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2.4 COMPETITORS AND MARKETS

An industry or sector may be too high a level to provide for a detailed understanding of com-petition. The fi ve forces can impact differently on different kinds of players. For example, Hyundai and Porsche may be in the same broad industry (automobiles), but they are posi-tioned differently: they are protected by different barriers to entry and competitive moves by one are unlikely to affect the other. It is often useful to disaggregate. Many industries contain a range of companies, each of which has different capabilities and competes on different bases.

Some of these competitor differences are captured by the concept of strategic groups . Customers too can differ signifi cantly and these can be captured by distinguishing between different market segments . Thinking in terms of different strategic groups and market segments provides opportunities for organisations to develop highly distinctive positionings within broader industries. Competitor differences, both actual and potential, can also be analysed using the strategy canvas and ‘ Blue Ocean ’ thinking, the last topic in this section.

2.4.1

Strategic groups

Strategic groups are organisations within an industry or sector with similar strategic charac-teristics, following similar strategies or competing on similar bases. These characteristics are different from those in other strategic groups in the same industry or sector. For example, in the grocery retailing industry, supermarkets, convenience stores and corner shops each form different strategic groups. There are many different characteristics that distinguish between strategic groups but these can be grouped into two major categories (see Figure 2.8 ). ¹⁹ First, the scope of an organisation’s activities (such as product range, geographical coverage and range of distribution channels used). Second, the resource commitment (such as brands, mar-keting spend and extent of vertical integration). Which characteristics are relevant differs from industry to industry, but typically important are those characteristics that separate high per-formers from low perper-formers.

Strategic groups can be mapped onto two-dimensional charts – for example, one axis might be the extent of product range and the other axis the size of marketing spend. One method for choosing key dimensions by which to map strategic groups is to identify top performers (by growth or profi tability) in an industry and to compare them with low performers. Characteristics that are shared by top performers, but not by low performers, are likely to be particularly relevant for mapping strategic groups. For example, the most profi table fi rms in an industry might all be narrow in terms of product range, and lavish in terms of marketing spend, while the less profi table fi rms might be more widely spread in terms of products and restrained in their marketing. Here the two dimensions for mapping would be product range and marketing spend. A potential recommendation for the less profi table fi rms would be to cut back their product range and boost their marketing.

Figure 2.9 shows strategic groups among Indian pharmaceutical companies, with research and development intensity (R&D spend as a percentage of sales) and overseas focus (exports

COMPETITORS AND MARKETS 55

and patents registered overseas) defi ning the axes of the map. These two axes do explain a good deal of the variation in profi tability between groups. The most profi table group is the Emergent globals (11.3 per cent average return on sales), those with high R&D intensity and high over-seas focus. On the other hand, the Exploiter group spends little on R&D and is focused on domestic markets, and only enjoys 2.0 per cent average return on sales.

This strategic group concept is useful in at least three ways:

● Understanding competition . Managers can focus on their direct competitors within their par-ticular strategic group, rather than the whole industry. They can also establish the dimen-sions that distinguish them most from other groups, and which might be the basis for relative success or failure. These dimensions can then become the focus of their action.

● Analysis of strategic opportunities . Strategic group maps can identify the most attractive ‘stra-tegic spaces’ within an industry. Some spaces on the map may be ‘white spaces’, relatively under-occupied. In the Indian pharmaceutical industry, the white space is high R&D invest-ment combined with focus on domestic markets. Such white spaces might be unexploited opportunities. On the other hand, they could turn out to be ‘black holes’, impossible to exploit and likely to damage any entrant. A strategic group map is only the fi rst stage of the analysis. Strategic spaces need to tested carefully.

● Analysis of mobility barriers . Of course, moving across the map to take advantage of oppor-tunities is not costless. Often it will require diffi cult decisions and rare resources. Strategic groups are therefore characterised by ‘mobility barriers’, obstacles to movement from one strategic group to another. These are similar to barriers to entry in fi ve forces analysis.

Figure 2.8 Some characteristics for identifying strategic groups

Although movement from the Exploiter group in Indian pharmaceuticals to the Emergent global group might seem very attractive in terms of profi ts, it is likely to demand very sub-stantial fi nancial investment and strong managerial skills. Mobility into the Emergent global group will not be easy. As with barriers to entry, it is good to be in a successful stra-tegic group protected by strong mobility barriers, to impede imitation.

2.4.2

Market segments

The concept of strategic groups discussed above helps with understanding the similarities and differences in terms of competitor characteristics. The concept of market segment focuses on differences in customer needs. A market segment ²⁰ is a group of customers who have similar needs that are different from customer needs in other parts of the market. Where these cus-tomer groups are relatively small, such market segments are often called ‘niches’. Dominance of a market segment or niche can be very valuable, for the same reasons that dominance of an industry can be valuable following fi ve forces reasoning.

For long-term success, strategies based on market segments must keep customer needs fi rmly in mind. Two issues are particularly important in market segment analysis, therefore:

Figure 2.9 Strategic groups in the Indian pharmaceutical industry

Source : Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International

Management , vol. 13 (2009), pp. 338–55 .

COMPETITORS AND MARKETS 57

● Variation in customer needs . Focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy. Customer needs vary for a whole variety of reasons – some of which are identifi ed in Table 2.1 . Theoretically, any of these factors could be used to identify distinct market segments.

However, the crucial bases of segmentation vary according to market. In industrial mar-kets, segmentation is often thought of in terms of industrial classifi cation of buyers: steel producers might segment by automobile industry, packaging industry and construction industry, for example. On the other hand, segmentation by buyer behaviour (e.g. direct buying versus those users who buy through third parties such as contractors) or purchase value (e.g. high-value bulk purchasers versus frequent low-value purchasers) might be more appropriate. Being able to serve a highly distinctive segment that other organisations fi nd diffi cult to serve is often the basis for a secure long-term strategy.

● Specialisation within a market segment can also be an important basis for a successful seg-mentation strategy. This is sometimes called a ‘niche strategy’. Organisations that have built up most experience in servicing a particular market segment should not only have lower costs in so doing, but also have built relationships which may be diffi cult for others to break down. Experience and relationships are likely to protect a dominant position in a particular segment. However, precisely because customers value different things in differ-ent segmdiffer-ents, specialised producers may fi nd it very diffi cult to compete on a broader basis.

For example, a small local brewery competing against the big brands on the basis of its ability to satisfy distinctive local tastes is unlikely to fi nd it easy to serve other segments where tastes are different, scale requirements are larger and distribution channels are more complex.

Type of factor Consumer markets Industrial /organisational markets Characteristics of Purchase/use situation Size of purchase

Brand loyalty Table 2.1 Some bases of market segmentation

Competitor analysis and ‘Blue Oceans’

Any environmental analysis should also include an understanding of competitors. As Michael Porter’s fi ve forces framework underlines, reducing industry rivalry involves competitors fi nd-ing differentiated positions in the marketplace. W. Chan Kim and Renée Mauborgne at INSEAD propose two concepts that help think about the relative positioning of competitors in the environment: the strategy canvas and ‘Blue Oceans’.

A strategy canvas compares competitors according to their performance on key success factors in order to establish the extent of differentiation. Figure 2.10 shows a strategy canvas for three electrical components companies. The canvas highlights the following three features:

● Critical success factors ( CSFs ) are those factors that either are particularly valued by cus-tomers (i.e. strategic cuscus-tomers) or provide a signifi cant advantage in terms of cost. Critical success factors are therefore likely to be an important source of competitive advantage or disadvantage. Figure 2.10 identifi es fi ve established critical success factors in this electrical components market (cost, after-sales service, delivery reliability, technical quality and test-ing facilities). Note there is also a new sixth critical success factor, design advisory services, which will be discussed under the third subhead, value innovation.

● Value curves are a graphic depiction of how customers perceive competitors’ relative per-formance across the critical success factors. In Figure 2.10 , companies A and B perform well on cost, service, reliability and quality, but less well on testing. They do not offer any design advice. They are poorly differentiated and occupy a space in the market where profi ts may be hard to get because of excessive rivalry between the two. Company C, on the other hand, has a radically different value curve, characteristic of a ‘value innovator’.

Figure 2.10 Strategy canvas for electrical components companies

Note : cost is used rather than price for consistency of value curves.

Source : Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy , Harvard Business School Press, 2005.

OPPORTUNITIES AND THREATS 59

● Value innovation is the creation of new market space by excelling on established critical suc-cess factors on which competitors are performing badly and/or by creating new critical success factors representing previously unrecognised customer wants. Thus in Figure 2.10 , company C is a value innovator in both senses. First, it excels on the established customer need of offering testing facilities for customers’ products using its components. Second, it offers a new and valued design service advising customers on how to integrate their compon-ents in order for them to create better products.

A value innovator is a company that competes in ‘Blue Oceans’. Blue Oceans are new market spaces where competition is minimised. ²¹ Blue Oceans contrast with ‘Red Oceans’, where industries are already well defi ned and rivalry is intense. Blue Oceans evoke wide empty seas.

Red Oceans are associated with bloody competition and ‘red ink’, in other words fi nancial losses. The Blue Ocean concept is thus useful for identifying potential spaces in the environ-ment with little competition. These Blue Oceans are strategic gaps in the marketplace.

In Figure 2.10 , company C’s strategy exemplifi es two critical principles of Blue Ocean think-ing: focus and divergence . First, company C focuses its efforts on just two factors, testing and design services, while maintaining only adequate performance on the other critical success factors where its competitors are already high performers. Second, it has created a value curve that signifi cantly diverges from its competitors’ value curves, creating a substantial strategic gap , or Blue Ocean, in the areas of testing and design services. This is shrewd. For company C, beating companies A and B in the areas where they are performing well anyway would require major investment and likely provide little advantage given that customers are already highly satisfi ed. Challenging A and B on cost, after-sales service, delivery or qual-ity would be a Red Ocean strategy, increasing industry rivalry. Far better is to concentrate on where a large gap can be created between competitors. Company C faces little competi-tion for those customers who really value testing and design services, and consequently can charge good prices for them. The task for companies A and B now is to fi nd strategic gaps of their own.