Lecture 6
Marketing and Competition
Jan 24, 2012
Today
• HW Presentation
• Progress in interviewing
– Issues
• Personalized Clinic
• Lecture
Six Forces Diagram to Determine how Competitive a
Company is (after Porter)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Possibility that what your
business is doing can be
done in a different way
Power, Vigor and
Competence
of Customers
The intensity of competitive rivalry
(known)
– number of competitors
– rate of industry growth
– intermittent industry overcapacity
– diversity of competitors
– informational complexity and asymmetry
– brand equity
– fixed cost allocation per value added
– level of advertising expense
The threat of new entrants
– the existence of barriers to entry
• Have a hub
• IP
• Gov license
• Limited market
• R&D costs
• Economies of scale
• Factory
• Knowing market
– Barriers to exit
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Economics of product development
Brand equity
Customer “stickiness” switching costs
capital requirements
access to distribution
absolute cost advantages
learning curve advantages
expected retaliation
government policies
Discussion
• Is it a good thing to have competition in your
market?
– Existing
– New entries?
The bargaining power of suppliers
– supplier switching costs relative to firm
switching costs
– degree of differentiation of inputs
– presence of substitute inputs
– supplier concentration to firm concentration
ratio
– threat of forward integration by suppliers
relative to the threat of backward integration by
firms
– cost of inputs relative to selling price of the
product
– importance of volume to supplier
– Examples?
The bargaining power of customers
– ratio of buyer concentration to seller concentration
– bargaining leverage
– buyer volume
– Buyer switching costs relative to firm switching costs
– buyer information availability
– ability to backward integrate
– availability of existing substitute products
– buyer price sensitivity
– price of total purchase
– Examples?
The bargaining power of complementors
– Relative strengths
– Customer perception
– Future R&D
– Switching costs
– Trust
– ability to sideways integrate
– Anti-trust
– Competition for margin
– Examples?
Six Forces Diagram to Determine how Competitive a
Company is (after Porter)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Possibility that what your
business is doing can be
done in a different way
Power, Vigor and
Competence
of Customers
Six Forces Diagram to Determine how Competitive a
Company is (with 10X disruptive force)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Power, Vigor and
Competence
of Customers
Possibility that what your business is doing can be done in a
different way. Disruptively! Or can you be the disrupter?
The threat of substitute products
–buyer propensity to substitute
–relative price performance of
substitutes
–buyer switching costs
–perceived level of product
differentiation
Are you adding features that don’t add value?
SWOT Analysis
Strengths, Weaknesses, Opportunities and Threats
by James Manktelow, editor of Mind Tools and an experienced
business strategist.
Strengths (with respect to competitors):
What advantages do you have?
What do you do well?
What relevant resources do you have access to?
What do other people see as your strengths?
Be sure to distinguish a strength in the market, from a necessity.
Look from the customers perspective!
Weaknesses:
What could you improve?
What do you do badly?
What should you avoid?
Opportunities:
Where are the best opportunities?
What are the interesting trends?
• Changes in technology
• Changes in markets
• Changes in government policy
• Globalization opportunities
• Changes in social patterns
• Demographics
• Partnerships
Threats:
What obstacles do you face?
What is your competition doing?
Are the required specifications for your products or services
changing?
Is changing technology threatening your position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten your
business?
You can also apply SWOT analysis to your competitors. This
may produce some interesting insights
You can apply SWOT analysis to yourself and your career
prospects
Interesting. . . But what do you do with
the SWOT analysis?
Example: A start-up small consultancy business
Strengths:
• Can respond very quickly as we have no red tape, no need
for higher management approval, etc.
• Can provide really good customer care, as current small
work load means we can focus on customers.
• Our lead consultant has strong reputation
• We can change direction quickly if need be
• We have little overhead, so can offer good value to
customers
Example: A start-up small consultancy business
Weaknesses:
•Our company has no market presence or reputation
•We have a small staff with a shallow skills base
•We are vulnerable to vital staff being sick, leaving, etc.
•Our cash flow will be unreliable in the early stages
Example: A start-up small consultancy business
Opportunities:
•Our business sector is expanding, with many future
opportunities for success
•Our locality wants to encourage local businesses with work
where possible
•Our competitors may be slow to adopt new technologies
Example: A start-up small consultancy business
Threats:
•Will developments in technology change this
market beyond our ability to adapt?
•A small change in focus of a large competitor
might wipe out any market position we achieve
Example: A start-up small consultancy business
Conclusions:
Specialize in rapid response, good value services
to local businesses.
Promotion in selected local publications, to get
the greatest possible market presence for a set
advertising budget.
Must keep up-to-date with changes in
technology
Key points:
SWOT analysis is a framework for analyzing
your strengths and weaknesses, and the
opportunities and threats you face.
This will help you to focus on your
strengths, minimize weaknesses, and take
the greatest possible advantage of
opportunities available.
In all of the E/ME 102 businesses there
is competition.
You will attack!
Why is it difficult?
In all of the E/ME 102 businesses there
is competition.
You will attack!
Why is it difficult?
“de l'audace, encore de l'audace, et toujours de
l'audace”
-Napoleon
In all of the E/ME 102 businesses there
is competition.
You will attack!
Why is it difficult?
“de l'audace, encore de l'audace, et toujours de
l'audace”
-Napoleon
Not a good idea
-Pickar
Bill Davidow (Intel, Mohr Davidow)
• “Marketing High Technology- an insiders
view”, William H. Davidow 1985
– If you attack a well-established competitor, you
must plan on spending ~70% of the sales of the
competitive leader has spent in building his
business.
Why is this so?
Cost of Attacking a Competitor
• Investment required to
– Establish market presence
– Establish distribution channels
– Develop a product line
– Plants
– Equipment
– Inventory
– Working Capital
• What about internet businesses?
Consider the broader problem- why is it easy
to underestimate the competition?
• Entrepreneurial bias (truth hurts!)
• Caltech bias
• Underestimate what it takes to achieve position
(Discount Davidow thesis)
• Competition has already solved problems that perhaps
you don’t know existed
• The competition may not even be a player at present
but is plotting in labs even as you are. (Particularly true
in high-visibility areas such as social networking, green
energy, homeland defense)
Consider the broader problem- why is it easy
to underestimate the competition?
• Your knowledge is incomplete i.e.,
You don’t know what you don’t know.
The Reality: What does the entrenched
competition have?
Assume a “good” company or companies
•
•
•
•
By definition they have market share
Brand
Management
A product that generally satisfies the
market.
• Knowledge of the Customer
– Sales Force
– Distribution
The Reality: What does the entrenched
competition have?
Assume a “good” company or companies
• Technology relationships
• Technology Strengths
• Industry knowledge of trends
–Industry groups
• Supplier relationships
• Distribution relationships
• $$$$$ for response
Attacking an entrenched competitor
working on an “old” technology
Capability of
“Old”
Technology
Number of researchers
working to advance “old” technology
Attacking an entrenched competitor
working on an “old” technology
Capability of
“Old”
Technology
You
Number of researchers
working to advance “old” technology
Common pitfalls
We are 20% better so we will win!
The competition is not important because It doesn’t
exist
We are disruptive
We are not attacking them head on
Common pitfalls
We are dis-intermediating them- rendering them
irrelevant
• E-Commerce- the example of E-Toys, Webvan,
Pets.com, etc., etc.
• B2Bs- the example of WholesaleExchange
Amazon vs Barnes and Noble
What are some of their weaknesses?
• Large company
– Bureaucracy
– Slow decision making in meetings
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• Structure
• Silos
Career avoidance of failure
Annual funding cycle
Complacency
Maybe don’t work so hard
others
• Small company
– Harder to respond to an attack to the side of their
business
– Overcommittment
– Others
Additional Reasons related to missing disruptive
technologies
• Wrong Value Network
– Context of corporation’s business leads to missing competition
arising from outside
• Organizational Structure
– Companies organized by a products substructure fail when
fundamental architecture changes
• Core Competencies
– Firms fail when a technological change destroyed the value of
competencies previously cultivated and succeeded when new
technologies enhanced them
Additional Reasons related to missing disruptive
technologies
• Technology S-curves
– Firms fail when they miss inflection points
along their main product thrust and
specifically when they miss technologies
advancing in related fields
• Wishful thinking
• Blinders
–Arrogance
–Tunnel vision
• Well-defined positions
• The problem with success
Thoughts on countering competition
• Look for weaknesses
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Dissatisfied customers e.g., quality or service
Unaddressed pain
Cracks in supply chain
Geographic hole
• Address with Total Customer Satisfaction
• Address with Total product- addresses all the pain
• Don’t attack an entrenched position frontally! Think
twice about competing on cost
• Find a (neglected?) niche
• Have proprietary technology that “changes the game”
– i.e., 10X improvement
More thoughts
• Have understanding of the market on your team
• Hire from your customer or best competitor
• Have leadership that either has a track record or
learns fast.
• Think strategically
– How will the big guys respond?
• How would you counter that response?
• Focus on a few key customers
• Keep under the radar screen?
• Speed! Fail quickly and correct
Opportunity for Entrepreneurial company
• Look for need not being served now by big
company
• Look for a 10X cost reduction to service these
companies
• After you have established yourself, move up
market and attack big company with a much
cheaper, solution for their customers.
• Think main frames to minis to micro
Kent Kresa’s game theory checkerboard
Put each of your competitors on a
“checkerboard”. From what you know of them
(SWOT analysis). What move would they make
if you were to enter the market with your
product? How could you counter that move a
priori or afterwards? What other moves could
they make to counter you?