Chap 6 Competitor Selection

1. Chap 6Competitor Selection Competitive Advantage

2. Strategic benefits of competition • Increases competitive advantaged. a. Absorbs demand fluctuations b. Enhance differentiation c. Serve unattractive markets d. Provide a cost umbrella e. Improve bargaining position with labour and regulators f. Increase motivation

3. Strategic benefits of competition 2. Improving current industry structure a. Increase industry demand b. Technological credibility c. Provide a second or third source d. Reinforce desirable elements of industry structure

4. Strategic benefits of competition • Aiding market development a. Share the costs of market development b. Reduce buyer’s risk c. Help to legitimize and standardise a technology d. Promote the image of the industry

5. Strategic benefits of competition • Deterring entry of rivals a. Increase the likelihood and intensity of retaliation b. Symbolise the difficulty of successful entry c. Block logical entry avenues d. Crowd distribution channels

6. What makes a good competitor • Tests of a good competitor a. Credible and viable to the firm and customers b. Clear and self perceived weakness c. Understands the rules of the industry d. Realistic assumptions about the industry e. Knowledge about the costs f. Inherently limiting strategic concept g. Moderate exit barriers

7. What makes a good competitor • Tests of a good competitor f. Reconcilable goals with the firm’s goals g. Has moderate stakes in the industry h. Has a comparable return on investment target i. Accept current profitability j. Desires cash generation k. Has short time horizon and does not attack firm l. Is risk averse.

8. Firm’s tactics to influence entry • Technology licensing • Selective retaliation • Selective entry deterrence • Coalition to draw in new entrant

9. What is the ideal configuration ? “A firm’s optimal share of the part of the industry it is targeting should be high enough not to tempt a competitor to attack it”

10. Structural characteristics of industry under which firm has to maintain high market share • Significant economies of scale • A steep learning curve that is proprietary • Few industry segments • Buyers willing to purchase from a single source • No distribution channels stocking multiple brands • Competitors can share value activities and thus attack the firm • Other high entry barriers

11. Structural characteristics of industry under which firm has to maintain low market share • Few economies of scale • A modest learning curve • There are unattractive segments • Buyers demand a second or third source • Channels have bargaining power and desire multiple suppliers • Competitors are single business firms who cannot share activities • Followers are necessary as credible entry deterrents against more threatening firms • A follower needs a meaningful share to be viable • The industry has a history of antitrust problems

12. Insights for the market leader • In an industry with few segments and little differentiation or low switching costs, a large markets share is necessary. • In an industry with many segments and high differentiation, firms can coexists profitably. • Share not controlled by leader should be distributed between followers who are keen on competing with each other for each other’s share and not interested in the leader.

13. ..moving towards ideal competitor configuration • Firm has to calculate cost of gaining positioning or the risk of giving away share • Yielding share has the risk of tempting competitors that they could take even more. • In case of losing market share another issue is barriers to shrinkage or exit barriers.

14. Competitor selection...Oops….. • Failure to distinguish good and bad rivals • Driving rivals to desperation • Having too big a market share • Attacking a good leader • Entering an industry with too many bad competitors.

15. Chap: 7Industry segmentation and competitive advantage • Critical issues for a firm a. Where in an industry to compete c. In what segments will focus strategies be sustainable because barriers can be built between segments

16. Industry segmentation • It is similar to market segmentation except for the fact that it combines purchasing behaviour of consumers with production costs and costs of serving consumers • It targets issues like what segments to target and how to serve them

17. Bases of industry segmentation • Structural base: Segments grow out from differences in buyer behaviour and the differences in economics of supplying different products to these buyers

18. Segmentation variables • There are four broad variables a. Product variety 2. Buyer type III. Channel e. Geographic buyer location.

19. Product • Physical size • Price level • Features • Technology • Inputs employed • Packaging • Performance • New versus Replacement • Product versus Ancillary services • Bundled versus Unbundled

20. Buyers Industrial and commercial buyers • Buyer industry • Buyer’s strategy • Technological sophistication • OEM v/s User • Vertical integration • Decision making unit or purchasing process • Size • Ownership • Financial strength • Order pattern

21. Buyers • Consumer goods buyer • Demographics • Psychographics • Language • Decision making unit or purchasing process • Purchase decision

22. Channel segments • Direct v/s distributors • Direct mail v/s retail • Distributors v/s brokers • Types of distributors or retailers • Exclusive v/s non exclusive outlets

23. Geographic segments • Localities in terms of regions and countries • Weather zones • Country’s stage of development or other country grouping. E.g EU, SAARC

24. Industry segmentation matrix • Once segmentation variables are identified they are combined to segment the industry. The tool used is the industry segmentation matrix For example: 1. Three categories of buyers 2. Two categories of geographic locations

25. Industry segmentation matrix Big customers Midsize customers Small customers Developed countries Developing countries

26. Attractiveness of a segment It is a function of the following criterias: • It is structurally attractive ( in terms of five force model) • Size and growth • Firm’s position vis-à-vis segment in terms resources and skills to deal in the segment • Segment interrelationship. It deals in the activities that of the value chain that can be shared between different segments. E.g. Same manufacturing facilities can produce different product varieties.(offset by costs of coordination, compromise in terms of segment spillover and inflexibility)

27. Costs of Interrelationships Broadly three costs: • Coordination costs which are due to complexity of operating multiple segments • Compromise costs occur when value chain is designed to serve one segment and is suboptimal for the other. Segment spillover is another one. • Inflexibility costs exist since sharing value activities limit flexibility to modify strategies in different segments.

28. Segment interrelationship and broadly targeted strategies • Firm competing in one segment is most likely to enter other segments where there are strong interrelationships. • Broadly targeted competitor bets that the gains from interrelationships outweigh the costs of sharing and minimise the coordination and compromise costs • Broadly targeted competitor should not serve all segments since benefits of sharing value activities shall be outweighed in some segments by the cost of compromise.

29. The choice of focus • It can consist of more than one segment and several segments with strong interrelationships.

30. Sustainability of focus strategy • It is determined by three factors: • Sustainability against broadly targeted competitors • Sustainability against imitators • Sustainability against segment substitution

31. Chapter: 8Substitution • It is the process by which one product/ service supplants another in performing a particular function or functions for a buyer • Substitution is one of the important five forces in Porter’s model and determines industry’s and firm’s demand. • Understanding substitutes and the threats that they pose can be best understood by using substitution analysis.

32. Identifying substitution • It requires searching for products or services that perform the same generic function or functions as an industry’s product rather than products that have the same form • A product often affects not only buyer value activity but also other activities • It is also important to define the function of a product in the activity generically rather than literally • More generically the function of an industry’s product is expressed, greater the number of potential substitutes. • A substitute may have wider or narrower range of functions than an industry’s product

33. Identifying substitution • Broadly there can be four substitutes: • Buyers does not purchase anything at all to perform the function • Buyer lowers the usage rate of the product required • Buyer uses used, recycled or reconditioned products • Buyer performs the functions internally or indulges in backward integration Interestingly multiple substitutions interact in shaping the overall substitution rate in an industry and may lead to counterintuitive consequences.( Aspartame and Saccharine help each other) Interestingly if an industry faces no direct substitutes, it may still be affected by substitution if there is threat of substitution “downstream” ( If battery operated devices are replacing electricity run devices, the sales of spare parts of electricity run devices will fall)

34. Economies of Substitution • One product substitutes for another if it offers buyers an inducement to switch and this exceeds the cost or overcomes the resistance to doing so. The substitute's relative value to price is more than that of the industry’s product. • There is always some “cost of switching” to substitute due to the disruption and potential reconfiguration of existing buyer activities. • The pattern of substitution is also affected by “the buyer’s propensity to switch” • Thus the threat of substitution is a function of three factors: a. the relative value/price of a substitute compared to an industry’s product b. the cost of switching to the substitute c. the buyer’s propensity to switch

35. Relative Value/Price (RVP) • The relative /price of a substitute is the value it provides to the buyer compared to the price the buyer pays for it. • When there are no switching costs and the product is consumed quickly, the relevant RVP is a function of current conditions. • When there are costs of switching or the product is durable, the attractiveness of a substitute is the expected RVP of the substitute over the planning horizon. • Expected RVP over the planning horizon would consist of price changes of both (substitute and products) in terms of discounts, free ancillary products, free service etc.

36. List of factors that impact buyer cost/performance when comparing RVP of substitute and product • Usage rate: Substitute can lower buyer cost if less of it is required compared to product • Delivered and Installed cost: It includes cost of transportation, installation, calibration etc. • Financing cost. • Relative variability of price or availability

37. List of factors that impact buyer cost/performance when comparing RVP of substitute and product e. Direct costs of use: It is the cost of using the substitute over its entire life. It consists of 1. Cost of labour 2. Consumables 3. Insurance 4. Frequency of cost or maintenance 5. Cost of spare parts 6. Salvage value 7. Dismantling cost

38. List of factors that impact buyer cost/performance when comparing RVP of substitute and product f. Indirect costs of use: A substitute can affect the cost of other activities in the buyer’s value chain if: a. It affects productivity in other value activities b. It influences the need for other raw material or their required quality c. It requires different ancillary equipment d. It affects the need for inventory e. It affects the frequency and complexity of required quality control checks f. It affects the amount and type of packaging materials needed in shipping g. It affects product weight and hence transport costs

39. List of factors that impact buyer cost/performance when comparing RVP of substitute and product g. Buyer performance derived from the substitute h. Number of functions given by the substitute • Cost and performance of complementary products related to the substitute j. Uncertainty in terms of how will substitute affect buyer’s cost or performance.

40. List of factors that impact buyer cost/performance when comparing RVP of substitute and product k. Perception of value: It is the buyer’s perception of the RVP of a substitute that will determine the threat of the substitute and not the reality of the RVP. Buyers are least likely to perceive the benefits of a substitute when: a. The advantage of the substitute is in lowering the costs of use over time rather than immediately b. The advantages of the substitute is indirect c. Substitutes raise performance over time and not immediately d. Gaining advantages from substitutes requires buyer to change behaviour or use patterns e. Credibility of substitute is hard to assess.

41. Switching Costs • Identifying and qualifying sources • Retraining and Relearning costs • Changing role of user • Risk of failure • New ancillary products • Switching costs v/s Switching back costs

42. Buyer propensity to substitute It is affected by the various factors: • Resources • Risk profile • Technological Orientation • Previous substitution • Intensity of rivalry ( for industrial buyer) • Generic strategy ( for industrial buyer)

43. Segmentation and Substitution • The identity and threat of substitute differ by industry segment. • Threat of substitution will change by buyer group if RVP, switching costs or the propensity to substitute vary. • The substitution threat can vary not only by buyer segments but also different product varieties, geographic areas and channels.

44. Changes in Substitution threat The threat of a substitute often changes over time, with a corresponding impact on the pattern of substitution:- Changes in the threat of substitution occur in five broadly defined areas: 1. Changes in relative price 2. Changes in relative value 3. Changes in buyer perception of value 4. Changes in switching costs. 5. Changes in propensity to substitute

45. Changes in substitution threat • Changes in substitution threat are determined by industry structure and competitor behaviour in both the substitute industry and threatened industry

46. Changing relative price Relative price will change if • Relative costs of substitute and product change and the change is partially or completely passed on to the buyers • The relative profit margins of the substitute and product change.

47. Changing relative value • The relative value to the buyer of a substitute will often change because of three reasons: a. Relative pace of technological change where substitute and threatened product are engaged in a technological race to see who can improve technology faster. b. The development of infrastructure where the RVP changes in favour of the substitute over time as better infrastructure develops to support it. c. The presence of institutional factors which can impact the RVP of a substitute.

48. Changing Buyer Perception of Value • The perception of value by buyers frequently changes over time in substitution because time and marketing activities are working to alter the way buyers view a substitute compared to a product • The perception of a substitute and a product can also be affected by the relative intensity and creativity of signaling activities. • Substitute will gain in perceived value over time as buyer becomes more familiar with how to use it.

49. Changing Switching Costs • The cost of switching to a substitute often change over time in a downward direction due to the development of procedures, designs or standards. • Switching costs for substitute also fall due to redesign to increase compatibility with ancillary equipment, procedures developed by suppliers etc.

50. Changing propensity to switch The propensity to switch to a successful grows over time. Early success with substitute reduces buyer risk