Competition

Competition has always been a preoccupation of marketers, since - over time - relative position usually translates into absolute position; and, thus, the influence of competitors is one of the most important factors determining the performance of an organisation. These competitors, though, may not be commercial competitors. They might just as easily be other government departments which are competing for attention and resources. Any exploration of Marketing needs, therefore, to take on another dimension, that of the relationship to competitors.

The 'conventional' theory which now dominates this aspect of marketing has mainly been developed over the past two decades - especially by Michael Porter. The following, long section, summarises the most important elements of the current position on this important theory;

According to this dominant theory, the first level of understanding of the competitive environment is that of the 'industry'. This may seem trivial, since presumably you already know what the level of competitive activity is in your industry/market. But, on the other hand, if you unreservedly accept this theory (and this is an commitment I myself do not necessarily make), what you are seeing may only be a short term deviation and the inherent 'industry' characteristics will ultimately determine what longer term developments you should expect.

The 'industry' is defined quite broadly, as a group of firms (or organisations) which offer a product (or service) which are near substitutes for each other. According to the theory, the 'character' of that industry will often largely determine the competitive activities taking place within it; and the profits of most of the participants. Some of the factors which may, supposedly, contribute to this overall 'character' may be;

SIZE OF MARKET - the larger the market the more attractive it will generally be to new entrants; and the more competitive it may become. On the other hand, looking at the theory critically, it is just as likely that the larger the market the more likely it will be that it will be segmented. This is a process which will be discussed later in this chapter; but in this context it means that the market is broken down to a series of smaller markets. This will allow 'niche' marketing, thus reducing competition.

NUMBER OF ORGANISATIONS COMPETING AND CONCENTRATION OF BUSINESS - the greater the number of organisations in a market the more competitive it may be - if the brands are of roughly the same size. But, again taking a more critical view, this may also be related to the pattern of concentration of the overall business into the hands of the major players; clearly a monopoly or oligopoly will significantly reduce competitive forces! The most stable, and profitable, market (apart from a pure monopoly) is usually that with one or two dominant brands and a few smaller brands[1]. If the comparable number of brands, say four or five, are all of the same size on the other hand, then the market may be the most viciously competitive that there is; as each brand strives to make the breakthrough to the dominant position.

PRODUCT DIFFERENTIATION - the most sophisticated marketers will aim to differentiate their product or service from the others in the market. In general, the more that products or services are differentiated the less direct will the competition be. This is, indeed, the main limitation on this theory of competition - since most sophisticated marketers have very deliberately differentiated their brands to remove them from such competition (and the industry theory accordingly holds relatively few lessons for them).

ECONOMIES OF SCALE - it is often considered that economies of scale are the main features of any market. The theory is that the greater the economies of scale, the greater will be the benefits coming to those with large shares /f the market; and hence the greater the competition by offering incentives to 'buy' market share in order to become the lowest cost producer. Conventional competition theory has tended to focus on this aspect (which is, in some respects, the antithesis of marketing theory - which would favour differentiation) and to a degree the whole industry theory tends to stand or fall by the extent to which this factor predominates - in most markets, I would argue, it falls!

Rule T20 - EXPERIENCE CURVE - in many markets, the more that is 'produced' the more that is learned, and the more experience which is available to reduce costs. This element of economies of scale relates to experience over the total production run, not just the current production levels, so its effect is cumulative; potentially offering the early leaders a major competitive advantage - and creating substantial barriers against late entrants.

More generally, though - as indicated by the Japanese examples (such as Matsushita in the VCR industry), 'experience' is now seen as the main source of economies of scale.

The definitive support for this theory was given by the Boston Consulting Group[2] itself when it proposed (in 1970) a general observation, based upon its consultancy work, that the characteristic decline in the unit cost of value added "is consistently 20 to 30 per cent each time accumulated production is doubled. This decline goes on in time without limit (in constant prices) regardless of the rate of growth of experience. The rate of decline is surprisingly consistent, even from industry to industry."

On the other hand, the evidence is that many markets are moving towards significantly increased variety, in terms of the ranges of products or services offered. This is a requirement imposed by consumer demand; and is the very reverse of that favouring economies of scale - once a viable level of mass production has been reached. Bennetton in the early 1980s, for example, had a product line with more than 500 colour and style combinations. In the 1980s, as well, the Japanese manufacturers moved to 'flexible manufacturing'; which enabled them to increase the number of varieties they offered without dramatic reductions in efficiency.

The evidence[3] does seem to show that a clear brand leader - in most consumer goods markets at least - holds a significant advantage over the other brands; typically holding; twice the share of the second brand, and three times that of the third - and able to employ marketing activities which do enjoy substantial economies of scale. It is arguable, therefore, that the 'experience curve' may also reflect the cumulative marketing investment - where marketing is essentially an investment activity:

LEGISLATIVE BARRIERS - it has long been the case that sitting tenants in large markets have managed to persuade government to enact legislation to govern the competitive behaviour of the main players. Pressure groups used to redirect this process can often offer the most profitable form of investment, and can erect near insuperable entry barriers! This limitation, too, is prevalent in many markets.

CONTROL OF DISTRIBUTION CHANNELS - if the distribution channels can be denied to competitors then competition can be limited.

OVER-CAPACITY - perhaps the most sensitive indicator of price competition, and one which is genuinely important, is the degree of over-capacity. Beware those markets, particularly those with economies of scale, where there is a significant amount of spare capacity. If it exists you can be sure that everyone will be focusing on sales (and hence production) levels, almost regardless of price; and that almost inevitably leads to low, commodity-based, prices.

AGE OF MARKET AND RATE OF CHANGE - dynamics of a market will have an impact on the players within it. According to life-cycle theory the older markets should be more competitive, as growth slows down and the competitors look for growth at the expense of each other. On the other hand, the evidence[4] suggests that this has not happened in FMCG markets - even though, according to most theory, these should have been most susceptible to this effect.

The previous reactions of competitors will to a large extent determine what the new competitive moves will be; particularly in terms of reactions to new entrants. This element, which I believe is the most important in almost all markets, may come as no particular surprise to you!

Instability may be created, however, if the organisations in the market differ in their structures, goals and cultures; and hence cannot easily 'read' what are the intentions of their competitors. This 'inscrutability' may have helped Japanese entrants to de-stabilise some markets, to their eventual benefit.

SUSCEPTIBILITY TO OUTSIDE FACTORS - all the above factors may pale into insignificance if there are key factors outside of the market which determine its future.

In a rather more practical contribution, Michael Porter[5] suggests that there are good and bad competitors. 'Good' competitors play by the rules the industry has tacitly recognised; they typically limit price competition, help to expand the industry and do not aim to destroy other competitors. 'Bad' competitors, on the other hand, usually do the opposite; they break the 'rules', buy share (often by starting a price war) and upset the equilibrium. To optimise their results, 'good' competitors should, within the very strict legal guide-lines, aim to (co-operatively) constrain the 'bad'. Which type you have facing you makes a quite dramatic difference to your prospects.

He takes competition onto an even wider canvas when he identifies five key actors engaged in 'extended rivalry';

Potential Entrants - the threat from new entrants, which may change the rules of competition, but against which 'entry barriers' can be built.

Suppliers - the bargaining power of common suppliers, which can change the structure of industries .

Substitutes - the threat of substitute products or services, which may destroy the whole industry not just the existing competitive positions.

ENTRY BARRIERS

One answer to the very dangerous threat of 'potential entrants' is for the 'sitting tenants' to erect 'entry barriers';

POSITIONING - one advantage the existing brand leaders have, which is often overlooked, is that they usually occupy the prime 'positions' in the market. This makes it very difficult for a newcomer to find any product advantage save price.

STRUCTURAL - the industry may be constrained by its structure which works against newcomers; who are fighting for the few very scarce resources which are not already owned.

'SWITCHING COSTS' - Michael Porter[6] also identifies the fact that customers may face significant costs in switching to new suppliers; costs which keep them locked to the old.

EXIT BARRIERS

In passing it is worth mentioning that there may also be cost penalties which work to prevent companies leaving an industry. The net result is that such firms are often forced to stay in the market, and engage in destructive rivalry.

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I differ from Michael Porter, in that I believe that - at least for the market leaders - it is the organisation itself, rather than the market it is in, which determines the competitive position. The smaller organisations may, of course, be dominated by the competitive positions taken by the market leaders. Even the leaders may over time be influenced by outside views as to what the overall position should be; and these become self-fulfilling predictions (aided and abetted by experts such as Michael Porter). There is, however, always the opportunity to break out from the crippling disabilities which such a self-fulfilling history of 'bad' competition - a possibility which Michael Porter's followers tend to downplay.

Simplifying matters somewhat, but not quite as much as Michael Porter, I would suggest that competitive power can be built on four main fronts - which make up the 'power diamond':

Two of the factors, 'Differentiation' and 'Scale Advantage', are those at the heart of Michael Porter's work, described below. The other two, 'Market Position' and 'Brand Investment' (or, from the other side of the relationship, 'Customer Franchise') are not usually considered in competition theory - though they are explored in considerable detail later in this book.

It is the total area between these (which reflects the overall power of the brand), and how the cutting edges (the corners of the diamond) are deployed in practice, which indicate how much competitive leverage the brand may be able to generate.

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COMPETITIVE STRATEGIES

Having taken care of the rather arid topic of 'industry', which you must recognise simply because it is so influential (so much so that your competitors may come to believe in it - and it will then be a self-fulfilling prophecy!). Michael Porter[7], again, moves onto more productive ground when he states that there are just "three potentially successful generic strategic approaches to outperforming other firms in an industry:

As we have already seen, the first alternative has come to prominence in recent years; and organisations have invested vast sums to achieve economies of scale. The second and third alternatives, however, rely on using factors other than price to contain competition. Product differentiation, particularly `branding', is a key device; since it removes the product from some of the most direct elements of competition (particularly from price competition). Segmentation and product positioning, which will discussed later in this chapter, are also particularly effective devices for containing competitive pressure. They allow the marketer to concentrate, to 'focus' in Michael Porter's[8] terminology, resources to best defend his or her offering within a small segment of the market

LEADERS AND FOLLOWERS

Michael Porter's work is undoubtedly the most influential in this area, but there are other commentators with contributions to make. Thus, some emphasise a different competitive split; that between those (`leaders') products or services which have a substantial market share (typically 40% or more), with a very strong position, and those (`followers') which have minor shares, with marginal positions. The approach each of these organisations adopts may be very different;

LEADERS: In this case, the `competitive thrust' may not necessarily be the only, or even the main, objective; since they stand to gain significantly from market expansion, and their promotional effort will often include elements directed as much to this end as against their competitors. In terms of competitive activity, it is normally expected that companies with major `brand leaders' will concentrate their effort on advertising.

Sometimes such strategies are described in military terms (especially by Kotler and Singh);

PRE-EMPTIVE DEFENCE - launching an attack on a competitor before it can be established, while it is still vulnerable

COUNTER-OFFENSIVE DEFENCE - attacking the competitor's home territory so that it has to divert its efforts into protecting its existing products

FOLLOWERS: On the other hand, in these cases, the whole strategy is likely to be fiercely competitive; aiming only to grab the largest share possible of the existing `cake'. Their main competitive device is likely to be, `below the line', promotion; and, in particular, price competition.

Frontal Attack - where the challenger takes on the market leader in its own territory and attacks the opponent's strengths rather than its weaknesses. For this considerable resources are needed

Flank Attack - a segment (or geographical region) where the market leader is most vulnerable is chosen. This is the most usual approach

Encirclement - this involves "launching a grand offensive against the enemy on several fronts...where the aggressor has, or is able to muster, enough to break the opponent's will to resist."

Bypass Attack - this is most prevalent in high technology markets, where a challenger puts its efforts into bypassing existing technology and winning the battle for the next technology to be brought to the market

So much for the theory! It is meant to be enlightening, and in some specific situations it might be - which is one reason I have given so much space to it. The main reason, though, is the one I mentioned earlier - so many managers have been indoctrinated into this very fashionable belief that it does begin to have a life of its own! In particular, the aspect of economies of scale (which is, in practice, central to much of this theory) is widely believed in; and many strategies are written around this basic assumption. It is one with which, you will have gathered, I do not feel altogether comfortable; at least not when it is presented as a general principle (rather than a specific exception - with which I would be happy).

I mean this in two senses. In the first, quite literally you should meet with your competitors and get to know them. I will discuss this below, but for now absorb the startling fact that the qualitative research undertaken by myself and my colleagues has revealed that many, if not most, managers believe they already operate in a competitive situation where informal (but not illegal) cartels dominate!

The second aspect is rather different. It is getting to know all about your competitor's organisation just as if it were a person - so that you can predict their responses to your own actions, and to those of others;

COMPETITORS' RESPONSE

One of the aptitudes which marks out great generals, as much as chess masters, is the ability to get under the skin of their opponents; to understand them in such a way that they can predict what their responses to different situations might be. So probably the most important, but often neglected, aspect of any competitor research is to determine how each of the competitors may respond to future changes. In a very general sense, there are four main categories of possible response;

NON-RESPONSE (or slow response) - this competitor will not respond directly to any changes in the environment, or at least will not do so in the short-term. It may be a dominant brand leader, or it may be a competitor in a particularly weak position, which cannot resource any reaction.

FOCUSED-RESPONSE - some competitors will only respond to certain types of challenge (typically on price).

FAST-RESPONSE - but there are also a few organisations, which have a policy of immediate and substantial response (often a deliberate 'overkill ') - as much as a deterrent to future challengers as to the current threat. If this strategy can be resourced it usually is the most effective; and the most cost effective - since the sooner the threat is removed the sooner high profits can be generated again. It is recommended that this is your own strategy (if you can afford it and are not forced into either of the first two categories).

UNPREDICTABLE RESPONSE - the most difficult to deal with and the most dangerous (to themselves as much as to others), however, are those organisations whose responses cannot be predicted at all! You should never adopt this strategy, unless all else has failed.

Of course, you will also need to understand not just what the competitor might want to do, but also what it is capable of doing. Again like a good general, competition theory seems to thrive on military analogy, you will want to know what is the disposition of the enemy's forces before you enter battle. This analysis should use all the techniques of 'desk research' described in a later chapter, but in particular it should ideally be motivated by a genuine interest, indeed a fascination, about everything a competitor does or says - that way nothing will be missed!

Let us now move on to the practical actions you, yourself can take in relation to competitors. I am illustrating these with three practical approaches which cover the spectrum;

Michael Porter[9] states that "Perhaps the single most important concept in planning and executing offensive or defensive competitive moves is the concept of commitment." He goes on to explain that such commitment can "deter retaliation", can "deter threatening moves" and can "create trust". The key element of persuasion is seen to be that the decisions are "binding and irreversible".

In the earlier box this would have come under 'Fast Response'. 'Conviction or Commitment Marketing', which is described in its more general sense later in the book, is based upon believing in your product or service with such a degree of blinding conviction, of almost an evangelical fervour which carries over to your relations with the outside world, that the obvious degree of conviction itself becomes the main message.

Such conviction marketing, when undertaken by the most powerful marketers, can go much further. It can force the competitors to fight the battle on ground of your own choosing. At times it may almost seem as if such competitors are mesmerised by the degree of your conviction; if it is strong enough. It is a device normally only available to market leaders; but strong second brands, with aspirations to lead, can also sometimes use it.

This approach, although not featured in most competitive theory, comes close to the aggressive, almost military based, tactics which are at the heart of traditional theory.

A much more radical approach in terms of conventional theory, but which seems to be the most prevalent in practice, is collaboration;

As you will have observed, it seems to be a requirement of managers that they swear an oath of 'death to the enemy'; few will publicly admit to anything less. We have christened this approach the 'Warrior'. It wins battles in war, but produces few profits in the commercial arena. In any case, according to our research, the opposite would appear to be true in business practice. Indeed, in group discussions - when the participants realised that the majority of those present collaborated - they admitted that they did the same. We eventually had a majority (in these small groups) who even said that the organisations in their industry operated almost as an informal cartel!

WARRIORS - these brave individuals, with their militaristic approach, win the war - though not the necessarily peace - and all too often pay a high price for their achievements; the industry has been destroyed in the course of their battles.

COLLABORATORS - on the other hand, work together to stabilise their industry; in Michael Porter's terms they are the 'good' competitors. They do not engage in destructive rivalry, and avoid price battles.

CARTELS - these go one step further, to work positively work together to develop the future of the industry; with mechanisms for collaborating on joint industry projects.

Rule T26* - THE THREE PAIRED CODES OF POSITIVE COLLABORATION

Code One, part one - POSITIVELY OUTPERFORM YOUR COMPETITORS, by as large a margin on as many fronts as possible. Collaboration does not in any way mean that you stop competing - collaboration is not the same as surrender, and competitors respect the organisation which is simply better than the rest.

Code One, part two - NEVER INDULGE IN NEGATIVE ATTACKS, on any front. Do not, even temporarily, pursue campaigns which they might see as destructive (price wars, dirty advertising or whatever).

Code Two, part one - UNDERSTAND YOUR COMPETITORS - I have previously recommended that you understand your competitors to beat them, here I suggest that you understand them in order to recognise why they take the actions they do - and hence not to read into those actions hostile intent where there is none

Code Two, part two - BE STRAIGHTFORWARD AND TRUSTWORTHY - in turn, if your competitors understand you, and trust you, they will even tolerate actions they don't like. When trust breaks down, however, beware; some of the most destructive industry wars have come about because of misunderstandings.

Code Three, part one - TALK INDUSTRY NOT ORGANISATION - the one thing you have in common with your competitors, and the thing you both want to promote, is the industry you share. Always emphasise your commitment to maintaining and developing that industry.

Code Three, part two - JAW-JAW NOT WAR-WAR - above all, talk to your competitors whenever you can. When you meet them, at industry conferences or socially, say , go out of your way to be positively friendly towards them; and to positively discuss the future of your shared industry.

Rule T27 - THREE ADDITIONAL CODES FOR CARTELS -

Code One - JOIN, OR SET UP, AN INDUSTRY FORUM, so that you have positive ground on which to discuss your shared objectives; and, if necessary, to debate those which divide you.

Code Two - RUN INDUSTRY CAMPAIGNS, which may be good for the industry in themselves, but most importantly force all the collaborators to think positively.

Code Three - THINK COLLECTIVELY, so that you can - within the constraints imposed by law - jointly act in the common interest of the industry; even while competing strenuously within it.

These positive approaches are the most productive of all, if your competitors will support them; and the indications are that, in the great majority of cases, they will. They are so clearly in everyone's best interests that only a fool would think otherwise. Unfortunately there are still some fools around! If they are merely foolish, and not dangerously insane, one of the best strategies for teaching them the lessons of good (competitor) manners is 'tit for tat'

Rule T28 - TIT FOR TAT -

This is a very simple approach to competitor's actions. If your competitor makes an aggressive move you respond with one, but as soon as the other's aggressive moves cease so should yours.

This has the virtue that the competitor is not rewarded for 'bad' behaviour (since you immediately undermine any gain that might have been made); and is rewarded for 'good' behaviour (by your immediate removal of your matching action).

Most important of all, it very clearly shows what are your rules of engagement; you are a 'good' competitor - but will not tolerate bad behaviour.

[1] Mercer, D S (1993) Research to be published. in the British Journal of Management

[2] Boston Consulting Group, Perspectives on Experience (1970)

[3] Mercer, D S (1993) Research to be published. in the British Journal of Management

[4] Mercer, D S (1993) Research to be published in the British Journal of Management

[5] Porter, Michael E (1980) Competitive Strategy The Free Press

[6] Porter, Michael E (1980) Competitive Strategy The Free Press

[7] Porter, Michael E (1980) Competitive Strategy The Free Press

[8] Porter, Michael E (1980) Competitive Strategy The Free Press

[9] Porter, Michael E (1980) Competitive Strategy The Free Press