Competitor analysis - Marketing Strategy

The ‘five forces’ analysis has examined the overall industry and is a starting point in assessing a company’s competitive position. This is likely to be a rather broad definition of an industry and contains a number of companies that would not be direct competitors. For instance. Toyota is likely to have a number of natural direct competitors but TVR is not likely to be one of them, although both companies are in the car industry. Toyota’s scale is global and it manufactures cars across the full range, TVR is a specialist,low-volume prestige sports car manufacturer. Companies that are direct competitors in terms of products and customer profiles are seen as being in a strategic group. The car industry would be made up of a number of strategic groups.

Strategic groups

Strategic groups are made up of organizations within the same industry that are pursuing equivalent strategies, targeting groups of customers that have similar profiles. TVR’s strategic group is likely to contain Ferrari,Lotus, Lamborghini, Aston Martin etc. All these companies are following similar strategies and facing similar strategic questions. They are also aiming at very similar market segments. In the airline industry there are at least three strategic groups. One group consists of airlines with regional operations who offer scheduled flights and compete on cost. There is a group of major airlines who have global operations and offer scheduled flights with quality environments and service. The third group offer charter services to a range of holiday destinations .

There are a range of attributes that can be used to identify strategic groups. Some examples are:

  • size of the company
  • assets and skills
  • scope of the operation
  • breadth of the product range
  • choice of distribution channel
  • relative product quality
  • brand image

For many companies, analyzing every competitor in its generic industry would be a difficult task in terms of management time and company resources. Defining an organization’s strategic group allows a company to concentrate its analysis on its direct competitors and to examine them in more detail.

Strategic groups in the airline industry

Strategic groups in the airline industry

Tools which are used to analyse the internal environment, such as the value chain, can of course be used to analyses competitors. For each competitor in their strategic group an organization needs, as far as possible,to establish the information discussed in the following subsections.

Competitor’s objectives

A competitor’s objectives can be identified by analyzing three important factors:

  • Whether the competitor’s current performance is likely to be fulfilling their objectives. If not, the competitor may initiate a change of strategy.
  • How likely the competitor is to commit further investment to the business. Financial objectives may indicate this. Investment is more likely from companies that have objectives which are long-term in nature, such as market share and sales growth, rather than organizations under pressure to produce short-term profitability. This also reveals potential trade-offs the competitor may be willing to take. If short-term profitability is the key objective then the rival is likely to be willing to lose market share in the short term in order to achieve its profitability targets.
  • The likely future direction of the competitor’s strategy. The organization may have non-financial objectives, such as gaining technology leadership.

Competitor’s current and past strategies

There are three areas that should be explored in order to establish a competitor’s current activities:

  • Identification of the current markets, or market segments,within which the competitor currently operates. This will indicate the scope of the business
  • Identification of the way the competitor has chosen to compete in those markets. Is it based on quality of service, brand image or on price?This may be an indication of whether a low cost or differentiation strategy is being pursued.
  • Comparison between the current strategy and past strategies can be instructive. Firstly it can illustrate the direction in which the competitor is moving, in terms of product and market development, over time. It can also highlight strategies that the organization has tried in the past and which have failed. The competitor is unlikely to attempt these approaches again without considerable reservations.

Competitor’s capabilities

An analysis of a competitor’s assets and competencies allows a judgment to be made about how well equipped they are to address the market, given the dynamics in the industry and the trends in the external environment. In order to evaluate a competitor’s potential challenge to an organization a number of areas need to be examined:

  • Management capabilities:The background and previous approaches of leading managers in a competitor company can give clues as to their likely future strategy. The level of centralization, or decentralization of management decisions will also affect decision making. Recruitment and promotion policies,along with the remuneration and rewards scheme, all give an indication as to the culture and style of the management team.
  • Marketing capabilities:An analysis of the competitor’s actions,with the marketing mix, uncovers the areas where their marketing skills are high and also areas of vulnerability. There are a number of questions that can be asked: How good is the competitor’s product line? Do they have a strong brand image? Is their advertising effective? How good are their distribution channels? How strong is their relationship with customers?
  • Innovation capabilities:Evaluating a competitor’s ability to innovate allows an organization to judge how likely the rival is to introduce new products and services or even new technology. Assessing the quality of a competitor’s technical staff, its technical facilities and its level of investment in research and development will all help indicate its likely potential in this area.
  • Production capabilities:The configuration of a competitor’'s production infrastructure can highlight areas that may place them at an advantage,or conversely point out areas that are problematic to them. Such factors could be geographic spread of plant, level of vertical integration, or level of capacity utilization. Low capacity utilization can increase fixed costs per unit of manufacture. On the other hand, it offers a competitor production capacity for new products. The flexibility of production staff is also an important issue to identify. In the service sector, capacity and staff flexibility are just as important. Factors such as the ability to pull in additional staff on
    a temporary basis give a service company an important capability.
  • Financial capabilities:The ability to finance developments is a critical area. Competitors that have strong cash flows, or are a division of a major group, may have the ability to finance investment not available to other competitors.

Competitor’s future strategies and reactions

One of the aims of the competitor analysis so far has been together information on rivals to establish their likely future strategy. It is equally important to evaluate a competitor’s likely reactions to any strategic moves the organization might instigate. The reactions of organizations can be categorized into four types of response:

  • Certain retaliation:The competitor is guaranteed to react in an aggressive manner to any challenge. Market leaders, in particular, are likely to react in this manner against any threat to their dominant position. Companies that have an aggressive culture may also fall into this category.
  • Failure to react:Competitors can be lulled into a false sense of security in an industry that, over a long period of time, has seen very little change. In this situation companies can be extremely slow to react to a competitive move. The classic example is British motorcycle companies failing to react to the entry of Japanese manufacturers into the lower end of the market.
  • Specific reactions:Some competitors may react, but only to competitive moves in certain areas. For instance, they may always react to any price reductions, or sales promotions, as they believe these will have an important impact on their business, but they may fail to respond to a competitor’s increase in advertising expenditure. The more visible the competitor’s move the more likely a competitor is to respond. Actions that are less visible, such as support material for the sales force or dealerships, are less likely to face a response.
  • Inconsistent reactions:Other companies’ reactions are simply not predictable. They react aggressively on occasion but at other times ignore similar competitive challenges.

Problems in identifying competitors

Analyzing members of a strategic group provides crucial information on which to base strategic decisions. However, there are risks in the process of identifying an organization’s competitors and a number of errors should be avoided:

  • Overlooking smaller competitors by placing too much emphasis on large, visible competitors.
  • Focusing on established competitors and ignoring potential new entrants.
  • Concentrating on current domestic competitors and disregarding international competitors who could possibly enter the market.

The competitive analysis has allowed the organization to establish its relative position versus its competitors on a range of important criteria. However, the organization has to judge itself and its competitors against the market it is operating within. At this stage in the external analysis it is useful to establish a range of information about the market. The customer and market segmentation would also be considered in a market analysis and this will be explored in detail later.

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