Competition Analysis Porter's 5 Forces Model for Competitive Environment,

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Competitor Analysis

Competitor analysis in marketing 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.

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Competitor Profiling

The raw material of competitive advantage consists of offering superior customer value in the firm's chosen market. Customer value is defined relative to rival offerings making competitor knowledge an intrinsic component of corporate strategy. Customer profiling can reveal strategic weaknesses in rivals that the firm may exploit.
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The proactive stance of competitor profiling will allow the firm to anticipate the strategic response of their rivals to the firm's planned strategies, the strategies of other competing firms, and changes in the environment. This proactive knowledge will give the firms strategic agility. Offensive strategy can be implemented more quickly in order to exploit opportunities and capitalize on strengths.
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COMPETITOR ANALYSIS:
It is required for formulating right strategy determining right positioning for the firm in the industry. Competitor analysis seeks to find answers to following questions Who are the competitors? Which are the current strategies of the competitor? What are the future goals& likely strategies? What drives the competition? When the competitor is vulnerable How the competitors are likely to respond to the 5/3/12 strategies of others?

What strategic moves are rivals likely to make?

Unless a company pays attention to what competitors are doing, it ends up flying blind into competitive battle. A company cannot plan its moves without monitoring competitors actions, understanding their strategies & anticipating what moves they are likely to make next. Competitive intelligence is about strategies rivals are deploying, their latest moves, their resources, strengths, & weakness & the plans they have announced is essential to anticipating the actions they are likely to take next & what bearing their moves might have on a companys own best strategic moves.
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Monitoring Competitors Strategies:

The best source of information about a competitors strategy comes from examining what it is doing in the marketplace & from what its management is saying about the companys plans. Addition to this what competitor is up to & its future strategy can be achieved by considering the competitors geographic arena, strategic intent, market share objectives, position on the industry strategic group map & willingness to take risks, further it is important to know whether the competitors recent moves are mostly offensive or defensive.

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Good sources includeThe companys annual report. Recent speeches by its managers The reports of security analyst Articles in business media Companys press release Information at companys website Exhibits at international trade show Conversation with rivals customers & former employees . 5/3/12

The concept of Driving Forces:

It is important to judge what growth stage an industry is in , there is more analytical values in identifying the specific factors causing fundamental industry & competitive adjustment. Industry & competitive conditions change because forces are in motion that create incentive or pressure for change. The most dominant force s are called driving forces, because they influence the kinds of changes that will take place in the industrys structure & competitive environment.
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COMPETITIVE FORCES
An organisation in any industry area directly affected by at least five forces. They are

Competitors Potential entrants Substitutes Suppliers Buyers The combined strength of these forces affects 5/3/12 long-term profitability of a firm

PORTERS FIVE FORCES MODEL:

The state of competition in an industry depends upon the five basic competitive forces.
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Porter's five forces include

Three forces from 'horizontal' competition Two forces from 'vertical' competition

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Three forces from 'horizontal' competition:

Threat of substitute products, The threat of established rivals, and The threat of new entrants; and

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Two forces from 'vertical' competition:

The bargaining power of suppliers, Bargaining power of customers.

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POTENTIAL ENTRANTS THREAT OF NEW ENTRANTS

SUPPLIERZS

RIVALRY AMONG EXISTING FIRMS (INDUST COMPETITION)

BUYERS

Click to edit BARGAINING POWER Master subtitle style OFSUPPLIER

BARGAINING POWER OF BUYER

THREAT OF SUBSTITUTES SUBSTITUTES

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The collective strengths of the forces determine ultimate profit potential in the industry., where profit potential is measured in terms of long run returns on invested capital. The goal of the competitive strategy for a business unit in an industry is o find a position in the industry where he the company can best defend itself against these forces or can influence them in its favor. The strategic business manager seeking to develop an edge over its rival firms can use this model to better understand the industry context in which the firm operates.
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Porters Five Forces Model is a powerful tool for systematically diagnosing the principle competitive pressure in a market & assign how strong & important each one is.

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RIVALRY AMONG THE EXISTING FIRMS:

The existing firms are engaged in repeated & regular moves against each other. This is the strongest of the five competitive forces. In some industries, cross company rivalry is centered on price competitiona competition to offer buyers the best price is typical among retailers & sellers of standard commodities such as nails, plywood, sugar, printed paper,
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Occasionally price can be so lively that market price temporarily falls below unit costs, forcing losses on some or most rivals. In other industries , price competition is minimal to moderate & rivalry is focused on one or more of the following factors,

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Offering buyers the most attractive combinations of performance features, Being first to the market with innovative product, Out competing rivals with higher quality or more durable products, Offering buyers longer warranties, Providing superior after sales service,
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Creating a stronger brand image,

The pattern of action & reaction makes competitive rivalry a war games type of contest conducted in a market setting according to the rules of fair competition.

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The common factors influence the tempo of the cross- company rivalry:

Rivalry intensifies as the numbers of competitors increase & as competitors become more equal in size & capability. Rivalry is usually stronger when demand for the product is growing slowly. Rivalry is more intense when condition tempt competitors to use price cuts other competitive weapons to boost & with volume. Rivalry is stronger when customers cost to switch brand is low.
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Rivalry is stronger when one or more competitors are dissatisfied with their market position & launch moves to bolster their standing at expense Rivalry increase in proportion to the size of the pay offs from a successful strategic move. Rivalry tends to be more vigorous when it costs more to get out of business than to stay in & compete. Rivalry becomes more volatile & unpredicted the more diverse competitors are terms of their visions, strategic intents, objectives, strategies, 5/3/12

Rivalry is stronger when one or more competitors are dissatisfied with their market position & launch moves to bolster their standing at expense Rivalry increase in proportion to the size of the pay offs from a successful strategic move. Rivalry tends to be more vigorous when it costs more to get out of business than to stay in & compete. Rivalry becomes more volatile & unpredicted the more diverse competitors are terms of their visions, strategic intents, objectives, strategies, resources & countries of origin.
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According to a traditional economic model competition among the rival firms drives profit to zero. Firms strive for a competitive advantage over their rival. The intensity of rivalry among the firms varies across the industry.

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Economist measures the rivalry by concentration ratio (CR). A high CR indicates high concentration market share is held by the largest firm-the industry is concentrated. Few firms holding a large market share the competitive bondage is less competitive or closet monopoly. A low CR indicates that the industry is characterised by many rivals none of them holding significant market share-the fragmented market. These fragmented markets 5/3/12 said to be competitive. are

If the rivalry among the firms in the industry is low, the industry is said to be disciplined. Common competitive actions includes Price change Promotional measures Customer service Warranty 5/3/12 Product improvement

Factors influencing intensity of rivalry:

Number of firms and their relatives market share, strength. etc State of growth industry. In case of stagnant or declining and slow growth rate a firm is able to increase its sales by increasing its market share. Low switching cost increase rivalry. Strategic stakes are high when a firm is loosing market position or has potential for greater gains. High exit barriers cause a firm to remain in the industry even when the venture is not profitable.eg 5/3/12 plant & equipment required for manufacturing a .The

A diversity of rivals with different culture, history and philosophy make an industry unstable. Industry shakeout- Growing market and the potential for higher profit induces new firms to enter market and incumbent firms to increase production . Appoints reached where the industry becomes crowded with competitors and demand cannot support the new entrants and the resulting increased supply .Too many goods and few buyers.
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THREATS OF SUBSTITUTES:

An important force of competition is the power of substitutes. To the economists a threat of substitutes exists when the product demand is affected by the price changes of substitute product. As more substitutes become available the demand decreases .eg. -To the tyre manufacturer tyre retreader is a substitute.
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Firms in one industry are quite often close competition with firms in another industry because their respective products are good substitutes. Eg. The producer of eyeglasses competes with the makers of contact lenses & with eye specialists who performs laser surgery to correct vision problems. Cotton & wool producers are in head on competition with the makers of polyester fabric
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The strength of substitute depends upon

Whether attractively priced substitutes are available, Whether buyers view substitute as being satisfactory in terms of quality, performance & other relevant substitute. Whether buyers can switch to substitutes easily.

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The availability of substitutes inevitably invites customers to compare quality, features, performance, ease of use & other attributes as well as price. Another determinant of the strength of substitutes is how difficult or costly it is for industrys customer to switch to a substitute. The switching costs includes price premium, the costs of additional equipment, time & cost in testing the reliability & quality of the substitute, the psychic cost of serving old supplier relationship & establishing new ones.
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BARGAINING POWER OF BUYERS:

Whether seller buyer relationship represents a weak or strong competitive forces depends upon

Whether buyers have sufficient bargaining power to influence the terms & conditions of sales in their favour & The extent competitive importance of seller buyer strategic partnership in the industry.

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How buyer bargaining power can create competitive pressures:

Large retail chains like Wal-Mart have a considerable negotiating leverage in purchasing products from manufacturers because of manufacturers need for broad exposure & favourable shelf spaces for their products. Retailers may stock one or even several brands but rarely all brands, so competition among rival manufacturers for the business of popular or high volume retailers gives such retailers significant bargaining leverage
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Buyers have substantial bargaining leverage in a number of occasions, the most obvious is when the buyers are large & purchases a sizable quantity of industry out put. Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige , they may still have some degree of bargaining power in following cases ,
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If buyers cost of switching to competitive brands or substitutes are relatively low. If the number of buyers is small or if a customer is particularly important to a seller. If the buyers are well informed about sellers products, prices, & costs. If the buyer pose a credible threat of integrating backward into the business of sellers. If buyers have discretion in whether & when 5/3/12 they purchase the product.

Buyers typically have weak bargaining power when they buy infrequently or in small quantities & when they have high cost to switch brands. High switching cost s can keep buyer locked into present brand. In some cases in industry buyers are potential competitors- they may integrate backward . The power of buyers is the impact that customer have on producing industry. 5/3/12

Eg -Monospony -Many supplier to one buyer (INDIAN RAILWAY) ,in this condition buyer can set price Buyer power depend upon Volume of purchase relative to the total sale of the seller. Product is important to the buyer interims of total cost. Profitability of the buyer. The 5/3/12 extent of standardisation or differentiation

How Collaborative partnerships between sellers & buyers can create competitive pressures:

Partnership between sellers & buyers are an increasingly important element of competitive picture in business to-business relationships as opposed to business to consumer relationships.
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Eg. Wal Mart provides the manufacturer with whom it does business with daily sales data from each of its stores so that they can replenish inventory stocks on time.

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BARGAINING POWER OF SUPPLIR:

Whether supplier seller relationship represents weak or strong competitive forces depends upon

Whether supplier can exercise sufficient bargaining power to influence the terms & conditions of supply in their favour. The extent of supplier-seller collaborations in the industry..

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How suppliers bargaining power can create competitive pressure: .

Suppliers have no or little bargaining power or leverage over rivals when the items they provide are available in the open market from numerous suppliers with ample capabilities to fill orders.

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Suppliers are likewise relegated to weak bargaining positions whenever there are good substitutes for the items they provide & buyer fined it neither costly nor difficult to switch their purchase to the supplier of alternative items. Supplier also tends to have little bargaining power over price & other terms of sale when company they are supplying is a major customer.
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When suppliers provides an item that accounts for a sizable fraction of the costs of an industry s products, is crucial to the industry; s production process, or significantly affects the quality of the industry product, suppliers have considerable influence on the competitive process. Suppliers e more powerful when they can supply components more cheaply than industry members can make it themselves.

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How collaborative partnership between sellers & suppliers can create competitive pressure:
In many industries sellers are forming strategic & close relationship with select suppliers in order to,

Promote just in time deliveries & reduced inventory & logistic costs. Speed the availability of next generation components.
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Eg. Dell Computers has used strategic partnership with key suppliers as a major element in its strategy to be the worlds low cost suppliers of branded PCs.

The producing industry requires raw materials and other supplies. This leads to supplierbuyer relationship. A powerful supplier can pressurise producing industry by selling raw material at higher price to capture some of the industry profits.

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Factors influencing supplier power

Importance of product to the buyer. Extent of substitutability of the product. Switching costs Extent of convention & dominance in the in the supplier industry

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THREAT OF NEW ENTRANTS:

New entrants to a market bring new production capacity, a desire to establish a secure place in the market & sometimessubstantial resources with which it competes. The seriousness of the threat of entry in a particular market depends upon two factors; Barriers to entry, The expected reaction to the of incumbent firms to the new entry.
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Entry of new firms affects competition. In case of markets having normal profit it is easy to enter and exit. Industry posses characteristic that protects the high profit level of firms in the market and inhibit additional rivals from entering the market. These are the barriers to entry. Barriers reduce the rate of entry of new firms thus maintaining a kevel of profit for those already in the industry.
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Government creates barrier through reservation policy, industrial licensing restricting foreign capital &technology. Patents and proprietary knowledge serve to restrict entry into an industriesPOLOROID Edwin Land in1947-camera for instant photograph. KODAK-1975. SUED KODAK &kept them out of industry.

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Economies of scale.

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Cost & resources disadvantages independent of size. Learning & experience curve effects.. Inability to match technology & specialized know how of firms already in the industry. Brand preference & customer loyalty . Capital requirements.

Entry barriers can be formidable for star- up enterprises trying to compete against established companies. In evaluating the potential threat of entry, the management must look for, How formidable the entry barriers are for each type of potential entrant. How profit prospects are for new entrants.
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The stronger the threat of entry the more that incumbents firms are driven to fortify their position in the market place against the new comers, endeavouring not only to protect their market share but also to make entry more costly & difficult. The threat of entry changes as the industry s prospects grow brighter or dimmer & as an entry barriers rise or fall eg. The expiration of key patent can greatly 5/3/12

Strategic Implication of the Five Competitive Forces:

The special contribution of the five forces model is the thoroughness with which it exposes what competition is like in a given market The strength of each of the five competitive forces. The nature of the competitive pressures comprising each force. Overall structure of competition. As a rule stronger the collective impact of competitive forces the lower the combined profitability of participating firms.
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When competitive forces are not collectively strong the competitive structure of industry is favorable or attractive from the standpoint of earning superior profits. The ideal competitive condition is one in which both suppliers & customers are in weak bargaining positions, there are no substitutes, entry barriers are relatively high & rivalry among present sellers is only moderate. When some of the five forces are strong , an industry can be competitively attractive to those firms whose market position & strategy provides a good enough defense against competitive pressure to preserve their 5/3/12