beyond product in order to improve the customersexperience with ordering, using and disposing of your product. This is a strategy I believemost firms can employ. By learning what really makes a difference to a small segment, andtaking action to deliver in those areas, a diligent firm can fairly quickly differentiate itselffrom the competition.The Cost of Differentiation,Buyer Value & Differentiation,An organization differentiates itself successfully from its competitors if it can be unique atsomething that is valuable to buyers. The starting point for understanding what is valuable tothe buyer is the buyer’s value chain. Generally speaking an organization can create value fora buyer through two mechanisms: a) by lowering buyer cost; and b) by raising buyerperformance.An organization lowers buyer cost or raises buyer performance through the impact of itsvalue chain on the buyer’s value chain. In addition to its products or services, anorganization typically impacts the buyer through such activities as the logistics system, orderentry system, sales force and application engineering group. Thus, the value an organizationcreates for its buyer is determined by the whole array of links between the organization’svalue chain and its buyer’s value chain.In pursuing a differentiation strategy, it is important to understand the buyer purchasecriteria which can be categorized into two types: use criteria and signaling criteria. Usecriteria are specific measures of what creates buyer value; signaling criteria are measures ofhow buyers perceive the presence of value. While use criteria which typically grow out oflinks between an organization’s value chain and its buyer’s value chain tend to be moreoriented to a supplier’s product, outbound logistics and service activities, signaling criteriaoften stem from marketing activities.Identification of buyer purchase criteria begins by identifying the decision makers for anorganization’s product and the other individuals that influence the decision maker. Usecriteria should be identified first as they measure the sources of buyer value and also
  14. 14. Satya kurmi (competitive strategy) Page 14determine signaling criteria. In addition to internal knowledge about the buyer’s needs anddirect contacts with the buyer, in any serious effort to understand buyer purchase criteria, anorganization must identify the buyer’s value chain and perform a systematic analysis of allexisting and potential linkages between an organization’s value chain and its buyer’s chain.Differentiation Strategy,A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs whichare possibly under-served, and the firm has unique resources and capabilities which enable itto satisfy these needsA differentiation strategy calls for the development of a product or service that offers uniqueattributes that are valued by customers. Customers perceive the product to be different and better than that of rivals. The value added by the uniqueness of the product may allow the firm to charge apremium price for it. Differentiation can be based on product image or durability, after-sales, quality,additional features. It requires flair, research capability and strong marketing.Steps in Differentiation, Analyze your target market and identify your competition. Your target market is ―aspecific group of consumers at which a company aims its products and services‖(Entrepreneur). A target market is distinguished by socioeconomic, demographic,and common characteristics or needs that make them the best audience to focus onselling to. To uncover your target market, answer the following simple questions:What am I selling? Who will most likely buy or consume my product or service?Before you can crush your competition, you need to know who they are. Find outwhich businesses are going after your same target market. How do they differentiatethemselves from other companies in the industry? Where are they located? To findthis information, business directories can be used to search free company profiles.Information included in the company profiles are company overview, contactinformation, location, key facts, employees, and company payment rating. Learn from your competition and your customers. Don’t be afraid of yourcompetition, but rather use them as a learning tool and assess their business model.Learn your competitors’ strengths and weaknesses – imitate their strengths, and usetheir weaknesses to your advantage. Use companies that specialize in businessinformation, such as Cortera, to construct and analyze a competitive landscape of thetarget market. The business information you learn from your rivals will help youdevelop the competitive edge you need to surpass them in your industry. Intimatecustomer knowledge is equally important as competitor knowledge. Gaining in-depthinsights about your customer portfolio will allow you to maximize revenue potential,increase customer retention, and boost prospective customers. You can use a mix of
  15. 15. Satya kurmi (competitive strategy) Page 15many tools and methods to measure consumer insight and both your position in themarket and the positions of your competitors. Along with traditional companyinformation resources, consider social media analysis tools that allow consumerinsight mining on a large scale. Create an ―Economic Moat‖. Take advantage of barriers to entry into the market,using them to dissuade competitors from challenging your marketing share. In somecases, an established company’s ability to manipulate hurdles to enter and compete inits market becomes an effective tool against new competition, further entrenching thebusiness and preserving its profit potential for the foreseeable future. Stay on the cutting edge. Once you’ve gained a competitive advantage, your work isfar from complete. To be successful, you will need to continuously maintain yourcompetitive advantage. After all, your competitors are not going to sit back and allowyou to steal their market share. You can maintain your competitive advantage bypredicting future trends in your industry, constantly researching and monitoring yourcompetitors, and adapting to your customer’s wants and needs. Sometimes you mayneed to take chances to keep ahead of the pack and differentiate your business, butwith big risk often comes big reward – Just remember to do your research beforediving head first into new ideas. Use Business Information Resources. The information revolution is here – takeadvantage of it! It creates a competitive advantage by providing companies with newways to outperform their rivals. Knowledge is power, and business informationcompanies provide just that. Reliable business information companies includeCortera, Hoovers, Manta,, and Goliath.Case Analysis
  16. 16. Satya kurmi (competitive strategy) Page 16MODULE 5TECHNOLOGY & COMPETITIVE ADVANTAGETechnology & Competition,In technology the competition is remorseless. In most businesses the competition might beable to do something as well as you – and it will remove your excess profit. People willbuild hotels for instance until everyone’s returns are inadequate but not until everyone’sreturns are sharply negative. Even in a glutted market a hotel tends to have a reason to exist– it still provides useful service. And someday the glut will go away so the hotel will retainsome value.[4] In most businesses the game is incremental improvement. If you get slightlybetter you can make some money for a while. If the competition gets slightly better you willmake sub-normal returns until you catch up.In technology the threat is always that someone will do something massively better than youand it will remove your very reason for existence. Andy Grove – one of the most successfultechnologists of all time (Intel Corporation) – titled his book ―Only the paranoid survive‖.He meant it.If your technology is obsolete the end game is failure – often bankruptcy. Palm will failbecause Palm no longer has a reason to exist. If we wait 20 years Palm will be even moreobsolete – but the hotel glut will probably have abated.Technology Strategy,An Technology strategy (Information Technology strategy or IT strategy) is the overall planwhich consist of objective(s), principles and tactics relating to use of the technologies withina particular organization. Such strategies primarily focus on the technologies themselves andin some cases the people who directly manage those technologies. The strategy can beimplied from the organizations behaviors towards technology decisions, and may be writtendown in a document.Other generations of technology-related strategies primarily focus on: the efficiency of thecompanys spending on technology; how people, for example the organizations customersand employees, exploit technologies in ways that create value for the organization; on thefull integration of technology-related decisions with the companys strategies and operatingplans, such that no separate technology strategy exists other than the de facto strategicprinciple that the organization does not need or have a discreet technology strategy.A technology strategy has traditionally been expressed in a document that explains howtechnology should be utilized as part of an organizations overall corporate strategy and eachbusiness strategy.Formulating Technology Strategy Core technologiesTo a strategist, "technology" is usually meant in the broadest possible terms—knowledge ofhow to do things and how to accomplish human goals. The first issue that arises informulating a technology strategy therefore is narrowing the scope. Of all the technologiesthat are relevant to an organization, which technologies should be the focus of strategy?Classical organizational theory distinguishes between technologies deployed in the
  17. 17. Satya kurmi (competitive strategy) Page 17"technical core"—the units where the product or service is produced—and technologies usedin support tasks. To increase efficiency, intervening technologies and elaborated structuresare designed to protect the technical core from too much uncertainty, to coordinate amongorganization elements, and to mediate the fit between the organization and its environmentTable 19.1. Key questions in technology strategy.Formulating technology strategyWhat are the organizations core technologies?How should the firm position itself relative to technology development?Should the firm seek to establish a technology standard?Why do technological discontinuities arise and how should the firm respond?Organizing for technology strategyWhat are the risks and rewards of strategic alliances as a means of developingnew technology?How much should the firm invest in research and development relative tocompetition?How can human capital be managed to produce superior technology? Technological pioneering strategy:- one of the key roles for technology incompetitive strategy is its effect on the timing of a firm’s entry into product markets.When a firm seeks to offer the latest technology in its new products or services, it issaid to be a technology leader, and technology leadership is one of the principlemeans by which firm’s pursue market pioneering strategies. Pioneering based ontechnology leadership carries a number of risks and benefits. Technology standards:- one of the benefits of a pioneering strategy may be theopportunity to establish a technological standard. The focus of standardization maybe at the component level end-product level or system level. standers tend emergewhen there are substantial benefits from using devices with compatible technicalelements in a particular domain.
  18. 18. Satya kurmi (competitive strategy) Page 18MODULE 6COMPETITOR SELECTIONThe Competitive Benefits Of Competitors,Competition policy is about applying rules to make sure businesses and companies competefairly with each other. This encourages enterprise and efficiency, creates a wider choice forconsumers and helps reduce prices and improve quality.Low prices for all: the simplest way for a company to gain a high market share is to offer abetter price. In a competitive market, prices are pushed down. Not only is this good forconsumers - when more people can afford to buy products, it encourages businesses to produceand boosts the economy in general.Better quality: Competition also encourages businesses to improve the quality of goods andservices they sell – to attract more customers and expand market share. Quality can mean variousthings: products that last longer or work better, better after-sales or technical support or friendlierand better service.More choice: In a competitive market, businesses will try to make their products different fromthe rest. This results in greater choice – so consumers can select the product that offers the rightbalance between price and quality.Innovation: To deliver this choice, and produce better products, businesses need to beinnovative – in their product concepts, design, production techniques, services etc.What Makes a “Good ”Competitor, Low cost provider. New technologies. Know about your customers. Business idea. Implementation of better strategies. Know about your competitors. Know about market. Know about industryInfluencing the Pattern of Competitors,
  19. 19. Satya kurmi (competitive strategy) Page 19MODULE 7INDUSTRY SEGMENTATION & COMPETITIVE ADVANTAGEBases for Industry Segmentation & Competitive Advantage,Four industry types Volume industriesAn industry characterized by few opportunities to create competitive advantages.each advantage is huge and results in a high pay-off. Stalemate industriesAn industry that produces commodities and is characterized by few opportunities tocreate competitive advantages, with each advantage being small. Fragmented industriesAn industry characterized by many opportunities to create competitive advantages,but each advantage is small. Specialized industriesAn industry where there are many opportunities for firms to create competitiveadvantages that are huge and give a high pay-off.
  20. 20. Satya kurmi (competitive strategy) Page 20The Industry Segmentation Matrix,Industry Segmentation &Competitive Strategy,Industrial market segmentation is a scheme for categorizing industrial and businesscustomers to guide strategic and tactical decision-making, especially in sales and marketing.While government agencies and industry associations use standardized segmentationschemes for statistical surveys, most businesses create their own segmentation scheme tomeet their particular needs.While similar to consumer market segmentation, segmenting industrial markets is differentand more challenging because of greater complexity in buying processes, buying criteria,and the complexity of industrial products and services themselves. Further complicationsinclude role of financing, contracting, and complementary products/services.The goal for every industrial market segmentation scheme is to identify the most significantdifferences among current and potential customers that will influence their purchasedecisions or buying behavior, while keeping the scheme as simple as possible.. This willallow the industrial marketer to differentiate their prices, programs, or solutions formaximum competitive advantage.
  21. 21. Satya kurmi (competitive strategy) Page 21MODULE 8SUBSTITUTIONIdentifying Substitutes,A product or service that satisfies the need of a consumer that another product or servicefulfills. A substitute can be perfect or imperfect depending on whether the substitutecompletely or partially satisfies the consumer. A consumer might consider Pepsi to be aperfect substitute for Coke, or Land OLakes butter to be a perfect substitute for Kerry goldIrish Butter. However, if a consumer sees a difference in these brands, he may see Pepsi andLand OLakes as imperfect substitutes, even if economists might consider them perfectsubstitutes.For a product to be a substitute of another good, it must share a particular relationship withthat good. When a goods price increases, the demand for its substitute will increase becauseconsumers will go looking for a cheaper alternative. Conversely, when a goods pricedecreases, the demand for its substitute will decrease. For example, margarine is a substitutefor butter because a consumer can meet similar needs by using margarine. So, when theprice of butter rises, the demand for margarine will likely increase.The economics of Substitution,In the two goods - two prices analysis, the effect of a change in the price of one of the goodsis generally decomposed into the substitution effect and the income effect. The substitutioneffect is the change in the quantity of that good consumed when the budget constraintreflects the new relative prices, but keeps the agent on the original indifference curve. Theincome effect is then the change in the quantity of that good consumed when the budgetconstraint is shifted holding its slope constant to intersect with the new endowment point.Changes in the Substitution threatsThe threat of substitutes is a factor that is more than just a theoretical concept. It influencesall the aspects of the marketing mix (product, price, place and promotion) and directly limitsthe profit potential of a market. Times of economic change are particularly important inrespect of this threat as it accelerates the possibility of customers of switching to substitutes.
  22. 22. Satya kurmi (competitive strategy) Page 22On the upside it also creates opportunities whereby new customers can be lured into yourmarket segment.Analyzing how Michael Porter explained the threat of substitutes in his Five Forces Model,the primary factor is that substitutes place a upper limit on the price a market and thuscompanies within the market can sustainable achieve.It is a fact that there are different ways in which a customer can satisfy any particular need.The choice that customers have to satisfy a particular need can be satisfied by a variety ofproducts or services that is available in the market. Customers will consciously orunconsciously compare price and benefit based on their particular main buying motive andmake procurement decisions. The final decision is the manifestation of the tread ofsubstitutes.One of the crucial issues that companies have to deal with continuously is the willingness ofcustomers to switch between different products. This inclination of customers is ofteninfluenced by the ease of comparison between the different products or services. From amarketing perspective the companies will try to maximize the differentiation of their productby highlighting a factor or benefit that is believed to have the ability to attract the maximumnumber of buyers.Product differentiation is generally speaking the development or incorporation of attributessuch that customers in a products market segment will perceive to be different and desirablefrom other products. Advertising and promotion of a product is based on its differentiatingcharacteristics to enhance this perception and can include attributes such as benefits, price,quality, style, design, support service, value etc. The aim is to make the comparison withsubstitute product more difficult.(The path of Substitution)SubstitutionIn the two goods - two prices analysis, the effect of a change in the price of one of the goodsis generally decomposed into the substitution effect and the income effect. The substitutioneffect is the change in the quantity of that good consumed when the budget constraintreflects the new relative prices, but keeps the agent on the original indifference curve. Theincome effect is then the change in the quantity of that good consumed when the budgetconstraint is shifted holding its slope constant to intersect with the new endowment point.Competitive StrategyCompetitive Strategy, a modern classic of business thinking, provides a strong conceptualfoundation for developing corporate strategy. It offers a rational and straightforward methodfor companies to extricate themselves from strategic confusion—and three generic strategiesfor dealing with competitive forces: differentiation, overall cost leadership, and focus, whichfor many have become the rules of the game.
  23. 23. Satya kurmi (competitive strategy) Page 23MODULE 9DIVERSIFICATION STRATEGYCase AnalysisMODULE 10COMPLEMENTORY PRODUCTS & COMPETITIVE ADVANTAGE(Control Over Complementary Products,)Bundling,A marketing strategy that joins products or services together in order to sell them as a singlecombined unit Bundling allows the convenient purchase of several products and/or servicesfrom one company. The products and services are usually related, but they can also consistof dissimilar products which appeal to one group of customers.Cross Subsidization,A strategy where support for a product comes from the profits generated by another productThis is usually done to attract customers to a newly introduced product by giving them alower price. The low price is sustained by the earnings of another product sold by the samecompany.(Complement and Competitive Strategy.)MODULE 11INDUSRY SCENARIOS & COMPETITIVE STRATEGY NDER UNCERTAINTYConstructing Industry Scenarios,Industry Scenarios & Competitive Strategy.MODULE 12DEFENSIVE STRATEGYThe Process of Entry or Repositioning,Repositioning involves changing the identity of a product relative to competing products.Many famous companies have saved failing products by repositioning them in the market.When a company initiates a repositioning strategy, it needs to change the expectations ofstakeholders, including employees, stockholders, and financial backers.
  24. 24. Satya kurmi (competitive strategy) Page 24Defensive Tactics,Raise structural barriers through: offering full line of products signing exclusive distribution agreements raising buyer switching costs by offering lower cost for training raising cost for competition to gain trial users by decreasing your cost increasing the scale of economies patents and licensing limiting access to facilities signing exclusive contracts with suppliers and buying key locations avoiding suppliers who deal with competition Encouraging the government to increase barriers. Increase expected retaliation by making a big deal of a small thing.Lower the inducement for attack by keeping pricing low and constantly decreasing costs tokeep profit high.(Evaluating Defensive Tactics,)• Raise Structural Barriers: block avenues challengers can take in mounting an offensive• Increase Expected Retaliation: signal challengers that there is threat of strong retaliation ifthey attack• Reduce Inducement for Attacks: e.g., lower profits to make things less attractive(including use of accounting techniques to obscure true profitability). Keeping pricesvery low gives a new entrant little profit incentive to enter.The general experience is that any competitive advantage currently held will eventually beeroded by the actions of competent, resourceful competitors. Therefore, to sustain its initialadvantage, a firm must use both defensive and offensive strategies, in elaborating on its basiccompetitive strategy.Defensive StrategyA management approach designed to reduce the risk of loss. For example, even a relativeaggressive business might employ a defensive strategy when it comes to investing its extraliquid funds in certificates of deposit or relatively stable bonds and stocks.MODULE 13ATTACKING AN INDUSTRY LEADERConditions for Attacking an Industry Leader,A challenger must possess a clear and sustainable competitive advantage over the leaderthrough cost or differentiation. If it is low cost the firm can reduce price to gain positionagainst a leader or earn higher margins at industry average prices to allow reinvestment inmarketing or technology development. If it is differentiation, it will allow for premiumprices or minimize marketing cost. However these competitive strategies must besustainable so as to allow for adequate time to close the market share gap before the leadercan react.
  25. 25. Satya kurmi (competitive strategy) Page 25A challenger must have some way of partly or wholly neutralizing the leader’s otherinherent advantages. If the challenger employs a differentiation strategy, it must alsopartially offset the leader’s natural cost advantage due to economies of scale, first moveradvantages or other causes. The challenger must maintain cost proximity or the leader willuse its cost advantage to neutralize the challenger differentiation. Also if the challengerbases its attack on a cost advantage, it must create value for the buyer. Otherwise, the leaderwill be able to sustain a price premium over the challenger, yielding the leader the grossmargin needed to retaliate vigorously.Venues for Attacking Leaders,Types of Attack Strategies Frontal attack Flank attack Encirclement attack Bypass attackGuerrilla attack- Frontal Attack Seldom work unless The challenger has sufficient fire-power (a 3:1advantage) and staying power, and The challenger has clear distinctive advantage(s)e.g. Japanese and Korean firms launched frontal attacks in various ASPAC countriesthrough quality, price and low cost Flank attack Attack the enemy at its weak points or blind spots i.e. its flanks Ideal forchallenger who does not have sufficient resources e.g. In the 1990s, Yaohan attackedMitsukoshi and Seibu’s flanks by opening numerous stores in overseas markets. Encirclement attack Attack the enemy at many fronts at the same time Ideal forchallenger having superior resources e.g. Seiko attacked on fashion, features, userpreferences and anything that might interest the consumer. Bypass attack By diversifying into unrelated products or markets neglected by theleader Could overtake the leader by using new technologies e.g. Pepsi use a bypassattack strategy against Coke in China by locating its bottling plants in the interiorprovinces. Guerrilla attack By launching small, intermittent hit-and-run attacks to harass anddestabilize the leader Usually use to precede a stronger attack e.g. airlines use shortpromotions to attack the national carriers especially when passenger loads in certainroutes are low.Impediments to Leader Retaliation,Signals of Leader Vulnerability,Attacking Leaders & Industry Structure