Competitive Strategy

1. Professor Joel Huber Marketing 360 Marketing Management Fuqua School of Business Competitive Strategy

2. Coke and Pepsi in Thailand

3. Agenda • Introduction • Competitive Analysis • Strengths and Weaknesses • Behaviors • Competitive Strategy • Game Theory • Porter’s 5 Forces Framework

4. Industry Competition • An industry is … • Group of firms whose offerings are close substitutes for each other • Competition in an industry ... • Drives down rate of return on invested capital toward that earned in “perfect competition”

5. Competitive Analysis and Strategy • Competitive analysis answers … • What is driving competition in this industry or industries the firm may consider joining? • What actions are competitors likely to take, and what are the best responses? • How will the industry evolve? • … in order to set strategy, which answers • How should the firm be positioned to compete in the long-run?

6. Current position and strategy Market share and sales Target market and positioning Marketing mix (4 P’s) Manufacturing and R&D Financial strength Ability to Design new products Manufacture Market Finance Manage Future Goals Product portfolio Share or profit Product Differentiation or Cost Leadership Competitive Analysis

7. Evaluating Existing Competitors: Form Competitive Matrix

8. Competitive Analysis: Competitive Intelligence • Where do you get information on competitors? • Sales literature • Published documents (Annual Reports, SEC filings, Patent filings) • Stock market analyst reports • CEO/CFO/VP interviews • Internet (company website, hiring trends - www.monster.com, • Data base search

9. Electronic Data Bases –One Source

10. Dow Jones Interactive

11. Competitive Strategy:Porter’s Five Forces Model Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

12. Existing Rivalry More Intense If: • Numerous or equally balanced competitors • Slow industry growth • High fixed costs • Low customer loyalties or switching costs • Added capacity comes in large increments • Diverse competitors • High strategic stakes • High exit barriers • Specialized assets, emotional barriers, government and social restrictions (e.g., concerns for job losses, etc)

13. Using Game Theory to Predict Existing Rivals’ Response • Brandenberger and Nalebuff 1995 (HBR) UA Regular Price Discount Price AA=$100m UA=$100m AA=$80m UA=$130m Regular Price AA AA=$130m UA=$80m AA=$90m UA=$90m Discount Price

14. Reaction Functions (Regression) to Predict Reactions • Correlation in short-term is large and negative • Correlation in long-term is large and positive

15. Anticipating NewCompetitive Response Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

16. Threat of New Entry Depends on Barriers to Entry • Barriers to entry • Economies of scale • Brand loyalties • Capital requirements • Switching costs independent of loyalties • Access to distribution • Cost disadvantages independent of scale

17. Threat of New Entry also Depends on Expected Reactions • Conditions that signal strong retaliation • Firms with history of retaliation to entrants • Firms with substantial resources • Cash and unused debt and/or equity capacity • Excess productive capacity • High leverage with channels or customers • Firms with commitment to industry and high levels of idiosyncratic assets employed in it • Slow industry growth

18. The Entry Deterring Price • Structure of prices that just balances ... • the potential rewards from entry that are forecast by the potential entrant with • the expected costs of overcoming structural barriers to entry and costs of retaliation • If prevailing prices exceed the entry deterring price, entry will occur

19. Anticipating NewCompetitive Response Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of customers Bargaining power of suppliers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

20. Bargaining Power of Customers • Customers “compete” with the industry by trying to force prices lower • Customers tend to be powerful when … • They represent a large portion of the firm’s sales • Offerings represent large portion of their expenditures • Offerings are undifferentiated • Switching costs are low • They pose a credible threat of backward integration • Quality of offerings is not important to them • They have full information

21. Anticipating Supplier Power Potential Entrants Threat of new entrants Industry Competitors Rivalry among existing firms Bargaining power of suppliers Bargaining power of customers Suppliers Customers Threat of substitute offerings Substitutes Porter’s Five Forces Model - Each Force is a Threat

22. Bargaining Power of Suppliers • Suppliers “compete” with the industry by trying to force costs higher • Suppliers tend to be powerful when … • They are concentrated • There are few substitutes to their offerings • The industry is not an important customer of theirs’ • Their offerings are important inputs to the firm’s • Their offerings are differentiated or there are high switching costs • They pose a credible threat of forward integration • They have full information

23. Customer or Competitor Orientation? • Focus on competitors • Aggressive and alert for changes • Focus on customers • Align resources to customer needs • Which is better?

24. Agenda: Key Take Aways • Identify Competitors • Engage a Competitive Analysis • Strengths and Weaknesses • Behaviors • Determine Competitive Strategy • Game Theory • Porter’s 5 Forces Framework • Competition is more than existing set

25. Some Good Advice “Keep your friends close, but your enemies even closer.” Don Vito Corleone