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INDUSTRY ANALYSIS Definition: The Company’s environment consists of: "the actors and forces outside marketing that affect marketing management's ability to develop and maintain successful transactions with its target customers“ Kotler 1994 Introduction Companies must evaluate both micro and macro- environment to identify any trends that may affect marketing strategies, and opportunities that can be developed into competitive advantages Porter's Five Forces model analyses market structures to determine market attractiveness taking into consideration the micro and macro environments in its construction Company’s Microenvironment Relates to the internal forces or forces close to the company over which some control is possible Top management Other functions e.g. finance and accounting, R& D, manufacturing and purchasing Suppliers Marketing intermediaries (channel partners) Customers Competitors Public Company’s Macro-environment Relates to the larger forces having an impact on society as a whole A company has little influence on these forces and therefore can only adapt its marketing mix to account for the resulting opportunities and threats. Components of the General Environment Demographic Economic Industry Environment Global Competitive Environment Technological Political/ Legal Socio cultural Major forces of the macro-environment Demographic Economic Natural Technological Cultural Political/legal Demographic Environment Demographic trends: Changing age structure Changing family structure Geographic shifts in population Higher education level & more white collar job holders Increasing globalization of cities Economic Environment Economic trends affecting consumers buying power and spending pattern Change in per capital real income Disposable (Not Refundable) Discretionary (Flexible) Income distribution Savings & debt Consumer expenditures Change in interest rates and cost of living Natural environment Natural trends include those natural resources used in production or those affected by marketing Activities. Raw material shortages Increase in energy cost Increase pollution levels Increase in Governmental intervention in natural resource management Technological Environment Consists of forces that affect new technology, new product development and market opportunities Faster pace of technological change Shorter PLC Higher R&D budgets Concentration on minor improvements Increased regulations Cultural Environment Affect society's basic values, perceptions, preferences and behaviors Core cultural values and beliefs. Secondary cultural values. Sub cultures. Legal and Political Environment Trends in the legal and political environment include Increased legislation regulating business Changing government agency enforcement Growth of public interest groups Regional groupings Competitive Analysis Who are your competitors? Do you know about your close competitors’ strengths and weaknesses? How detail should we analyze the competition? Use a systematic approach Analysis competition at various levels (next slide) 1. Core Product Competition This is the basic product and the focus is on the purpose for which the product is intended. For example, a warm coat will protect you from the cold and the rain. 2. Generic Product Competition This represents all the qualities of the product. For a warm coat this is about fit, material, rain repellent ability, high-quality fasteners, etc. Competition among products that are different, but solve the same problem or provide the same benefit or utility, such asAudio cassettes and CDs, Adhesive tape, Glue-sticks, Carpets and Tiles. 3. Expected Product Competition This is about all aspects the consumer expects to get when they purchase a product. That coat should be really warm and protect from the weather and the wind and be comfortable when riding a bicycle. 4. Augmented Product Competition This refers to all additional factors which sets the product apart from that of the competition. And this particularly involves brand identity and image. Is that warm coat in style, its color trendy and made by a well-known fashion brand? But also factors like service, warranty and good value for money play a major role in this. 5. Potential Product Competition This is about augmentations and transformations that the product may undergo in the future. For example, a warm coat that is made of a fabric that is as thin as paper and therefore light as a feather that allows rain to automatically slide down. 6. Form Product Competition Competitors as all companies manufacturing products that supply the same service Toyota against manufacturers of other vehicles that provide the same service. 7. INDUSTRY COMPETITION competitors as all companies making the same product or class of products Honda against Mercedes, Lexus etc who make same products or class of product (different prices) or 8. BRAND COMPETITION (Brand Competitors) competing brands of products which can satisfy a consumer's wants almost equally as well as each other. Honda against Toyota, Nissan etc. who offer similar products and service to the same customers and prizes. class of products Porter’s Five forces Model of Industry Competition Whether you are starting a new business or looking for more insight into your existing company's prospects, you probably have questions about the competition. One way to answer those questions is by using Porter's Five Forces model. Originally developed by Harvard Business School's Michael E. Porter in 1979, the five forces model looks at five specific factors that help determine whether or not a business can be profitable, based on other businesses in the industry. "Understanding the competitive forces, and their underlying causes, reveals the roots of an industry's current profitability while providing a framework for anticipating and influencing competition (and profitability) over time," Porter wrote in a Harvard Business Review article. “ A healthy industry structure should be as much a competitive concern to strategists as their company’s own position.“ According to Porter, the origin of profitability is identical regardless of industry. In that light, industry structure is what ultimately drives competition and profitability —not whether an industry produces a product or service, is emerging or mature, high-tech or low-tech, regulated or unregulated. "IF THE FORCES ARE INTENSE, AS THEY ARE IN SUCH INDUSTRIES AS AIRLINES, TEXTILES, AND HOTELS, ALMOST NO COMPANY EARNS ATTRACTIVE RETURNS ON INVESTMENT," PORTER WROTE. "IF THE FORCES ARE BENIGN, AS THEY ARE IN INDUSTRIES SUCH AS SOFTWARE, SOFT DRINKS, AND TOILETRIES, MANY COMPANIES ARE PROFITABLE Understanding the Five Forces Porter regarded understanding both the competitive forces and the overall industry structure as crucial for effective strategic decision-making. In Porter's model, the five forces that shape industry competition are: BARGAINING POWER OF SUPPLIERS This force analyzes how much power a business's supplier has and how much control it has over the potential to raise its prices, which, in turn, would lower a business's profitability. In addition, it looks at the number of suppliers available: The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers. Sources of supplier power also include the switching costs of firms in the industry, the presence of available substitutes, and the supply purchase cost relative to substitutes. BARGAINING POWER OF CUSTOMERS This force looks at the power of the consumer to affect pricing and quality. Consumers have power when there aren't many of them, but lots of sellers, as well as when it is easy to switch from one business's products or services to another. Buying power is low when consumers purchase products in small amounts and the seller's product is very different from any of its competitors. COMPETITIVE RIVALRY This force examines how intense the competition currently is in the marketplace, which is determined by the number of existing competitors and what each is capable of doing. Rivalry competition is high when there are just a few businesses equally selling a product or service, when the industry is growing and when consumers can easily switch to a competitors offering for little cost. When rivalry competition is high, advertising and price wars can ensue, which can hurt a business's bottom line. Rivalry is quantitatively measured by the Concentration Ratio (CR), which is the percentage of market share owned by the four largest firms in an industry. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES This force studies how easy it is for consumers to switch from a business's product or service to that of a competitor. It looks at how many competitors there are, how their prices and quality compare to the business being examined and how much of a profit those competitors are earning, which would determine if they have the ability to lower their costs even more. The threat of substitutes are informed by switching costs, both immediate and long-term, as well as a buyer's inclination to change. FIVE FORCES ANALYSIS OF THE COCA-COLA COMPANY IN RELATIONSHIP TO ITS COCA-COLA BRAND. Threat of New Entrants/Potential Competitors: (Medium Pressure) Entry barriers are relatively low for the beverage industry: there is no consumer switching cost and zero capital requirement. There is an increasing amount of new brands appearing in the market with similar prices than Coke products. Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant market share for a long time and loyal customers are not very likely to try a new brand. THREAT OF SUBSTITUTE PRODUCTS (MEDIUM TO HIGH PRESSURE) There are many kinds of energy drinks/soda/juice products in the market. Coca-cola doesn’t really have an entirely unique flavor. In a blind taste test, people can’t tell the difference between CocaCola and Pepsi. THE BARGAINING POWER OF BUYERS: (LOW PRESSURE) The individual buyer no pressure on Coca-Cola Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining power is pointed because of the end consumer brand loyalty. THE BARGAINING POWER OF SUPPLIERS: (LOW PRESSURE) The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and caffeine. The suppliers are not concentrated or differentiate. Coca-Cola is likely a large, or the largest customer of any of these suppliers. RIVALRY AMONG EXISTING FIRMS: (HIGH PRESSURE) Currently, the main competitor is Pepsi which also has a wide range of beverage products under its brand. Both Coca-Cola and Pepsi are the major sparkling beverages and committed heavily to sponsoring outdoor events and activities. There are other soda brands in the market that become popular, like Dr. Pepper, because of their unique flavors. These other brands have failed to reach the success that Pepsi or Coke have enjoyed. Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Threat of Substitute Products Bargaining Power of Buyers Intensity of Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: * Using price competition * Performing advertising fight * Increasing consumer warranties or service * Making new product introductions Occurs when a firm is pressured or sees an opportunity * Price competition often leaves the entire industry worse off * Advertising battles may increase total industry demand, but may be costly to smaller competitors Intensity of Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: * * * * * * * * Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments High strategic stakes High exit barriers Intensity of Rivalry Among Existing Competitors High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. * * * * * Specialized assets Fixed cost of exit (e.g., labor agreements) Strategic interrelationships Emotional barriers Government and social restrictions Competitor Analysis Performing a Detailed Analysis of the Firm’s Main Competitors Industry Environment Competitive Environment Competitor Analysis Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What force the competitor? Competitor Analysis Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis Strategy be Current placed in the future? How are we currently What is the attitude toward competing? risk? Does this strategy support changes in the competitive structure? What is the competitor doing? What can the competitor do? Competitor Analysis Future Objectives What does the competitor believe about itself and the industry? How do our goals compare to our competitors’ goals? Where will emphasis Strategy be Current placed in the future? How are we currently What is the attitude toward competing? risk? Assumptions Does this strategy support Do we assume the future will changes in the competition be volatile? structure? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions? Competitor Analysis Future Objectives What are the competitor’s capabilities? How do our goals compare to our competitors’ goals? Where will emphasis Strategy be Current placed in the future? How are we currently What is the attitude toward competing? Assumptions risk? Does thisDo strategy support we assume the future changes will in the becompetition volatile? structure? What assumptions do our competitors hold about the Capabilities industry and themselves? What are my competitors’ Are we operating under a strengths and weaknesses? status quo? How do our capabilities compare to our competitors? Competitor Analysis Future Objectives Response How do our goals compare •What will our competitors do to our competitors’ goals? in the future? Where will emphasis Strategy be Current •Where do we have a placed in the future? How are we currently competitive advantage? What is the attitude toward competing? Assumptions risk? •How will this change our Does thisDo strategy support we assume the future relationship with our changes will in the becompetition volatile? structure? competition? What assumptions do our competitorsCapabilities hold about the industry What and themselves? are my competitors’ Are we operating a strengthsunder and weaknesses? status quo? How do our capabilities compare to our competitors?
