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Strategic Marketing 2e
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By Syed H. Akhter
Marquette University
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Strategic Marketing 2e/Akhter
Side 2
Dr. Syed H. Akhter is Professor of Marketing and Chairman of the Marketing Department at
Marquette University. He is a Fulbright scholar and his research interests include globalization, strategic marketing, consumer psychology, and e-marketing. He has published extensively in international business and marketing journals such as Journal of International Business Studies, International Marketing Review, European Journal of Marketing, International
Trade Journal, Business Horizons, and Journal of Advertising. He has published two books,
Global Marketing and Strategic Marketing and Guest Edited special issues of the Journal of
Direct Marketing on International Direct Marketing and a special issue of the Journal of Interactive Marketing on International Interactive Marketing. Dr. Akhter has won the Excellence in Executive Education Award in the EMBA program at Marquette University.
Features of 2e:
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A comprehensive treatment of strategic marketing
A rigorous treatment of theories with applications to show the interdependencies between
them
Decision-oriented approach to the study of marketing strategy
More examples in each chapter to illustrate the usefulness of concepts and theories
More up-to-date data in tables on firm, industry, and country
Updated opening vignette for each chapter
A web-based exercise in each chapter to enhance learning
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Strategic Marketing 2e/Akhter/TOC
Chapter 1: Strategy: Concepts, Developments, and Practices
Chapter 5: Environmental Analysis
1-1 The Evolution of Strategy
1-2 Strategic Analysis and Strategy
1-3 What is Strategic Marketing?
1-4 Elements of Strategic Marketing
1-5 Why Strategic Marketing?
1-5a Leveraging Competencies
1-5b Entry Barriers
1-5c Sustainable Competitive Advantage
1-6 Strategic Marketing and Management Orientations
1-6a Production Orientation
1-6b Product Orientation
1-6c Sales Orientation
1-6d Market Orientation
1-6e Societal Orientation
5-1 The Economic Environment
5-1a National Economy
5-1b Regional Economic Integration
5-1c The Global Economy
5-1d The Globalization of the U.S Economy
5-2 Political Environment
5-2a Business and Marketing Regulations
5-2b Assessing and Managing Regulations
5-3 Cultural Environment
5-3a Cultural Values
5-3b High-Context versus Low-Context Cultures
5-3c Monochronic versus Polychronic Cultures
5-4 Cultural Universals
5-5 Technological Environment
5-6 Understanding Environmental Developments
5-6a Scenario Building
5-6b The Statoil Scenario Development Example
Chapter 2: Strategic Marketing and Strategic Marketing Plan
2-1 Corporate Strategy
2-1a Mission Statement
2-1b Strategic Vision
2-2 Strategic Business Unit Strategy
2-3 Marketing Strategy
2-4 Strategic Marketing Plan
2-4a Mission and Vision
2-4b External Analysis
2-4c Internal Analysis
2-4d Objectives
2-4e Formulating Strategies
2-4f Executing Strategies
2-4g Evaluating Outcomes
2-4h Taking Corrective Actions
2-4i Feedback and Knowledge Management
2-5 Advantages of Strategic Marketing Plan
2-5a Market Responsiveness
2-5b Competencies Development
2-5c Value Proposition
2-5d Customer Satisfaction
2-5e Strategic Opportunism
Chapter 3: Customer Analysis
3-1 What is a customer?
3-2 Consumer Analysis
3-3 Demography
3-3a Gender
3-3b Age
3-3c Education, Occupation, and Income
3-4 Psychology
3-5 Psychographics
3-6 Consumer Buying Decision Process
3-6a Problem Recognition
3-6b Information Search
3-6c Alternatives Analysis
3-6d Purchase Decision
3-6e Post-purchase Behavior
3-7 Consumer Profile
3-8 Demand Drivers and Consumer Behavior
3-8a Expectations
3-8b Information
Chapter 4: Competitive Analysis
4-1 Competitive Intelligence
4-1a What to Collect
4-1b How and from Where to Collect
4-1c How to Analyze
4-1d How to Disseminate
4-2 Competitive Developments and Strategic Marketing
4-2a Supply Drivers
4-3 Models of Competition
4-3a Perfect Competition
4-3b Monopoly
4-3c Oligopoly
4-3d Monopolistic Competition
4-4 Identifying Competitors
4-4a Existing Groupings
4-4b Consumer Decision Hierarchy
4-4c Perceptual Map
4-5 Understanding Competitors
4-5a Market Position
4-5b Market Presence
4-5c Market Barriers
4-5d Management Orientations
4-5e Strategic Relationships
4-6 Porter’s Five Forces Model of Competitive Intensity
4-6a Threat of New Entrants
4-6b Bargaining Power of Buyers
4-6c Threat of Substitutes
4-6d Bargaining Power of Suppliers
4-6e Intensity of Rivalry
Chapter 6: Internal Situation Analysis
6-1 Metrics and Market Performance
6-2 Marketing Metrics
6-2a Market Metrics
6-2b Consumer Metrics
6-2c Product Metrics
6-2d Price Metrics
6-2e Place Metrics
6-2f Promotion Metrics
6-3 Portfolio Models
6-3a Boston Consulting Group Growth-Share Matrix
6-3b Strategic Options
6-3c Advantages and Disadvantages of Growth-Share Matrix
6-4 General Electric and McKinsey Market Attractiveness-Business Strength Matrix
6-4a Market Attractiveness
6-4b Business Strength
6-4c Strategic Options
6-4d Advantages and Disadvantages
6-5 Competencies
6-5a Knowledge Mapping
6-6 Consumer Satisfaction
Chapter 7: Segmenting, Targeting, and Positioning
7-1 Segments and Segmentation
7-2 Segmentation Rationale
7-2a Competitive Developments
7-2b Demographic Shifts
7-2c Information Revolution
7-3 Segmentation Criteria
7-3a Identifiable
7-3b Accessible
7-3c Stable
7-3d Profitable
7-4 Segmentation Bases
7-4a Physical Bases
7-4b Attitudinal/Behavioral Bases
7-5 Targeting
7-5a Determining Market Attractiveness
7-5b Selecting Market Segments
7-6 Positioning
7-6a Target Market
7-6b Differentiation
7-6c Value
7-6d Communication
7-7 Positioning Dimension and Perceptual Maps
7-7a Perceptual Map
Chapter 8: Offensive and Defensive Marketing Strategies
8-1 Strategy and Business Performance
8-1a Sustained High Performers
8-1b Declining High Performers
8-1c Fallen High Performers
8-1d Rising Moderate Performers
8-1e Steady Moderate Performers
8-1f Declining Moderate Performers
8-1g Turnarounds
8-1h Rising Underperformers
8-1i Chronic Underperformers
8-2 Market Orientation and Marketing Strategy
8-2a Marketing Strategies
8-3 Offensive and Defensive Strategy
8-3a Offensive Strategies
8-4 Defensive Strategy
Strategic Marketing 2e Table of Contents (cont.)
Chapter 9: New, Growth, and Mature Market Strategies
Chapter 11: E-marketing Strategy
9-1 Porter’s Generic Strategies
9-1a Cost Advantage Leadership
9-1b Differentiation
9-1c Focus/Niche
9-1d Pursuing Cost Leadership and Differentiation
9-1e Sustaining Competitive Advantage
9-2 Growth Strategy Matrix
9-2a Market Penetration
9-2b Market Development
9-2c Product Development
9-2d Diversification
9-3 Product Life Cycle
9-3a Introduction
9-3b Growth
9-3c Competitive Turbulence
9-3d Maturity
9-3e Decline
9-4 New Markets
9-4a Advantages
9-4b Disadvantages
9-5 Growth Markets
9-5a Easier To Gain Share
9-5b Share Gains Are Worth More in Growth Markets
9-5c Heading down the Experience Curve
9-5d Less Price Pressure in Growth Markets
9-5e Early Participation Provides Technological Expertise
9-5f Early Entry Deters Later Entrants
9-6 Strategies for Growth Markets
9-7 Mature Markets
9-7a Growth Rate Decline
9-7b Sophisticated Buyer
9-7c Market Concentration
9-7d Price and Service
9-7e Niche Markets
9-8 Strategy for Mature Market
11-1 Internet, World Wide Web, and E-marketing
11-2 Value Chain Framework and E-marketing
11-3 Channels and E-marketing
11-4 E-enabled Website
11-4a Catalog
11-4b Merchandising
11-4c Configurator
11-4d Shopping Cart
11-4e Tax Calculation
11-4f Shipping/Logistics
11-4g Payment System
11-5 E-marketing Integration Strategies
11-5a E-mail
11-5b Website
11-5c Intranet
11-5d Extranet
11-6 Sequencing and Pacing
11-6a Informational
11-6b Transactional
11-6c Fulfillment
11-6d Service
11-7 Customer Benefits from the Internet
11-7a Information
11-7b Assortment
11-7c Price
11-7d Transaction
11-7e Community
Chapter 10: Local, Regional, and Global Strategy
10-1 Organizational Models
10-1a International Firms
10-1b Multinational Firms
10-1c Global Firms
10-1d Transnational Firms
10-2 International Expansion
10-3 Reasons for International Expansion
10-3a Market Opportunities
10-3b Strategic Advantage
10-3c Scale and Scope Economies
10-3d Leveraging Competencies
10-4 Country Market Selection
10-5 Market Entry Strategies
10-5a Exporting
10-5b Licensing
10-5c Franchising
10-5d Foreign Direct Investments
10-6 Strategic Orientations
10-6a Ethnocentric Orientation
10-6b Polycentric Orientation
10-6c Regiocentric Orientation
10-6d Geocentric Orientation
10-7 Marketing Strategy: Standardization verus Customization
10-7a Standardized Marketing Strategy
10-7b Customized Marketing Strategy
10-7c The Contingency Approach
10-8 Marketing Strategy
10-8a Local Niche Strategies
10-8b Local High-Share Strategies
10-8c Regional Niche Strategies
10-8d Regional High-Share Strategies
10-8e Global Niche Strategies
10-8f Global High-Share Strategy
Chapter 12: Strategic Marketing and Ethics
12-1 Ethical Frameworks
12-1a Teleology
12-1b Deontology
12-2 Corporate Codes of Ethics
12-2a In the Area of Product Development and Management
12-2b In the Area of Promotions
12-2c In the Area of Distribution
12-2d In the Area of Pricing
12-2e In the Area of Marketing Research
12-3 Roles for Corporate Codes of Ethics
12-4 Unethical Corporate Behavior
12-5 Evaluating and Making Ethical Marketing Decisions
12-6 Drivers of Ethical Decision Making
12-6a Resource Stewardship
12-6b Information Revolution
12-6c Special Interest Groups
12-6d Market Mechanism
Chapter
4
Competitive Analysis
Chapter Outline
4-1 Competitive Developments and Strategic Marketing
4-2 Supply Drivers
4-2a Globalization
4-2b Cost Pressure
4-2c Innovation
4-3 Competitive Intelligence
4-3a What to Collect
4-3b How and from Where to Collect
4-3c How to Analyze
4-3d How to Disseminate
Know your enemy and know yourself—
your victory will be painless.
Know the weather and the field—your
victory will be complete.
-Sun Tzu, The Art of War.
4-4 Models of Competition
4-4a Perfect Competition
4-4b Monopoly
4-4c Oligopoly
4-4d Monopolistic Competition
4-5 Porter’s Five Forces Model of Competitive Intensity
4-5a Threat of New Entrants
4-5b Bargaining Power of Buyers
4-5c Threat of Substitutes
4-5d Bargaining Power of Suppliers
4-5e Intensity of Rivalry
4-6 Identifying Competitors
4-6a Existing Groupings
4-6b Consumer Decision Hierarchy
4-6c Perceptual Map
4-7 Understanding Competitors
4-7a Market Position
4-7b Market Presence
4-7c Market Barriers
4-7d Management Orientations
4-7e Strategic Relationships
Summary
Key Terms
Discussion Questions
Further Reading
Web Exercise
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Chapter 4: Competitive Analysis
Learning Objectives

Learn about the significance of competitive intelligence in strategic marketing.
Focus on competitive developments and their effects on marketing decisions.
 Differentiate between the different models of competition.
 Examine the different methods and procedures for identifying competitors.
 Learn about different aspects of competitors.

Toys ‘R’ Us, a name synonymous with toys, opened the first store in 1957, went public in 1978, and announced in August 2004 that it was getting out of the toy business. Although it did not surprise the industry analysts, the announcement was ironic, considering that the company had revolutionized the toy
industry by competing on price and assortment. It achieved the most dominant position in the toy market in the late 1980s and early 1990s, having driven competitors like Child World and Kiddie City into
bankruptcies and liquidation. The announcement resulted from Toys ‘R’ Us loss of market share in the
U.S. retail toy market, from 25% in the late 1980s to about 15% in 2004, and decline in operating profit, from over $400 million in 1999 to slightly over $100 million in 2003. What
happened? First, just as Toys ‘R’ Us changed the competitive environment in the 1980s
with low price and large assortment, Wal-Mart and Target did the same in the 1990s and
gained market share. Second, consumer tastes changed, with children showing greater
preference for electronic toys that the discounters carried. Third, the discounters changed
their value proposition, focusing on low price and selection. These developments changed
the competitive positions of firms, improving the position of discounters and worsening
that of specialty stores.1 In 2005, Toys ‘R’ Us was acquired by KKR & Co., Bain Capital Partners LLC, and Vornado Realty Trust.2
Marketing strategies of discount retailers highlight the value of understanding
the competitive environment to meet the changing needs and expectations of consumers
and achieve a competitive advantage. As competitive pressures increase, managers are
discovering the value of market orientation for strategic decision making. One of the elements of market orientation is competitor orientation (see chapter 1), which directs managerial attention to the competitive space where competitors, customers, and environmental factors interact to create market opportunities and threats. The interactions of different forces in the marketplace create a dynamic competitive environment where changes can occur unexpectedly. Managers learn about this environment
by conducting a competitive analysis. Competitive analysis examines the changes in the competitive
environment resulting from (1) socioeconomic, political, and technological developments, and (2) strategies and strategic positions of competitors in the marketplace.
Competitive analysis is an integral component of strategic planning and decision-making. Strategic marketing decisions about how to segment, which segment to target, how to position the product,
how much to charge for the product, how to distribute the product, and what messages to craft and
communicate to customers and which medium to use to deliver the messages should be guided by the
results of competitive analysis. Competitive analysis should thus be conducted with the goal of obtaining relevant and timely information to help managers make strategic marketing decisions and achieve
marketing and financial goals. Henderson highlights the importance of competitive analysis and notes
that “the success of any marketing strategy depends on the strength of the competitive analysis on
which it is based.”3
In the next section, we begin with a discussion of competitive developments and their effects on
the competitive environment. We follow this with the coverage of different aspects of competitive analysis: competitive intelligence, models of competition, the five forces model of competitive intensity, and
identifying and understanding competitors.
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Competitive Developments and Competitive Environment
In industry after industry, the competitive environment has undergone a major shift. Not only are the
players different, but also the products and services they offer are different. Consider the case of electronics. Sony has been a dominant player in this industry, producing a range of products from televisions
to camcorders to laptops. Its market position was challenged by South Korean firms such as Samsung
and LG Electronics, who entered the market at the low end of price points. And now, Chinese firms such
as Haier Group and TCL are entering the market and competing with these established Japanese and
South Korean firms with similar strategies that South Korean firms employed to make their offerings
attractive—low price with comparable quality.
Competitive developments, similar to those in the electronics industry, have also transformed
the automobile industry. American and European firms were the dominant players until the middle of
the 20th century. In the early 1960s, Japan’s Toyota and Honda entered the global competitive arena.
After Toyota and Honda, South Korea’s Hyundai, Kia, and Daewoo entered the market in the 1980s.
Now China, as a major emerging economy and the second largest economy in the world, has also entered the automobile market. Along with China, two other emerging economies, Brazil and India, also
see a future in the automobile industry. The entry of firms from these different countries in the automobile market has increased competitive pressures on the traditional players in Europe and the U.S. and
forced them to review the sustainability of the competitive advantages they gained over the years from
their competencies. These developments show that the forces shaping the competitive environment are
not only local but also global. And to gain a better perspective on the forces shaping the competitive
environment, managers need to study the supply drivers.
Supply Drivers
Marketing success is the outcome of the fit that the firm is able to achieve between what the market
expects and what the firm offers. In putting the marketing offerings together, a thoughtful consideration
of the supply drivers that shape the competitive environment is necessary. Supply drivers
Supply drivers
refer to developments that influence value-creating activities of firms. The drivers affect
refer to the developments
how firms develop and manufacture products, where they manufacture products, how
that affect value-generating
they take these products to the markets, and how they compete in the marketplace. We
activities of firms
will discuss three supply drivers in the following section: globalization, cost pressure, and
innovation.
Globalization
The rapid expansion of international business activities is the result of several factors. Among them are
trade and investment-enhancing policies of governments, developments in telecommunication and
transportation technologies, and market expansion strategies of firms from both developed and developing economies. Not only multinationals but also small and medium-sized enterprises have expanded
their business across national borders to satisfy needs and wants of consumers and achieve and
strengthen their competitive position. The term commonly used to characterize these developments is
globalization. Although the term has varied meanings, it has come to signify the worldwide participation
of firms in economic exchange activities and the global focus of production, distribution, and marketing
of goods and services. Peng4 defines globalization as “the close integration of countries and peoples of
the world,” and Rundh5 views it as a “shift toward a more integrated and interdependent world economy.”
Globalization has expanded the scope of the market and brought strategic marketing into a sharper focus. Firms no longer have to confine business activities to their
increasing integration of
domestic markets. McDonalds, for example, has successfully expanded its operations invalue chain activities across
ternationally to take advantage of growing market opportunities. It now earns more than
countries.
half of its revenue from international markets. While globalization has allowed US firms to
take advantage of international market opportunities, it has also made them vulnerable to competitive
attacks in their domestic markets. General Motors (GM), once the largest manufacturer of automobiles,
found itself in less than a desirable situation in its domestic market because of competitive pressures
Globalization
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due to globalization. It declared bankruptcy in June 2009, and in November 2010 went public again with
an initial public offering (IPO).
Globalization is also having a profound impact on the competitive situation of multinationals as they
enter foreign markets and share knowledge with local firms. European and Japanese firms entered the
Chinese market and partnered with local Chinese firms to build the rail transit system. These junior Chinese partners adopted and improved upon the technology and are now competing against established
multinationals, such as Kawasaki Heavy Industries Ltd., Siemens AG, Alstom SA, and Bombardier Inc. In
the growing global market for super-fast train systems, the Chinese firms are selling trains that are faster
and more advanced than their rivals in the developed economies.6
Cost Pressure
Cost management is now a major concern of businesses. Cost management is important because of its
key role in setting a price for a product. Firms cannot expect to survive and grow if the price they charge
is below the cost incurred to produce and market the product. Price should be higher than cost to earn
a profit. The wider the spread, the more profitable is the company. For firms to stay price
Offshoring
competitive, they need to achieve cost efficiency by improving the input-output ratio. If
shifting production to a
firms are able to produce the same output with less input, or more output with the same
country where the cost of
input, they achieve cost efficiency. The search for cost efficiency has led firms to explore
production is lower.
different options including offshoring and outsourcing.
Outsourcing
contracting production to
firms that can produce at a
lower cost.
Offshoring refers to shifting production to a country where the cost of production is lower.
Outsourcing refers to contracting production to firms that can produce at a lower cost.
China, India, and other Asian countries have become attractive locations for these activities. Nike, the leading athletic footwear company based in the U.S., outsources most of its
production to countries in Asia to reduce cost and increase profit. Similarly, Briggs and
Stratton, a small engine company in Milwaukee, now produces some of its engines in China. Firms are finding themselves under immense competitive pressure to achieve cost efficiency. Cost containment will remain an important supply driver.
Innovation
Product innovation gives the firm an edge in the marketplace. Recent developments in markets reveal
two important aspects of innovation. First, innovation is no longer the exclusive domain of established
firms in the developed economies. Second, the pace of innovation has accelerated significantly. The
new sources of innovation are large and mid-sized firms in the developing economies of Asia and Latin
America. In Asia, for example, some of the firms, such as Taiwan’s BenQ, that started as designers and
builders of finished products for other companies, have now entered the market with their own brands.
These firms, known as Original Design Manufacturers (ODM), are investing heavily in research and development to hasten the launch of new and innovative products. Now a global player and a rival of Sony
of Japan, Samsung of South Korea, which started out as an ODM, is an inspiring example to these new
Asian ODMs.7 Firms in developing economies have acquired knowledge and skills and are
Original Design
now producing their own innovative products that compete in global markets. The major
Manufacturer (ODM)
outcome of this development is an increase in competitive pressures in different markets.
companies that design and
And as these ODMs give consumers choices that are value based—competitively priced
build finished products for
other companies.
innovative products--products and brands competition will continue to become more intense.
The pace of innovation has also changed in today’s global economy. Firms need to innovate quickly and
continually, if they do not want others to beat them to the market with new and innovative products.
Richard D’Aveni8 argues that the period during which firms are able to sustain their competitive advantages from innovation is shrinking. That is, the advantages from innovation do not last very long. He
characterizes this as a hypercompetitive environment and recommends that firms should disrupt existing
sources of advantages and create new ones to stay competitive. In short, firms now have to innovate to
stay ahead of the competition.
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Take the case of a common product that many insist has been perfect for well over a century,
the pencil. As the computer age arrived, it was generally thought that the pencil would become obsolete. Faber-Castell, a pencil manufacturer since 1761, has taken this common product and increased
sales through innovation. The company’s track record for innovation dates back to 1839, when it introduced the hexagonal pencil, the first of its kind designed to stay on flat surfaces instead of rolling off.
More recent innovations include manufacturing pencils with water-based paints to make them safer for
children who chew on them and introducing a triangular-shaped pencil, ergonomically designed for children. Faber-Castell’s success is based on the desire to increase the performance of their product to
meet the needs of customers through innovation. When looking at this product, they still think that
there is room for further refinement.9
While Faber-Castell focused on fashioning pencils to meet customer needs without turning
them into a high-tech product, Liverscribe has taken the common pen and focused on twenty-first century technology to build the Echo smartpen. The Echo pen writes like any other, unless a specially designed paper is used, in which case the writing is digitally preserved and can be transferred to a computer using a USB cord. The uploaded handwritten notes appear exactly as they did on the page. The Echo
can make sound recordings as well. The secret for both Faber –Castell and Liverscribe is in product innovation to meet the changing needs of consumers; for the former the major target market is students in
the classroom, for the latter tech savvy consumers, doctors, executives, and academics who need handwritten documents saved in a digital format.10
Firms cannot live off of their innovation and expect to sustain for long the advantages they gain
from these products. The strategic imperative is that they cannot back off on their innovation efforts.
Consider the case of Nokia. When Nokia dominated the cell phone industry, European leaders hailed the
company as a high-tech success story for the continent. Nokia, however, has lost its edge. By examining
the factors surrounding Nokia’s decline, valuable marketing lessons are there for the taking. First, the
company worried more about maintaining market share than creating innovative products that excited
customers. Second, the company failed to capitalize on the environmental changes taking place, especially changes in how consumers were using cell phones not only for making calls but also for emailing
and social networking. Third, its location in Finland isolated it from the movers and shakers of the industry and deprived it of a location in the midst of innovative ideas.11
Competitive
intelligence
Competitive Intelligence
The effective development of marketing strategies presupposes the use of competitive
intelligence. Competitive intelligence refers to insights about competitors that marketers
derive from primary and secondary data. 12 Although managers can make decisions without competitive intelligence, such decisions will not match the effectiveness of decisions
based on relevant and timely intelligence. Marketing managers place themselves in an
advantageous position by understanding the strategic orientations and behaviors of their
competitors. Managers also need to understand how marketing strategies of competitors influence consumer responses. Competitive intelligence contributes to this understanding by collecting, organizing,
analyzing, and disseminating information to managers. It formalizes and systematizes the process of data
collection about the environment and competitors. The objective of competitive intelligence is to help
managers become better decision makers by providing them with timely and relevant data. 13 The competitive intelligence system can be organized around five critical questions: what to collect, how to collect, from where to collect, how to analyze, and how to disseminate information.
insights about competitors
that marketers derive from
primary and
secondary data.
What to Collect
The answer to the question what to collect comes from the questions that managers need answered.
They may have questions about the growth potential of the industry, or the competitive position of
firms, or the bargaining power of retailers. Managers collect data at the industry and firm levels to answer such questions and to make strategic and tactical decisions. Industry-level data provides the context in which the firm operates and competes. Michael Porter’s five forces model provides a useful
framework for collecting industry-related data. Data needs to be collected on rivalries among competitors, bargaining powers of buyers, bargaining power of suppliers, relative attraction of substitutes, and
entry/exit barriers. Porter’s five forces model is discussed later in the chapter.
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At the firm level, managers need to identify who the key competitors are on whom data needs to be
collected. Marketing managers need to know:
--how these competitors are satisfying the needs and wants of their target markets,
-- what their marketing offerings are,
--how these competitors have positioned their offerings,
--what are their competitive advantages,
--what is the market share of each product,
--what are their plans for introducing new products,
--how much do they spend on research and development, and
--which markets are they betting on and from which markets are they retreating.
The marketing data needs to be supplemented with financial data such as return on investment, return
on assets, and contribution margin. Together, this data can be analyzed and interpreted to develop competitor profiles. The profiles help managers understand the relative position of competitors with respect
to marketing and financial criteria, such as market share, consumer satisfaction, and profit margin.
How and Where to Collect
There are two types of data, primary and secondary data. Primary data is data that the firms collect
themselves, and secondary data is data that others have collected. Primary data is collected in three
major ways: surveys, experiments, and focus groups. In surveys, the firm develops an inPrimary data
strument such as a questionnaire to collect data. Survey data is collected either by mail or
data that the firm
phone or on the Internet. In experiments, data is collected in a controlled environment,
collects itself.
where it is possible to evaluate the effects of a stimulus, keeping other variables constant.
In focus groups, data is collected from a small group of a representative sample, using either a structured or an unstructured approach. In a structured approach, the focus group
Secondary data
moderator has a set of specific questions on which responses are solicited. An unstrucdata collected by others.
tured approach is open-ended, which allows the moderator to introduce new questions.
Firms collect secondary data from different sources (see Table 4-1 for some of the major
sources of data). Governmental agencies are a good source of secondary data on the economy, industry,
the environment, consumers, and publicly held companies. Businesses also provide data when they announce their strategic intentions and marketing and financial performance. Research companies also
publish data on the different elements of marketing mix. For example, AC Nielsen provides data on sales
of different consumer-packaged goods and other products in different types of retail stores.
Table 4-1
Sources of Competitive Data
Government





Universities




U.S. Department of Commerce
U.S. Census Bureau
U.S. Securities and Exchange Commission
U.S. Patent Database
U.S. Department of Labor
Research Reports
Articles
Case Studies
Working Papers
Periodicals
Business









Dun & Bradstreet
Hoovers
A.C. Nielsen
Standard & Poors
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Journal of Business Strategy
Journal of Marketing
Wall Street Journal
Business Week
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Data collection is a costly and challenging enterprise. In this information age, one could assume
that large amounts of data are available on different topics. However, the question for managers is not
how much data is available, but what is the relevant data and where can it be found. Jaworski, et al., in
their research found four criteria for judging the efficacy of the search process: efficiency, accuracy, comprehensiveness, and timeliness.14

Efficiency refers to the cost incurred in terms of time, money, and human resources
to obtain competitive data.

Accuracy refers to the validity of information obtained.

Comprehensiveness refers to the extent to which relevant information is collected.

Timeliness refers to the usefulness of data for decision making.
Both the methods of data collection and sources of data give rise to ethical and legal considerations. In today’s business environment, information is a precious source of competitive advantage. As
such, firms may be tempted to employ means that cross ethical boundaries. Recognizing that the temptation is there, firms need to set high standards for gathering data, prohibiting unethical and illegal practices. Unethical and illegal practices may yield short-term benefits, but are not beneficial for the organization in the long run.
How to Analyze
Primary and secondary data can be analyzed in many different ways. In addition to procedures ranging
from frequency analysis to analysis of variance to multiple regression analysis to structural equation
modeling, there are other powerful statistical procedures available for analyzing primary and secondary
data. In particular, the choice of the statistical procedure will be determined by questions that managers
need answered. Marketing managers may need to know how pricing or promotion strategies of competitors are affecting market outcomes such as market share and consumer satisfaction. Analysis of variance
or regression analysis can be used to answer this question. Perceptual maps can be used to determine
how competitors’ offerings compare to those of the firm. A variety of statistical tools are available to
help managers make strategic decisions.
How to Disseminate
With the advent of the Intranet, Extranet, and Internet, firms are able to disseminate information effectively and efficiently to different locations. However, for disseminating
strategic information, the use of the Intranet is recommended because its use is limited to
designated, password-authorized users. Managers need to answer several questions before developing a system for disseminating information. Who needs the information?
What type of information is needed? Why is the information needed? When is the information needed? Where is the information needed? In developing the disseminating system, the concept of just-in-time is highly relevant. That is, people who need the information
should have access to the information when they need it and where they need it. The timely dissemination of strategic information can be a valuable source of competitive advantage.
Models of Competition
After the failure of the regulated economy in the then Soviet Union, the market-based economy has
emerged as the most successful model economic system. In a market-based economy, firms decide what
to produce, how to produce, when to produce, and for whom to produce. The firms, however, are not
allowed unfettered power in making business and marketing decisions. Governments regulate business
activities, and the extent of their involvement determines the type of decisions firms can make. However, the essence of a market-based economic system is competition, which can be defined as rivalry between firms for customers. The intensity of rivalry is captured in the different models of competition
such as perfect competition, monopoly, oligopoly, and monopolistic competition. The salient features of
each model are described on the next page.
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Perfect Competition
Perfect competition is a theoretical construct that presents an idealized picture of a market. In a perfectly competitive market there are numerous sellers and buyers, none of them large enough to exercise
market power. The products sold in the market are not differentiated, thus buyers do not show a preference for a specific seller. The sellers accept the going price as their own price, as they are not large
enough to influence market price. They are thus price takers. Both buyers and sellers have perfect
knowledge of the market, which precludes either from taking advantage of exclusive information. There are no entry or exit barriers and firms do not collude or form alliances to
Price takers
firms that accept market
change market positions. Although these competitive conditions are seldom met in the
determined price.
marketplace, the idea of perfect competition serves as a valuable benchmark for judging
the other models of competition.
Monopoly
Monopoly is at the other end of the competitive continuum. Unlike the large number of sellers in a perfectly competitive market, there is only one seller, a monopolist, in the market. Buyers thus have to buy
the product from the monopolist if they wish to satisfy their needs. The product that a
monopolist sells does not have close substitutes, which gives it considerable leeway in
Price maker
setting the price. It uses this market power to become a price maker. A price maker is the
the firm that sets the price.
firm that sets the price.
Monopolists create high entry barriers. The most effective barriers result from patent and copyright laws. For example, upon the approval of a patent, the patent laws grant exclusive rights to the firm
to sell its products for a specified period of time. Similarly, the copyright laws give an author exclusive
rights over her work by making it illegal for others to print and sell the work without the author’s permission. A monopoly can also result from exclusive control over resources. The most famous example is that
of De Beers, the South African diamond company. Although the company does not have 100 percent of
either the market share or the supply of diamonds, it comes close to being a monopolist because of the
market power it enjoys.
Oligopoly
Oligopoly is positioned between perfect competition and monopoly. Unlike in a perfectly competitive
market in which there are many sellers and in a monopoly in which there is only one seller, there are
only few sellers in an oligopoly. A two-seller oligopoly is known as a duopoly. The products that oligopolists sell are similar and are considered close substitutes. Buyers do not have perfect knowledge of the
different offerings in the marketplace. And the market is considered imperfect in the sense that the firms
are not price takers. Each firm sets its own price, knowing, however, that its strategies will elicit competitive responses from competitors. In an oligopolistic environment, firms seek to gain a competitive advantage by forming alliances with others. These alliances can either be equity or non-equity based.
Monopolistic Competition
Monopolistic competition can be considered a hybrid of perfect competition and monopoly. In monopolistic competition, there are many firms competing in the marketplace, with each firm trying to achieve a
monopoly position through product differentiation. Although there are no entry or exit barriers, firms try
to create these barriers through creating favorable brand image, increasing consumer satisfaction, and
exercising power over the distribution channel. Given the large number of firms in the marketplace, the
likelihood of alliances, either equity or non-equity, does not appear to be very high.
Porter’s Five Forces Model of Competitive Intensity
Performance varies by industry. Some industries perform better than others. The pharmaceuticals industry, for example, has achieved a higher average return on assets than, say, the metals industry. While
there is inter-industry variation, there is also intra-industry performance variation. The average return
on assets in the U.S. automobile industry ranged from 5 percent to –2 percent during 1993–1997.15 Furthermore, inter-firm performance within an industry also varies considerably. Some firms do better than
others in the same industry. Toyota, for example, has been more profitable than Ford in recent years.
Performance variation exists not only between industries, but also between firms within an industry.
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Industry structure
refers to factors such as the
number of competitors,
market share of competitors, and entry and exit
barriers.
Conduct
refers to the firms strategies related to markets,
customers, and marketing
mix.
Performance
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Competitive Analysis
Porter developed the five forces model for analyzing industries. The model is based on the
industrial organization (IO) framework that examines relations between structure, conduct,
and performance. The framework argues that industry structure influences firm’s conduct,
which, in turn, determines performance. Industry structure refers to factors such as the
number of competitors, the market share of competitors, and entry and exit barriers. Conduct refers to the firm’s strategies related to markets and customers. Performance refers
to the financial and marketing outcomes in the marketplace. Porter adopted the IO framework to develop his five forces model to explain industry structure and performance. The
five forces model, shown in Figure 4-1, includes the following: threat of new entrants,
threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and competitors shaping the intensity of rivalry.
refers to the financial and
marketing outcomes in the
marketplace.
Figure 4-1
The Five Forces Model
Threat of new entrant
New Entrants
Intensity
Suppliers
of
Buyers
Rivalry
Bargaining power of suppliers
Bargaining power of buyers
Substitutes
Threat of substitutes
Source: Michael E. Porter, 1980, Competitive Strategy: Techniques for Analyzing Industry and Competitors, The Free Press, New York, NY.
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Threat of New Entrants
The threat of new entrants in a market is determined by the entry barriers that firms erect.
There are different types of barriers that firms can erect to deter competitors from entering the market. First, firms can place themselves on the experience curve where they enjoy
a cost advantage. Experience curve traces the decline in costs as the volume of production
increases. If firms in the industry have a cost advantage, competitors will be discouraged
to enter the market. Second, entry barriers can also be created by increasing brand loyalty.
Firms that enjoy a high degree of brand equity not only experience repeat purchase but
also increase the cost of entry for potential competitors. Third, firms can erect barriers by
charging a low price for their products and thus reducing per-unit profit. Low profit can
reduce the incentive for competitors interested in entering the market.
Threat of Substitutes
The attractiveness of an industry diminishes when the threat of substitutes increases. Let’s take the example of steel industry. In many products, plastic and aluminum can be substituted for steel. Firms that
use steel can look at these substitutes to judge their suitability. The decision to substitute will depend on
the cost-benefit ratio. If the cost-benefit ratio of, say, plastic is lower than steel, that is, plastic is either
cheaper or more effective or both than steel, firms may substitute plastic for steel.
Bargaining Power of Buyers
The increased bargaining power of buyers can reduce the attractiveness of the industry. This happens if
few firms buy from a relatively large number of firms. The large number of firms competing for the patronage of the few buyers increases the buying power of these few firms. Furthermore, if the components or parts that these firms are buying do not have proprietary components or are not patented, the
buyers will enjoy market power.
Bargaining Power of Suppliers
Just like buyers, suppliers can also exercise market power and reduce the attractiveness of the industry
to which they supply their parts or components. If there are few firms that supply to a large number of
buyers, these suppliers will enjoy considerable market power. Furthermore, if these suppliers are supplying components and parts that are patented or whose production requires specialized knowledge that
only they possess, they will be able to charge high price. Such market power will reduce the average
profitability of the industry to which they are suppliers.
Intensity of Rivalry
The intensity of rivalry between firms increases if there are more of them competing in the marketplace
for the same group of customers. Rivalry between firms is also intensified if the industry suffers from
overcapacity. As each firm has an incentive to reduce cost by increasing production and improving its
price competitiveness, the strategy may oversupply the market. Such a strategy generates price competition, which reduces average profitability. Rivalry is also intense when the market is in a growth stage. In
a growing market, firms try to consolidate their market share, which intensifies competition among
firms.
The five forces model provides a multidimensional view of industry attractiveness. However, the
model has come under attack because it does not show how firms can develop specific strategies to improve their market position. This drawback, however, does not diminish the significance of the use of the
framework for understanding the competitive situation within a specific industry.
Identifying Competitors
Who are the competitors? This may look like an easy question to answer, but Theodore Levitt 17 showed
the danger of identifying competitors incorrectly. In his now-famous article, “Marketing Myopia,” Levitt
warned against identifying competitors too narrowly. The tunnel vision that results from a myopic view
blinds managers to developments at the periphery that can later challenge their market position. Take
the case of a bookstore retailer. If it takes a narrow view of competition that only includes other store
retailers, it will preclude from consideration the competitive threats arising from online retailing. The
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danger in incorrectly identifying competitors is that it not only leaves the firm vulnerable to current
threats but also to threats that can potentially arise in the future. It is, therefore, important for firms to
understand the different ways of identifying competitors. We will cover three approaches of identifying
competitors: existing groupings, decision hierarchy, and perceptual map.
Existing Groupings
The process of identifying competitors can begin by examining the North American Industry Classification System (NAICS—pronounced “nakes”). NAICS, developed by the U.S., Canada, and Mexico, replaces
the decades-old Standard Industrial Classification (SIC) system. NAICS identifies more industries than the
SIC and provides data on key economic indicators such as number of establishments, employment, annual payroll, output per hour, retail sales, manufacturers’ shipments, and service industry receipts. 18
NAICS is organized as a hierarchy (see Table 4-2 for the six-digit codes for the information industry).19 The first two digits designate a major economic sector, such as information. The third digit designates an economic sub-sector such as broadcasting, except Internet. The fourth digit designates an industry group, such as radio and television broadcasting. The fifth digit designates the NAICS industry,
such as radio broadcasting. The sixth digit identifies subdivisions of NAICS industries that accommodate
user needs in individual countries. For example, the sixth digit in the U.S. industry will identify radio networks or radio stations.
Table 4-2
NAICS Classification Codes
First two-digits: Sector
51
Information
Third digit:
515
Broadcasting
Sub-Sector
(except Internet)
Fourth digit:
Industry Group
5151
Radio and Television Broadcasting
Fifth digit:
NAICS Industry
51511
Radio Broadcasting
Sixth digit:
U.S. Industry
515111
Radio Networks
515112
Radio Stations
Although it has the information, the Census Bureau does not provide the names and addresses
of companies associated with the NAICS codes. Title 13 of the United States Code protects the confidentiality of the information provided by companies. However, there are private research firms that provide,
for a fee, both SIC and NAICS codes for specific companies. Some of the companies that provide data are
Dun & Bradstreet, Standard & Poor’s, Moody’s Investors Service, and Hoover’s. Such data can be useful
for identifying competitors involved in similar lines of business.
NAICS data can be used to determine the N-firm concentration ratio, which is a measure of the
relative power of the firm in an industry. The popular ratio is the four-firm concentration ratio, the CR4,
which shows the combined market share of the four largest firms in an industry. Although the CR4 is
quite popular, other ratios can also be calculated from the data, such as a three-firm or a five-firm concentration ratio, depending on the need of managers. A higher ratio suggests a consolidated industry
and a lower ratio suggests a fragmented industry. Another method of calculating the concentration ratio
is the Herfindahl index. The index equals the sum of the squared market share of all firms in the industry. An increase in the index suggests a decrease in competition and an increase of market power,
whereas a decrease in the index suggests the opposite, an increase in competition and a decrease in
market power.20
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Consumer Decision Hierarchy
In the consumer decision hierarchy approach, the underlying premise is that consumers define competitors by the choices they make in the marketplace. They are the final arbiters of competition. If, for example, consumers consider the market offerings of a group of firms to be a part of their specific choice set,
then this group will constitute the competitive set. From a marketing perspective, this is the direct application of consumer orientation—looking at exchange relationships from the viewpoint of consumers.
Consider this example. You are in the market to buy a pair of tennis shoes and the only brands you are
willing to consider are Nike, Adidas, and K-Swiss. Your decision to include only these three brands into
your choice set identifies the three firms as competitors. These are the firms that will compete for your
patronage. If there are a whole lot of people who think like you about these brands and who can be
grouped together into a viable segment, then the competitive set has been determined.
Consumers can select from a variety of product and brand options to satisfy their needs or
wants. These options can be represented as a hierarchy, leading from general product categories to
more specific brands (see Figure 4-2). Each branch in Figure 4-2 encloses a set of competitors. Thus,
moving outward from the base is a representation of how competitive sets change before consumers
arrive at the final purchase decision. In Figure 4-2 the base of the hierarchy shows that the product under consideration is beverages, stemming from which is the choice between different alternatives
(product categories) of beverages, which may include fruit juices, soft drinks, alcoholic drinks, bottled
water, coffee, and tea. Let’s assume that consumers choose alcoholic beverages at this stage. This choice
forces another decision on consumers, what type of alcoholic beverage—beer, wine, or hard liquor. If,
say, beer is chosen, another decision presses on, should it be regular beer or low-calorie (light) beer. If
regular beer is chosen, there is yet another decision to be made, a choice between premium and nonpremium beer, both of which can be either imported or domestic.
Figure 4-2 Consumer Decision Hierarchy
The decision hierarchy determines the different degrees of the competitive set. A firm concentrating on competitors near the base (product categories) would end up with a very broad definition of
competitors. On the other hand, a firm concentrating on the outermost branch will come up with a very
narrow definition of competitors. A broad view of competition will lack the focus that is needed to compete at a local level. And a narrow view will lose sight of developments at the margin that can alter the
future of the competitive environment. Managers, therefore, need to take both the broad and narrow
views of competition. The combined views will prepare firms to be vigilant to macro and micro developments that may affect their market performance.21
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Perceptual Map
A perceptual map is a graphical tool for determining the competitive set. The map shows the perceived
relative position of product categories, product forms, or brands on different dimensions. Although a
three-dimensional perceptual map can be drawn, both its construction and interpretation
can be cumbersome. Therefore, marketers prefer to use the two-dimensional perceptual
Perceptual map
a graphical tool for showing
maps. In constructing a perceptual map, marketers select dimensions that are relevant to
the perceived relative
consumers, that is, dimensions that consumers use to evaluate products or brands and
position of product
make purchase decisions. Products or brands can then be plotted on a map with these
categories, product forms,
dimensions. The distance between these products or brands on the map is interpreted as
or brands on different
dimensions.
measures of psychological similarities. The closer they are, for example, the more similar
they are.
Marketers determine the competitive set by examining the clusters of products or brands on a
perceptual map. For example, with reference to brands (see Figure 4-3), the perceptual map shows several clusters with each cluster representing a specific consumer market segment. In the northwest quadrant, Lincoln and Cadillac are grouped as upscale, classy and conservative; and in the southeast quadrant, Toyota and Nissan are grouped as sporty, practical, and affordable. Individually, each cluster represents a market segment. And the different brands in each cluster represent a specific set of competitors.
The blank spaces in the map can be seen as opportunities for introducing new brands, under the assumption that there is a sizable, profitable, and reachable segment of consumers whose needs and
wants are not being met currently at these levels of the two dimensions. Different statistical techniques
can be used for constructing perceptual maps, such as cluster analysis, discriminant analysis, factor analysis, and multidimensional scaling.
Figure 4-3 Perceptual Map
Upscale,
Classy
*Mercedes
*Lincoln
*Porsche
*Cadillac
*BMW
*Volvo
*Saab
*Chrysler
Conservative
*Buick
*Honda
*Nissan
*Ford
*Dodge
Sporty
*Toyota
*Chevrolet
*Plymouth
*Hyundai
Practical,
Affordable
Source: Alexander Hiam and Charles D. Schewe, 1992, The Portable MBA in Marketing, John Wiley & Sons.
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Understanding Competitors
Competitors are rivals who struggle for the patronage of the same group of consumers. In this struggle,
some competitors hold key positions in the market and are thus more important than others. Managers
need to identify these key competitors for an in-depth analysis. Key competitors, from a firm’s perspective, are those whose actions have a significant impact on the firm’s performance. For example, Unilever
would consider Proctor & Gamble and Nestle as key competitors. Identifying the key competitors sets
the stage for learning about them. Firms derive many advantages from this knowledge. First, it puts
them in an advantageous position to develop and execute marketing strategies. Second, it prepares
them to anticipate how their competitors might respond to their strategic and tactical initiatives. Third, it
allows them to compare their own strengths and weaknesses against those of their competitors. And,
fourth, it helps them determine the competencies they need to develop to gain a sustainable competitive advantage. Figure 4-3 shows the different factors that help firms understand their competitors. The
factors are market position, market presence, market barriers, management orientation, and strategic
relationships.
Figure 4-4 Understanding Competitors
Market
Position
Strategic
Relationships
Market
Presence
Understanding
Competitors
Management
Orientation
Market
Barriers
Market Position
In India, Coke’s market share is 2.6 percent versus Pepsi’s 4.5 percent. How this came about is an interesting study of strategic decisions and marketing strategy. In 1977 Coca-Cola pulled out of the Indian
market because a new regulation would have required it to partner with a local firm and share its syrup
formula. In 1988 PepsiCo entered the Indian market and formed a joint venture with two Indian companies. It then launched an aggressive advertising campaign to leverage its brand reputation. To the Indian consumers, the word Pepsi soon became synonymous with carbonated soft drinks. Coke reentered
the market in 1993 and found a well entrenched competitor. For Coke, the strategic question then was
how to reestablish its position in India. It adopted a multipronged marketing strategy that included acquiring local brands, introducing new brands, and launching a campaign to position Coke as the new soft
drink. Coke promoted a simple slogan, “Thanda Matlab Coca Cola” which translates to “Cold Means
Coke.” The intent was to link the word thanda, which means cold in Hindi, with Coke as Indians commonly ask their guests if they would like “thanda,” meaning if they would like a cold soft drink. 22
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The market position of a firm is determined by the ratio of sales to total sales in a specific product market. A high market share over a long period of time suggests that the firm has been able to
achieve a good fit between what it offers and what the market expects. Changes in relative market positions result from the growth rate of sales of each competitor. The understanding of sales and growth
rates is critical because it indicates how consumers are responding to competitors’ marketing strategies.
In addition to sales and growth rates, firms also need to know about the profitability position of each
competitor. Low profitability can hamper a competitor’s effort to invest in new product
Market position
and market development. On the other hand, high profitability allows competitors to disales as ratio of total sales
versify and strengthen their market positions. Toyota, for example, used its financial
in a product market
strength to enter the luxury car market and solidify its market position in the U.S.
Market Presence
Market presence refers to the geographical dimensions of markets where the firm conducts its business.
A firm may choose to maintain only a national presence for strategic reasons. However, when it decides
to go international, it has the option of expanding its presence either regionally or globally.
Umbrella branding
The geographical expansion of market space gives firms the advantage of both scale and
using the same brand name
scope economies. A firm with a global presence, for example, will be able to achieve econfor different products.
omies of scale because of the increased size of the market. A global presence will also allow it to achieve scope advantage such as using umbrella branding for different products.
Umbrella branding refers to using the same brand name for different products. A firm’s
Cross subsidization
presence in different country markets is also significant because of its ability to cross subsiusing funds from one mardize. Cross subsidization refers to the use of funds from one market to enter, maintain, or
ket to enter, maintain, or
enhance presence in other
enhance presence in other markets. Firms therefore need to understand how their commarkets.
petitors have expanded their market presence and the advantages they have gained from
such expansions.
Market Barriers
In a perfectly competitive market, there are no market barriers. Firms are able to freely enter and exit
the market. However, in the other models of competition, especially in oligopolistic competition, firms
can create both entry and exit barriers. Entry barriers can be created by increasing production capacity,
market share, product differentiation, and brand equity. 23 For example, investments in increased capacity can act as an entry barrier. Potential competitors will be discouraged from entering the market, knowing that the company with high capacity can increase supply and put downward pressure on price. Price
competition will lower the profit margin of would-be competitors, thus reducing the incentive to enter
the market. Market entry barriers can also be created by firms with large market shares. A large market
share signals the market power of competitors. Firms with large market share can make it costly for others to enter the market. Product differentiation can also act as an entry barrier. A highly differentiated
product meets the specific needs of customers and increases loyalty among them, thus discouraging
others from entering the market. Market entry barriers can also be created by increasing brand equity
through advertising and product performance. Consumers’ commitment to a brand increases brand equity, which gives the firm the ability to charge premium price and increase profit.
While entry barriers make it costly for new firms to enter a market, exit barriers make it costly
for current firms to leave the market. Exit barriers can arise when firms make an investment in specialized assets that have no other feasible use. Exit barriers can also result from the psychological commitment of managers to a pet project. As time goes by, there may be an escalation of managerial commitment to the project, making it difficult for the firm to leave the market.
Management Orientations
Management orientations are reflected in the strategies they develop and implement. As strategies are
designed to achieve specific outcomes, they reveal management’s thinking about the market. Firms
therefore need to understand marketing strategies of competitors, especially those strategies that succeeded and the reasons behind their success and those that failed and the reasons behind their failures.
The understanding of both sets of strategies is important because competitors are more likely to implement successful strategies in the future, while avoiding those that failed. Firms can understand the stra-
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tegic orientations of competitors by asking a series of questions. What new products have the competitors introduced and what products do they have in the development phase, what are the different price
points on which they compete in different segments, what channels do they use to distribute products,
and what media and message do they use to reach target markets?
Strategic Relationships
Firms not only compete but also collaborate with each other. In Figure 4-5, two types of collaboration
are shown, one integrates vertical activities and the other integrates horizontal activities. Vertical collaboration in the upstream and downstream activities can give firms strategic advantages in managing their
value chain activities. By ensuring that the supply of raw materials or components is timely, defect-free,
and economical, firms can deliver quality products to achieve a competitive advantage. Horizontal collaboration occurs between firms at the same level of the value chain, such as between two manufacturers or two suppliers. Collaboration can either be equity based or non-equity based. Managers need to
understand such collaborative activities between firms because of their impact on the value chain activities and thus on the competitive position and profitability of firms.
Figure 4-5 Competitors’ Strategic Relationships
Suppliers
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Customer
Summary
Competitive analysis is a critical ingredient in strategic decision making. Strategic decisions are guided by
an understanding of competitive developments, such as cost pressure, pressure to innovate, and globalization. The more a firm knows about its competitors and competitive environment, the more effective it
will be in making strategic marketing decisions. Competitive intelligence is the art and science of gathering information on markets and competitors. Firms need to know what to collect, how to collect, from
where to collect, how to analyze, and how to disseminate. As information is a critical source of competitive advantage, firms are sometimes tempted to engage in practices that can be considered unethical. A
high ethical standard should be maintained in collecting and using information.
There are different models of competition that attempt to capture the market structure. The
different competitive models are perfect competition, monopoly, duopoly, oligopoly, and monopolistic
competition. Perfect competition is the ideal competitive structure in which neither the buyers not the
sellers have market power. In contrast, other models have both. Duopoly refers to a market with only
two sellers. In oligopoly there are several sellers with market power. In a monopoly there is only one
seller. In monopolistic competition, there are many sellers, but each seller targets a segment where it
wants to create a monopoly position through product differentiation.
At the industry level, Porter’s five forces model provides insights into the competitive structure.
The five forces that determine the profitability of the industry are buyer power, supplier power, threat
of substitutes, threat of new entrants, and competitive intensity. Firms improve the effectiveness of
their strategies by identifying and understanding their competitors. Firms can identify competitors by
using existing categories in the industry classification system, consumer decision hierarchy, and perceptual maps. Firms can understand competitors by examining their market position, market presence, market barriers, management orientations, and strategic relationships.
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Key Terms
Competition
Competitive analysis
Competitive intelligence
Conduct
Cross subsidization
Globalization
Horizontal collaboration
Market barriers
Market position
Market presence
NAICS
Offshoring
Original design manufacturer
Outsourcing
Perceptual map
Price maker
Price takers
Primary data
Secondary data
Supply drivers
Discussion Questions
1. Section 4-1 discussed the differences between primary and secondary sources of information. What
costs and benefits do you think are associated with each type? Are there situations in which one type of
source is superior to the other?
2. Section 4-3 outlined three models of competition. Can you provide an industry example for each
model? What specific characteristics of each industry apply to the models?
3. Use Porter’s five forces model to analyze the level of rivalry in the software industry and in the automobile industry. Which industry do you think is more attractive? See the web exercise below.
Further Reading
Locke Carter. Market Matters: Applied Studies and Free Market Competition. Marina, CA: Hampton,
2005.
Mathias Coburn. Competitive Technical Intelligence: A Guide to Design, Analysis, and Action. New York,
NY: Oxford University Press, 2005.
Michael E. Porter. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New
York, NY: Free Press, 1998.
Web Exercise
Go to the U.S. Census Bureau’s NAICS list (http://www.census.gov/epcd/www/naics.htm). Describe the
hierarchy used for the transportation equipment manufacturing and the information industry sectors.
For example, how is an economic sub-sector labeled differently from an industry group in each sector?
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Endnotes
1. Adapted from Joseph Pereira, Rob Tomsho, and Ann Zimmerman, 2004, Toys ‘Were’ Us? The Wall Street Journal,
August 12, pp. B1 & B2; Nanette Byrnes and Michael Eidam, 2004, Toys ‘R’ Us: Beaten At Its Own Game, Business
Week, March 29, pp.89–90; Michael Barbaro, 2004, Toys R Us Restructuing, Washington Post, August 12, p. E01; and
Constance L. Hays, 2004, Toys ‘R’ Us Says It May Leave the Toy Business, The New York Times, August 12.
2. Zijing Wu and Cotten Timberlake, “Toys ‘R’ Us seeks $800 million in IPO by KKR, Bain,” Bloomberg Business Week,
August 20, 2010.
3. B.D. Henderson, 1983, The Anatomy of Competition, Journal of Marketing, 47 (2), pp. 7–11.
4. Peng, Mike W. 2009. Global Business. Canada: South-Western, p.11.
5. Rundh, Bo. 2007. International Marketing Behavior Amongst Exporting Firms. European Journal of Marketing 41 (12): p. 181.
6. Norihiko Shirouzu, Kersten Zhang, Sue Feng, Gao Sen, and Josh Mitchell, Train Makers Rail Against China’s HighSpeed Design, The Wall Street Journal, November 18, 2010, pp. A1 and A20.
7. Lee Gomes, 2004, PCs Aren’t Just Made In Asia Now; Many Are Designed There, The Wall Street Journal, July 19.
8. Richard A. D’Aveni (1994), Hypercompetition: Managing the dynamics of strategic maneuvering, New York, Free
Press.
9. Faber-Castell: The Future of the Pencil, The Economist, September 18, 2010, pp. 80-81.
10. Hesseldahl, Arik, Bloomberg Businessweek, August 9-15, 2010, p. 84.
11. Matthew Lynn, 2010, Bloomberg Businessweek, The Fallen King of Finland, September 20-26, pp. 7-8.
12.Bernard J. Jaworski, Deborah J. Macinnis, and Ajay K. Kohli, 2002, Generating Competitive Intelligence in Organizations, Journal of Market-Focused Management, 5, 4, pp. 279–307.
13. Mark J. Chussil, 1996, Competitive Intelligence Goes to War: CI, the War College, and Competitive Success, Competitive Intelligence Review, 7 (3), pp. 56–69.
14. Jaworski, et.al., 2002, p. 285.
15. L.J. Bourgeois, Irene M. Duhame, and J.L. Stimpert, 1999, Strategic Management: Concepts for Managers, Dryden.
16. Michael E. Porter, 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York:
Free Press.
17. Theodore Levitt, 1960, Marketing Myopia, Harvard Business Review, (July-August), pp. 45-56.
18. www.census.gov/naics, 7/12/2004.
19. See for more detail, James A. Walker and John B. Murphy, 2001, Implementing the North American Industry Classification System at BLS, Monthly Labor Review, December, pp. 15–21.
20. David Besanko, David Dranove, Mark Shanley, and Scott Schafer, 2007, Economics of Strategy, 4 th Ed. John Wiley
& Sons. NJ.
21. For managers’ view on developing competitive sets see Joseph F. Porac and Howard Thomas, 1994, Cognitive
Categorization and Subjective Rivalry among Retailers in a Small City, Journal of Applied Psychology, 79, 1, pp. 54–66.
22. Mehul Srivastava, For India’s Consumers Pepsi Is The Real Thing, Bloomberg Businessweek, September 20—
September 26, 2010, pp. 26-27.
23. F.M. Scherer, 1980, Industrial Market Structure and Economic Performance, 2 ed. Boston: Houghton Mifflin Company.
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