When talking about the industry and market, competitors are always a major concern, and knowing how to analyze them and also what strategies should be taken in a matter of time is vital for every firm, even a non-profit organization!
The Structural Analysis of Industries
5 competitive forces control the economic structure of every industry.
The competitive strategy of every company is to have a market share in the industry while defending itself from the forces.
Structural Determinants of the Intensity of Competition:
Competition in every industry has more players and factors other than the established players including potential entrants, customers, suppliers, and substitute products and services, and these factors decide the intensity of the competition.
The threat of new entrants:
There are six types of barriers from the current competitors. These barriers also can result in monopolistic competition.
- Economies of Scale: Existing organizations benefit from lower average cost because of their size, joint products, vertical integration, and other factors.
- Brand Loyalty: Organizations benefit from their brands which are identified by customers and made those customers loyal to the existing products.
- Capital Requirements: Investments for producing, inventory, and R&D are required which can be a barrier especially when you want to start anew.
- Switching Costs: It means the costs related to the customer when switching from one product, supplier, etc. to another.
- Access to Distribution Channels: Selling channels refer to the chain of businesses through which the product reaches the end-user including the wholesale and retail channels of the product.
- Government Policy: every government has different policies and regulations, like product testing, which can become a hindrance to market entry.
Other factors can become barriers for new companies, like access to raw materials, specific technology, or even experience
The intensity of rivalry among existing competitors
The extent of pressure that existing companies put on one another to limit each other’s profit and market share shows the intensity of rivalry. The price war is one of the most common forms of these pressures. Some interactive structural factors influence this intensity.
- The number of competitors is a lot or equally balanced
- The rate of industry growth is slow
- High fixed costs or high storage costs in the industry
- No differentiation or switching costs
- The capacity is added in large increments resulting in price-cutting
- Various competitors with different strategies
- Global prestige and technological credibility is the strategy
- High exit barriers due to different factors like strategic interrelationships, emotional barriers, social restrictions, etc.
These factors can change due to internal and external changes. Keep in mind that Entry and exit barriers are dependent on one another and they are either high or low.
Pressure From Substitute Products
When substitute products are offering almost the same benefits at a competitive price the competitiveness of an industry is threatened.
Bargaining Power of Buyers
The following characteristics increase the bargaining power of buyers, and selecting the target customer is important:
- Customers concentrate or purchase large quantities in terms of the seller’s total sales.
- Purchased products show a large percentage of the buyer’s costs.
- The products are standard and undifferentiated.
- The customers face switching costs
- The customers get low profits
- The customers cause backward integration
- The product is not important to the customer’s product quality
- The customer has full information about market prices, supplier costs, etc.
Bargaining power of Suppliers
The factors that increase the supplier’s power
- Raise prices without affecting the buyer’s demand
- Can reduce quantity supplied
- Can cooperate formally or informally
- Few substitutes are available
- Their product is critical to the end product
- Can impose switching costs on customers
- Have the potential to integrate downstream
Other factors can influence the supplier’s power, like the type of supplier they are, let’s say the labor or the government which also is a buyer who can influence the structure of industry effectively.
Structural Analysis and Competitive Strategy
There are different ways to develop an effective strategy:
- Positioning: making defenses against competitive forces using the company’s capabilities
- Influencing the Balance of Forces: making strategic moves to improve the company’s position
- Exploiting Change: anticipating the trends that affect the industry and acting on them before others recognize them.
Before anything the company should define the industry and the part of the industry, it wants to compete in.
The Three Generic Competitive Strategies
- Cost Leadership: By achieving cost leadership you will get market share by lowering prices or by maintaining average prices while increasing profits. Don’t forget that sources of cost reduction are not exclusive to you and others can copy you, so always try to find ways to reduce the cost. Try Kaizen’s Continuous Improvement.
- Differentiation: unfair advantages and unique features that respond to the value the customers want can win a good percentage of market share. Stay agile with your product development, and don’t risk your advantage by imitating.
- Focus: achieving cost leadership or differentiation in niche markets while not available to other competitors who have more broad focus can result in a win. But you should add something extra to win in the niche market, or other broad competitors will win over you. Also, try to not focus on only “one” market segment even if your company is small.
It’s not always possible for a company to pursue more than one of these strategies successfully. So if the company fails to use one of the strategies, it will be guaranteed low profitability. And cost leadership firms are the most profitable when the middle-sized ones are the least profitable.
A Framework for Competitor Analysis
There are four components to analyze all potential and existing competitors and the company’s position in the competitive environment
- Future Goals: knowing about the goals of competitors can help with understanding if they are satisfied with their position at the moment and whether they might change their strategy
- The Assumptions: you should identify the competitor’s assumptions about itself and also what they think about the industry and other competitors.
- The Current Strategy: you should develop statements about each competitors’ current strategy
- The Capabilities: Evaluate the competitor’s strengths and weaknesses to determine its ability to react to strategic changes and dealing with external occurrences.
Information gathered can be compiled into a Response Profile where you would be able to analyze the competitor’s possible offensive and defensive moves in certain situations. You can predict the competitor’s behavior and influence that behavior in favor of your own firm.
Gathering data about competitors is difficult and time-consuming. So it is better to use a sort of Competitor Intelligence System, to gather everything, analyze them, and give the resulting data to management to formulate a strategy.
There are signals including warnings, bluffs, and other kinds of communications in the market that indicate competitors’ goals, internal situations, etc. directly and indirectly. Some of these signals are important and should be taken into consideration. But any of these signals should be analyzed correctly, regarding the time and beneficiary of the probable move for that competitor.
Prior Announcements of Moves: these moves can be referred to as formal communications that might take place or bluff, and they have different purposes like discouraging others from doing the same, threatening others who have indicated a damaging move to the firm, testing competitors attitude, minimizing others future strategic moves, to raise the firm’s stock price, etc.
Results or actions after competitive discussions and explanations of their moves are some other important signals.
Use a firm’s history to identify the signals that a firm gave before they made a move in the past. This can show how they will act in the future.
Most industries are oligopolies and competitive moves by one firm can affect the others in the industry. An effective competitive move should have a quick outcome for the company and not destabilize the industry or create a competitive war. You should use superior resources and capabilities with delicacy at the same time to avoid retaliation by other companies.
Cooperative on Non-threatening Moves: the moves that are not noticeable or have no or little impact on the competitors or the industry.
- Moves that improve the company’s and competitors’ positions
- Moves that improve the company’s position as well as those competitors’ that match the move
- Moves that improve the company’s position because others will not match the move
Threatening Moves: it is important to predict the influence of retaliation.
Defensive Moves: these moves either make the competitors back down from their move or prevent it by making it clear that there will be retaliation.
In all, as Mary Hamilton discussed in one article there are 4 kinds of strategies for making moves, offensive, defensive, collusive, and strategic alliances.
Nowadays strategic alliances are used commonly by rivals to reduce costs and enter global markets by both small and large firms.
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