Industry Structure Analysis

Q: Explain the framework for competitor analysis. -05 / develop a framework for competitor analysis and discuss how it helps a firm to develop a competitor profile. -05 Competitor Analysis Framework Michael Porter presented a framework for analyzing competitors based on the following four key aspects of a competitor, depicted in the diagram. Objectives and assumptions are what drive the competitor, and strategy and capabilities are what the competitor is doing or is capable of doing. Competitor Analysis Components What drives the competitor

| |[pic] | |[pic] | | What the competitor is doing | |or is capable of doing | |[pic] | | | |Future goals | |[pic][pic] | |[pic] | |[pic] | |Strategy | |[pic][pic] | |[pic] | | | |Competitor Response Profile | |1. satisfaction with current position | |2. likely moves or strategy | |3. where competitor vulnerable | |4. what provokes effective retaliation | | | | | | | |[pic][pic] | |Assumptions | |[pic] | |[pic][pic] | |Resources | |& Capabilities | | | | | | |

Understanding these four components will allow an informed prediction of the competitor response profile, as articulated in the key question posted in the above diagram. Competitor’s future goals: Knowledge of goals will allow predictions about whether or not each competitor is satisfied with its present position and financial results and hence their likely moves. For example, a competitor that is focused on reaching short-term financial goals might not be willing to spend much money responding to a competitive attack. • Competitor goals may be financial or other types. growth rate, market share, and technology leadership) • Goals may be associated with each hierarchical level of strategy – corporate, business unit, and functional level. Assumptions: The assumptions that a competitor’s managers hold about their firm and their industry help to define the moves that they will consider. For example, if in the past the industry introduced a new type of product that failed, the industry executives may assume that there is no market for the product. Such assumptions are not always accurate and if incorrect may present opportunities.

For example, new entrants may have the opportunity to introduce a product similar to a previously unsuccessful one without retaliation because incumbent firms may not take their threat seriously. Honda was able to enter the U. S. motorcycle market with a small motorbike because U. S. manufacturers had assumed that there was no market for small bikes based on their past experience. Competitor’s Current Strategy: The two main sources of information about a competitor’s strategy are what the competitor says and what it does. What a competitor is saying is revealed in: • annual shareholder reports interviews with analysts • statements by managers • press releases What the competitor is doing is reveled through • hiring activity

• R & D projects • capital investments • promotional campaigns • strategic partnerships • mergers and acquisitions Capabilities: Knowledge of the competitor’s assumptions, objectives, and current strategy is useful in understanding how the competitor might want to respond to a competitive attack. However, its resources and capabilities determine its ability to respond effectively. A competitor’s capabilities can be analyzed through SWOT analysis. Competitor Response Profile

Information from the analysis of the four components can be arranged into a response profile of possible moves that might be made by the competitor. This profile includes both potential offensive and defensive moves. The specific moves and their expected strength can be estimated using information gained from the analysis. A) Offensive Moves: The first step is to predict the strategic changes the competitor might initiate. 1. Satisfaction with current position: Comparing the competitor’s (and its parent company’s) goals with its current position, is the competitor likely to attempt to initiate strategic change? . Probable moves: Based on the competitor’s goals, assumptions, and capabilities relative to its existing position, what are the most probable strategic changes the competitor will make? These will reflect the competitor’s views about the future, its likely strength, its vulnerability, and the biases by top management 3. Strength and seriousness of moves: The analysis of a competitor’s goals and capabilities can be used to assess the expected strength of these probable moves. It is also important to assess what the competitor may gain from the move. B) Defensive Moves:

The next step in building a response profile is to construct a list of the range of feasible strategic moves a firm in the industry might make and a list of the possible industry and environmental changes that might occur. These can be assessed against the following criteria to determine the competitor’s defensive capability. 1. Vulnerability: To what strategic moves and governmental, macroeconomic or industry events would the competitor be most vulnerable? What events have asymmetrical profit consequences, that is, affect a competitor’s profits more or less than they affect the initiating firm’s? 2.

Provocation: What moves or events are will provoke a retaliation from competitors even it may be costly and lead to marginal financial performance? That is, what moves threaten a competitor’s goals or position so much that it will be forced to retaliate, like it or not? 3. Effectiveness of retaliation: To what moves or events is the competitor impeded from reacting to quickly and/or effectively? What courses of action might be taken in which the competitor would not be effective if it tries to match or emulate them? Q; “Before discussing each components of competitor analysis, it is important to define which competitor should be discussed”.

Explain the statement. -05 In formulating business strategy, managers must consider the strategies of the firm’s competitors. Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. Competitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats. The four components of competitor analysis are • Competitor’s objectives Competitor’s assumptions • Competitor’s strategy • Competitor’s capabilities Before discussing each components of competitor analysis, it is important to define which competitor should be discussed. Clearly all significant existing competitors must be analyzed. Form the above analysis we found that the potential competitors that may come on the scene must also be analyzed.

But forecasting potential competitors is not an easy task, they can often be identified form the following groups: • Firms not in the industry but who could overcome entry barriers particularly cheaply. Firms for whom there is obvious synergy from being in the industry. • Firms for whom competing in the industry is an obvious extension of the corporate strategy. • Customers and suppliers who may integrate backward and forward. Another potentially valuable exercise is to attempt to predict probable mergers and acquisitions that might occur, either among the establish competitors or involving outsiders. • A merger can instantaneously propel a weak competitor into prominence, or strengthen an already formidable one. • Forecasting acquiring firms follows the same logic as forecasting potential entrants.

Forecasting acquisition targets within the industry can be based on their ownership situation, ability to cope with future developments in the industry, and potential attractiveness as a base of operations in the industry, among other things. Thus we can say form the above analysis that a firm needs to identify not only its existing competitors but also potentials competitors before discussing each components of competitor analysis. Q: How would you outsmart your competitors? -3 Experts point out the following 8 techniques that would give a company a lead of two or more years on the competition. 1.

Watch the small companies, industries and related industries. 2. Follow patent application information can be found on various online and CD ROM data bases. 3. Track the job changes and other activities of industry experts. Seek the answer to such questions as – whom have the competitors hired? What are the values of their expertise to the competitors? 4. be aware of licensing agreements 5. monitor the formation of business contracts and alliances 6. Find out about new business practices that are saving competitor’s money.

7. Be aware of social changes and changes in consumer taste and preferences. . Follow changes in pricing. Q: Define industry. Discuss the industry concept of competition. Explain bases according to which industries may be classified. Industry concept of competition: an industry is a group of firms that offer a product or a class of products that are close substitutes for each other. 1. Number of seller and degree of differentiation: the starting point for describing an industry is to specify whether there are one, few or many sellers of the product and whether the product is homogenous or highly differentiated. Pure monopoly: one firm provides a certain product in a certain area. • Oligopoly: a small number of large firms produce products that range from highly differentiated to standardize. • Monopolistic: consists of many competitors able to differentiate their offers in whole or part. • Pure competition: many competitors offering the same product.

2. Entry and mobility barriers: the major entry barriers include high capital requirements, economies of scale, patents and licensing, scare locations, raw materials or distributions. Mobility barriers face when it tries to enter more attractive market segments. . Exit and shrinkage barriers: exit barriers are legal or moral obligations to customers, creditors, employees, govt. restriction, and low asset salvage value lack of alternative opportunities, high vertical integration and emotional barriers. Common shrinkage barriers are contract commitments, and stubborn management 4. Cost structure: each industry has certain cost mix that drives much of its strategic conduct. Firms are always tried to reduce their costs. 5. Degree of vertical integration: in some industries companies find it advantageous to integrate backward and forward. . Degree of globalization: some industries are highly local, others are global. Companies in global industries need to compete on global basis if they are to achieve high profit. Bases for industry classification: The four well-known industry structures are 1. Pure monopoly 2. oligopoly 3. monopolistic competition

4. pure competition Pure monopoly: • only one firm provides certain product • monopolist seeks to maximize profit • charges high prices • absence of close substitutes • regulated monopolist charges low prices • think about public interest Oligopoly: small number of large firms produce products • highly differentiated to standardize • Two forms of oligopoly: pure and differentiated. Pure oligopoly: few company producing essentially same commodity Differentiated: few companies producing partially differentiated good. Monopolistic competition: • Many competitors able to differentiate their offer • Focus on market segment • Meet customer needs in superior way • Command a price premium Pure competition: • Many competitors offering the same product • No bases for differentiation • Competitors price is same

Q: How can competitors’ future goals be identified? The following diagnostic questions help to determine a competitor’s present and future goals. We begin by considering the business unit or division, which in some cases will comprise the competitor’s entire corporate entity. Business unit goals I. What are the stated and unstated financial goals of the competitor? 2. What is the competitor’s attitude toward risks? 3. Does the competitor have economic or non economic organizational values or beliefs, either widely shared or held by senior management, which importantly affect its goals? . What is the organizational structure of the competitor (functional structure, presence or absence of product managers, separate R;D laboratory, etc. )?

5. What control and incentive systems are in place? 6. What accounting system and conventions are in place? 7. What kinds of managers comprise the leadership of the competitor, particularly the Chief Executive Officer (CEO)? 8. How much apparent unanimity is there among management about future direction? 9. What is the composition of the board? 10. What contractual commitments may limit alternatives? 1. Are there any regulatory, antitrust, or other governmental or social constraints on the behavior of the firm? The impact of the corporate parent on the future goals of the business unit: If the competitor is a unit of a larger company, its corporate parent is likely to impose constraints or requirements on the business unit that will be crucial to predicting its behavior. The following questions need to be asked in addition to those just discussed: 1. What are the current results (sales growth, rate of return, etc. of the parent company?

2. What are the overall goals of the parent? 3. What strategic importance does the parent attach to the particular business unit in terms of its overall corporate strategy? 4. Why did the parent get into this business? 5. What is the economic relationship between the business and others in the parent company’s portfolio? 6. What are the corporate-wide values or beliefs of top management? 7. Is there a generic strategy that the parent has applied in a number of businesses and may attempt in this one? 8.

Given the performance and needs of other units in the corporation and the overall strategy, what sorts of sales targets, hurdles for return on investment, and constraints on capital might be placed on the competitor unit? 9. What are the parent company’s diversification plans? 10. What clues does the organizational structure of the competitor’s corporate parent provide about the relative status, position, and goals of the unit in the eyes of the corporate parent? 11. How is divisional management controlled and compensated in the overall corporate scheme? 12.

What kinds of executives seem to be rewarded by the corporate parent? 13. Where does the corporate parent recruit from? 14. Does the corporation as a whole have any antitrust, regulatory, or social sensitivity? 15. Does its corporate parent or particular top managers in the organization have an emotional attachment to the unit? Q: What question should be asked for analyzing a business portfolio about the needs the competitor unit is fulfilling in the eyes of the parent company? The most revealing technique for portfolio analysis of the competitor is the one the competitor uses itself. What criteria are used to classify businesses at the competitor’s parent if a classification scheme is in use? How is each business classified?

• Which businesses are being counted onto be cash cows? • Which businesses are candidates for harvest or divestment given their position in the portfolio? • Which businesses are the habitual sources of stability to offset fluctuations elsewhere in the portfolio? • Which businesses represent defensive moves to protect other major businesses? • Which businesses are the most promising areas the parent company has in which to invest resources and build market position? Which businesses have a lot of ”leverage” in the portfolio? Whether businesses’ performance changes will have a significant impact on the performance of the parent company. Portfolio analysis of the parent will provide clues to what the objectives of the business unit will be; how hard it will fight to maintain its position and performance along dimensions such as return on investment, share, cash flow, and so on; and how likely it is to attempt to change its strategic position. Q: How can you identify the competitor’s assumptions about itself and its industry?

The following questions are directed toward identifying competitors’ assumptions and also areas where they are likely not to be completely dispassionate or realistic: 1. What does the competitor appear to believe about its relative position? What does it see as its strengths and weaknesses? 2. Does the competitor have strong historical or emotional identification with particular products or with particular functional policies? 3. Are there cultural, regional, or national differences that will affect the way in which competitors perceive and assign significance to events? .

Are there organizational values or canons which have been strongly institutionalized and will affect the way events are viewed? 5. What does the competitor appear to believe about future demand for the product and about the significance of industry trends? 6. What does the competitor appear to believe about the goals and capabilities of its competitors? 7. Does the competitor seem to believe in industry “conventional wisdom” or historic rules of thumb and common industry approaches that do not reflect new market conditions? 8.

A competitor’s assumptions may well be subtly influenced by, as well as reflected in, its current strategy. Q: Does history work as an indicator of goals and assumption? One of the often powerful indicators of a competitor’s goals and assumptions with respect to a business is its history in the business. The following questions suggest some ways to examine these areas; 1. What is the competitor’s current financial performance and market share, compared to that of the relatively recent past?

Better past indicates the competitor potential. and the competitor tries to regain the performance of the recent past. . What has been the competitor’s history in the marketplace over time? Where has it failed or been beaten, and thus perhaps not likely to tread again? 3. In what areas has the competitor starred or succeeded as a company? – In new product introductions? Innovative marketing techniques? Others? 4. How has the competitor reacted to particular strategic moves or industry events in the past? Rationally? Emotionally? Slowly? Quickly? Q: Does managerial backgrounds and advisory relationship help to indicate a competitor’s goals and assumptions?

Where its leadership has come from and what the managers’ track records and personal successes and failures have been. 1. The functional background of top management is one key measure of its orientation and perception of the business and appropriate goals. 2. A second clue to the top managers’ assumptions, goals, and probable future moves is the types of strategies that have worked or not worked for them personally. 3. The other businesses they have worked in and what rules of the game and strategic approaches have been characteristic of those businesses. 4.

Top managers can be greatly influenced by major events they have lived through, such as a sharp recession, traumatic energy shortage, major loss due to currency fluctuations, and so on. 5. Indications of top managers’ perspectives can also be gained from their writing and speaking, their technical background or patent history where applicable, their outside activities. 6. Management consulting firms, advertising agencies, investment banks, and other advisors used by the competitor can be a important clues.

Q: when a firm to choose to attack competitors with a move to be successful? Best battle ground to fight? A company should choose to attack in the market segment or dimensions of strategy as a battleground in which competitors are ill-prepared, least enthusiastic, or most uncomfortable about competing. The ideal is to find a strategy that competitors are frozen from reacting to given their present circumstances. Such strategy may make some moves very costly for competitors. For example, when Folgers’s Coffee invaded Maxwell House strongholds in the east with price cutting, the cost of matching these cuts were enormous for Maxwell House because of its large market share.

Another key strategic concept is creating a situation of mixed motives or conflicting goals for competitors. This strategy involves finding moves for which retaliation, though effective, would hurt the competitor’s broader position. For example, as IBM responds to the threat of the minicomputer with its own minicomputer, it may hasten the decline in growth of its large computers. Q: Discuss the functions of a competitor Intelligence System. See in the book @ page 73