Competitive Strategy - technique for analysing industries and competitors

Explicit or implicit, all firms have a competitive strategy

An organization's structure defines its competitive strategy. For example, a small locally-owned creamery and Gossner Foods will hardly have similar ones. A strategy comprises several policies employed to achieve specific goals. An explicit strategy is developed through planning and approved by the company's top management. However, if the strategy is not documented officially, the company still has it. An implicit strategy presupposes that different employees or departments pursue specific goals that fit their vision of long-term company development. But, the sum of these departmental approaches rarely equals the best strategy.

Essentially, developing a competitive strategy is developing a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals.

 Strategic planning allows you to see how the company is likely to develop from a long-term perspective. As a manager or a person in charge, you might want to ask yourself these questions:

• What is driving competition in the industries I want to enter?

• How will my industry evolve?

• What actions are competitors likely to take?

• What is the best way to respond?How can the firm compete in the long run?

The adoption of strategic planning all over the world shows there are significant benefits to gain.

However, formal strategic planning emphasizes the necessity to ask these questions while overlooking the possible answers. The techniques that have been used for answering the questions, most times by consulting firms, look into each company’s separate case rather than put it in a larger industry perspective.

The threat of entry: new competitors

An industry refers to a group of firms producing goods or providing services that are close substitutes for each other. Competition in an industry continually works to drive down the rate of return on invested capital toward the competitive floor rate of return.

The forces driving industry competition are entry, the threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors.

 New entrants in an industry often bring substantial resources and the desire to gain market share. They might lower prices, which can make their counterparts' costs inflated. Reduced profitability is a possible outcome. The threat of entry into any industry depends on how well the existing competitors hold their ground and the objective economic factors, or barriers, of this specific industry.

Some primary sources of barriers to entry are:

1. Economies of Scale. This deters entry by forcing an entrant to come in at a large scale and risk strong reactions from existing firms or come in at a small scale and accept a cost disadvantage. Both are undesirable options.

2. Product Differentiation. This creates a barrier to entry by forcing the entrant to spend heavily to overcome existing customer loyalties.

3. Capital Requirements. The need to invest large sums in order to compete creates a barrier to entry, particularly if the capital is required for risky up-front advertising or research and development.

4. Switching Costs. This is one-time cost buyers face as a result of switching from one supplier’s product to another’s.

5. Access to Distribution Channels can be created by an entrant’s need to secure distribution for its product. Established firms have already employed logical distribution channels for a particular product. Therefore, the new firm must persuade the channels to accept its product through price breaks, cooperative advertising allowances, and the like to get profit.

6. Government Policy can, for example, limit a company’s access to raw materials or enforce licensing.

Switching costs can include employee retraining costs, cost of new ancillary equipment, and testing time.

 Three universal strategies to outrun your competitors

Even within one industry, companies that provide similar services or goods may differ significantly when it comes down to their structure. The structure defines the competitive strategy a company will pursue. However, there are three nearly universal or generic strategies you might consider. Later, they can be amended and tailored to the specific needs of your business.

Overall cost leadership: This revolves around the costs. Reduction of costs is your main goal. You employ the facilities in the most cost-effective way and try to eliminate marginal customer accounts. The areas you foremost cut the costs are research and development, service, salesforce, advertising, etc.

Research and development or advertising are vital in getting the edge over the competition. However, lowering your costs implies a competitive advantage. It will keep the price for goods and services relatively low and still let you earn returns. If your expenses are one of the lowest, powerful buyers will not be able to affect them. That is also true about powerful suppliers. Reduced costs also demand access to a large segment of the market and raw materials. AliExpress, Alibaba, Amazon, McDonald’s, WizzAir are examples of successful cost leadership.

You may invest returns gained through cost leadership in advanced equipment

Differentiation: This is your chance to be unique. This uniqueness doesn’t have to manifest entirely but reveals itself in specific areas: design or brand image, customer service, technology, features, etc. Some of the successful cases of differentiation are:

• Apple (operating system, product design, higher pricing resonant with higher quality);

• Emirates (customer service, advanced technology);

• Hermés (exclusive, original, hard to get products of high quality);

• Tesla (innovation, sustainability, absence of marketing strategy);Lush (handmade of high quality, ethical, and social responsibility of the brand).

Approaches to differentiating can take many forms: design or brand image, technology, features, customer service, dealer network, or other dimensions.

The desire to own something unique, original, and crafted benumbs sensitivity to a higher price. Customers who prefer such brands become loyal as they feel that the company creates something specifically for them. Thus, increased margins are implemented and even justified. Your differentiation strategy tells your customers that your product is not for everyone, but it’s worth it..

Differentiation increases margins, and there is no need for cost reduction. You can invest in customer care, R&D, and advertising

Focus: This requires that you single out a particular group, a segment of the product line, or geographical market, as Porter writes. Each department of a company works towards policies that affect the entire industry but target niche markets. Peculiar about this strategy is that either cost reduction or differentiation are its complementary strategies. Whichever you choose, you should also offer something extra — a benefit, a range of choices, and so on.

When the focus falls on lowering costs, your product should be essential, not exclusive. It is quite beneficial if that’s an everyday-use type of product, as there is always a demand for them. If you target uniqueness, you look at narrow markets and strive to enhance that one-of-the-kind idea. In this case, your “something extra” might be satisfying individual demands or creating a product tailored specifically to each consumer’s needs.

A low-cost position always places a firm in a favorable position, vis-à-vis substitutes relative to its competitors in the industry.

Use these tools to analyze your competitors

Competitive analysis asks: “Who are our rivals in the industry?”

Future goals: These are the endpoints of the business cycle, yet they define the company’s behavior on the market. They also help you learn whether your competitor is happy to be where they are. Perhaps, they want to change their strategy due to internal factors or the influence of external ones. Goals define the capacity they have to make a new move or stick to their proven ways.

The following diagnostic questions will determine a competitor’s present and future goals:

• What are the stated and implied financial goals of the competitor? Do they give more attention to short-term or long-term goals?

• What is your competitor’s attitude toward risks?

• Do they want to become a leader in the industry? Do they have particular values apart from getting revenue that influences their goals?

Analyze your competitor’s goals to predict how they are likely to react to your strategic changes.

Assumptions: These are accepted beliefs that do not require support by evidence. These fall into two major categories:

• How your competitor sees itself: These assumptions are not always based on concrete facts and statistics. Instead, they have to do with the image a company pursues to project. For example, an oil producer might be investing in planting trees in Southern America, which would make them enthusiastic ecology defenders. At the same time, this company makes a profit by drilling into the seabed and destroying the coral reef and underwater life in general. Thus, their main activity doesn’t fit in with the image.How they see the industry and the other companies in it: Again, these might not reflect reality. However, there five things to think about before you make such assumptions: you can’t always know exactly what the customer wants; advertising and communication through social media are not 100% beneficial; trends you see as long-playing might become outdated in a snap; customers are different and not equal; loyalty doesn’t guarantee high profits.

Current strategy: This was already discussed in “Explicit or implicit” as a set of policies to achieve company goals.

Capabilities: This stands for the resources, such as time, money, and intensity of a competitor’s reaction to changes. Its weaknesses and strengths will determine its ability to react or initiate strategic moves and deal with occurring environmental or industry events.

Examining assumptions of all types can identify biases or blind spots that may creep into the way managers perceive their environment.

 

Fragmented industries need to formulate a competitive strategy in order to survive

The absence of the market leader defines fragmented industries. A market leader usually shapes and somehow dictates the competition. One more peculiarity is that medium-sized companies form the bulk of such industries. The examples of fragmented industries are services, retail, distribution, wood and metal fabrication, agricultural products, and creative businesses.

In a highly fragmented industry, the entrant may affect many firms but have only marginal impact.

Industries are fragmented for different, mostly complementary reasons. The principal ones are:

• Low overall entry barriers: The easier it is to get into an industry, the more companies take advantage of it.

• High transportation costs: This reason affects the size and territorial coverage of the company.

• Local regulation: Introducing very specific standards for the companies or forcing them to comply with the local political realia.

• Focus activity: The demand for excellent customer service is better satisfied with a small number of employees who can establish strong connections with their clients. 

Local regulation can cause fragmentation in an industry.

Here is what you should do to neutralize fragmentation:

1. Neutralize aspects most responsible for fragmentation: Sometimes it is one or several areas that cause industry fragmentation. The solution is to separate those aspects from the rest of the business.

2. Recognize industry trends early: Sometimes industries consolidate naturally as they mature, mainly if the primary source of fragmentation was the newness of the industry, or exogenous industry trends can lead to consolidation by altering the causes of fragmentation.

3. Standardize diverse market needs: Product or marketing innovations can do that. Instead of adapting to different market segments' needs, choose to bring them closer to one standard. In other words, custom variety.

4. Create economies of scale or experience curves: If technological changes lead to economies of scale, consolidation can occur. Economies of scale created in one segment of the business can outweigh diseconomies in another.

Emerging industries tend to focus on uncertainties and risks for survival

Emerging industries are re-formed or newly formed industries that appear due to technological innovation, customer demand for a new product or service, or other external changes on the market.

The following structural factors characterize many industries in this stage of their development:

• technological uncertainty;

• no “right” strategy identified;high initial costs and slow process of cost reduction.

Cost reduction can be a slow-burner for emergent industries due to a relatively short presence on the market and small production volume.

There are several problems that constrict industry development. Among them are, according to Michael E. Porter, inability to obtain raw materials and components; period of rapid escalation of raw material prices; absence of infrastructure; customers’ confusion.

The formulation of strategy in an emerging industry must cope with the uncertainty and risk of this period of an industry’s development.

However risky the emerging industry business may seem, there are ways to alleviate the situation and even get ahead in the competition. You may be the first one to enter the playing field. It is risky, but, on the other hand, entry barriers might be extremely low, and you will be the first one to establish your brand name on the market. Another way is to influence the industry by having it follow your rules. You can do this if your marketing or pricing strategy is hard to beat. Sometimes emerging businesses have to compete against the strategy they are not fond of. However, as soon as you hold solid ground, you can enhance and develop your strategy. Shifting mobility barriers and changing suppliers and channels' role are also good ways to start strengthening your market position.

Did you know? Emerging businesses that bring cutting-edge products to the market can rely on governmental and non-governmental subsidies in the form of grants, tax incentives, and so on.

Effective strategies for industries with declining competitive demand

An industry is considered to be in the state of declining if it has failed to reach its target sales for a sustained period of time. Therefore, a failure to reach a short-term goal is just a part of a regular business cycle. With time, a demand for certain products or services becomes weaker and might even disappear for the following reasons:

• Technological substitution: Imagine that you have been a typewriter manufacturer for many years, but then personal computers started flooding the market. Your product might be right for antique collectors. But how many of them are required to sustain your business?

• Demographics: The population worldwide is aging, and this trend will continue to persist well into the future. The purchasing power of the retirees tends to be lower. And here, geography matters, too. For example, when thinking of selling gadgets, target areas populated with the Millennials and younger generations.

• Shifts in needs: This may occur due to different factors. For instance, wars, revolutions, and other kinds of armed conflicts increase the demand for weapons, whereas pandemics require the means of personal protection.

Customer groups that purchase a product can influence its survival or decline.

The situations of decline are not always condemnation. Companies often resort to disinvestment and harvest as strategies to reduce costs and expenditures. However, Porter offers several strategic alternatives that are not universal and won’t suit every industry. They are:

Leadership: The industry is declining, but there is still a demand for what it has to offer. Your company might be that last one or among a few still working in this industry. You can get rid of your competitors by purchasing their market share or invest extensively in strategies that allow you to increase your market share.

Niche: Your business finds a segment or a “demand pocket,” as Porter calls it, and throws all its efforts into retaining it. Leadership tactics will be helpful, too.

Harvest: The firm tries to optimize cash flow from the business and retain the revenue. It could be achieved by nearly eliminating new investment, lowering the maintenance of facilities, and investing money into the areas that are most likely to bring profit. 

Conclusion

Industry structure, which is embodied in the five competitive forces (entry, the threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors), provides ways to think about how value should be created and divided among potential and existing industry participants. It shows that competition is much more than just rivalry with existing competitors. While there can be uncertainty about where to draw industry boundaries, one of the five forces always captures the essential issues in value division. There are arguments in favor of a sixth force, which could be either government or technology. Yet, its influence cannot be fully estimated if the mentioned five forces are out of the picture.

Michael E. Porter offers three generic strategies that any company can consider to use in its development and rivalry for market share. They are universal but can be tailored to the particular needs of the business. Moreover, the author looks into the cases of emerging industries with the edge of novelty but cannot afford large production volumes. They haven’t had the time to persuade their potential customers that their product is exactly what they need. On the other pole, there are industries in decline, but not all of them are becoming completely extinct, and there are still market shares to fight for. And Porter tells his readers how to do that.

Try this

Even if you are not thinking of starting a business, you might want to do it one day. Consider these questions to guide you in the right direction:

• What are the current demographic trends in your country? Do these trends correspond to the global ones? How do they affect the purchasing power of your potential customers?

• Will your product or service be in demand 10 years from now? How about 50? Is it essential or more exclusive? Has anyone else already been doing it? If no, think why not. If yes, think about how you can beat your competitor(s).

• Develop a set of standards to evaluate the success of your product or service. Establish the criteria to estimate that your business needs to be shut down or transformed because it is always beneficial to stop at the right time.