Competitive rivalry within the marketplace is highly intense. Intense competition has, over the years, changed the shape of a number of industries, and as a result there has been an increasing number of mergers and acquisitions to ensure that major players within the market- place maintain market share and superior positioning. This has been particularly prevalent in the financial services sectors, with a number of mergers between key players in the banking sector, for example Royal Bank of Scotland and the Halifax.
We have already seen that competition can take various shapes. Competition can be cut- throat, with ongoing price wars, as have been experienced in recent years in the food retail industry, while at the other end of the scale, competition can appear to be non-existent. However, while rivalry might seem healthy, it can have both positive and negative effects. Organizations who succeed in competition, possibly increasing market share, through a range of activities, potentially experience a rise in profit. However, the reverse may happen; the organization might increase market share, but at the expense of their profit margins.
Key factors influencing competitive rivalry will be identified when undertaking the competitor analysis as already suggested, but key components might be:
o Stage of the product life cycle (PLC) of competing products o Use of specialized production techniques
o Liquidity of competitor
o Ability to achieve differentiation and brand loyalty o Competitor intentions
o The relative size of the competitor o Barrier of exit from the industry.
Understanding the balance of various forces is critical to ensuring that the organization makes the correct competitive response.
Bargaining power of suppliers
The key components of this particular element of Porter’s Five Forces emphasize the following key points:
o The strength of the supplier brand – Is it a brand that all organizations will want to
exploit, and will this therefore increase the price of supplies?
o The source of supply spans only a small number of suppliers – Limited sources provide
the supplier with a supply and demand component in their favour: the more limited the demand, the higher the price they can charge.
o Switching supplier – The cost of switching suppliers can be quite high: negotiation of
new contracts, establishing relationships and developing trust all cost time and resource. This can act as a deterrent to many organizations, who will want to retain their relationship with their supplier.
o Substitute products of suppliers – Are there appropriate substitute products available? o Forward integration – Is there a threat of suppliers establishing their own production facilities?
Bargaining power of buyers
The bargaining power of buyers is likely to be quite strong in the following instances:
o Where few buyers control a large volume of the market – A good example of this might
be that larger players in the electrical goods industry can buy large volumes of products based on economies of scale and can pass these reductions on to their customers.
o Where there are a large number of smaller suppliers fighting for a share of the market –
Again the retail industry would be a classic example of this, particularly in the food sector, that is grocery and meat products.
o The cost of switching supplier is low – The retail sector and high street are a good
example of how customers who are not brand loyal will swap around to gain the best deal. This can happen where the relationship between customer and supplier is not based upon loyalty.
o The supplier’s product is a mass-market product and not necessarily differentiated – for
example where there are many variations on the same theme, such as toothpaste, soft drinks and so on.
o Strong customer power – This involves knowledge of the market and where to attain the
best deal.
o Threat of backward vertical integration – Where the buyer goes back to the supplier,
cutting out the middle man.
The threat for potential entrants
This issue looks at the obstacles to entering new markets:
o Economies of scale – Existing organizations often have economies of scale and there-
fore new entrants will struggle to achieve the same competitive economies in the short/ medium term.
o Access to new distribution channels – It may be difficult to gain access to the appro-
priate distribution channels, due to competitive operations and networks in the marketplace.
o Brand loyalty – In a brand-loyal market it might be difficult to attract new customers and
therefore marketing spend could be quite considerable.
o Capital investment – It can be cash intensive to enter into new markets and require high
levels of investment – from a competitive perspective, this would actually weaken your initial position, unless you are a cash-rich organization.
o Competitor retaliation – It is likely that competitors will follow suit quite closely behind,
therefore competitive rivalry could be highly intensive.
o Regulatory influence – What is the position in respect of fair competition, monopolies
and mergers. The case of Microsoft is a clear example of trying to prevent competitive rivalry.
Threat of substitutes
o A new product or service equivalent – A directly equivalent product, from a differing brand,
may have a competitive influence. This is typical of the evolution of ‘home brands’, for example supermarket brands as a substitute in soft drinks, breakfast cereals and so on.
o A new product replacing an existing product – For example the DVD player replacing the
VHS video player or cassette tapes being replaced by compact discs.
o Consumer substitution – Consumer choice can be the basis of a threat, when the
consumer is willing to search for substitute products; for example, when the consumer chooses a new kitchen over a new car.
Essentially the Porter framework is an opportunity for the organization to understand the holistic range of driving forces in the micro environment, which they can clearly link to the macro analysis, that is the SLEPT/PEST analysis.
From an audit perspective, whereby information is being collected in order that key marketing decisions are made and strategies developed, it will enable the organization to consider ultimately the following factors, that will in turn enable a full SWOT analysis to be developed, to inform the strategy development process.
o What is the likelihood of change in the marketplace, both on a macro and micro scale,
and what is driving that particular change?
o What is the likely response that the organization can make, in order to retain sustainable
competitive advantage in the marketplace – how can they develop their weaknesses and turn them into strengths and their threats into opportunity? Ultimately what is their competitive response likely to be?
o What is the likely response of their competitor in the marketplace – how are the driving
forces affecting them, what might be their likely approach – what might it do to their competitive positioning overall?
As a marketer you must consider what the likely response of your organization might be – will it be certain retaliation – will you compete on an aggressive basis, if so what is the likely challenge that you will be presented with?
A further consideration will be what will happen if you fail to act, fail to compete aggressively. What will it do to your market share, your customer base? Will you see a loss of long-term customer relationships, will your brand loyalty be challenged, will your bottom line be challenged?
Reacting competitively does not just mean reducing prices or increasing sales promotions, it means looking at the bigger picture of increased marketing budget, diversification, new product strategies, to name but a few. The biggest failing of many organizations is to attack what is an overt competitive hit by competitors, but to continue blissfully unaware of the competitive activity that is being orchestrated behind closed doors. This will then hit the organization from behind, it will not be ready for the attack, and will then have to develop a reactive marketing approach, as opposed to a pre-emptive marketing strike.
Failure to observe competitive actions will mean inconsistency in competitor attack. Losing sight of the competitor will give them a position of strength and they will ultimately be unpre- dictable, preventing a continuous competitive reaction from your organization.
Finally, organizations should never be complacent, and as a marketing manager, you should not be lulled into a false sense of security by the continuous monitoring of existing competition. All organizations, without exception, should also be on the look out for new entrants to the markets, who could potentially offer a competitive proposition with the development of the same or substitute products. Therefore, competitive monitoring in line with environmental scanning are critical components of a successful marketing-oriented organization.
Suppliers
Supplier relationships are a further critical component to the success of any organization. It is of primary importance to many organizations to ensure consistent supplies flowing through in order to meet consistent demand for their products. Therefore, supplier analysis is vital. This should include a review of the following:
o The basis of the supplier relationship
o The supply and demand components of raw materials o Supplier innovations
o The relationship suppliers have with competitors
o Supply record – that is ability to deliver and meet demand on an ongoing basis o Liquidity and financial stability
o Costs o Quality
o Supply trends
o Any potential change to the supply environment – new entrants.
There is more discussion of supplier relationships in Unit 8, ‘Managing marketing relationships’.
Customers
As already indicated and highlighted in the case of easyJet in Unit 1, customers should be at the centre of any business. Organizations should be customer-focused, meeting customer needs and managing to deal with the evolution of ever-increasing customer power.
It is essential that customers are analysed; we must know who they are, where they are, what they are, what they want, when and how they want it. The sole focus of the marketing effort should be based around meeting customer expectations, the idea being that as an organization you can provide the right product, at the right price, communicated through the right medium and distributed to the right place at the right time.
While undertaking the Professional Diploma in Marketing your studies will focus on other modules, including ‘Market research and information’. Here you will look very closely at the concept of using information about your customers to support the marketing decision-making process. In addition, ‘Marketing communications’ will focus very much on the psychology of the customer, buyer behaviour, the necessity to understand the strategic importance of the custo- mer, marketing segmentation and market research. Both these modules will underpin the analysis of customers and their buying behaviour.
The important aspect of understanding customers is being able to respond and react and to remain competitive for them, in order that you retain them as customers in the long term. Ultimately, once customers have been segmented into particular market groups, then they can be targeted with a tailored marketing mix that meets their individual demands.
Once again this will require marketers to ensure that the infrastructure of human, physical and financial resources is in place to underpin the customer experience.
Stakeholders
The role of stakeholders in any organization seems to have an increasing influence on the way in which organizations can do business. The mini-case study on Exxon highlights how environ- mental pressure groups actually strive to influence the future direction of the organization overall. Stakeholders include: o Customers o Suppliers o Shareholders o Employees o Financiers
o Wider social community (including pressure groups).
Stakeholder influences and expectation should be understood. In the Exxon case, it would appear that they might have underestimated the potential power of the ‘wider social community’ and the pressure that they may bring to bear upon the organization. It is vital that the organization understands the balance of power and influence that various stakeholders might have.
For example, in many organizations, shareholders play a vital role in the decision-making process. The pending de-mutualization of Friends Provident, or the merger between the Halifax and the Royal Bank of Scotland, is reliant on the vote of the shareholders for the planned changes to succeed.
In order that your organization can provide the basis for strong relationships with stakeholders, it is necessary to understand the balance of power that they hold so that appropriate marketing mix strategies and indeed marketing communications strategies can be developed to keep them informed of the proposed changes. Effectively, you will need to know how influential they are and how controllable they are. Currently in the case of Exxon, the demonstrations could do untold damage to the business, should Exxon fail to respond to the treaty while competitors work towards meeting the objectives of it.
For both the ‘macro’ and ‘micro’ environments, analysis is essential, as is monitoring and reacting to changes. It is important that organizations are not just reactive, but that they are proactive, managing the components in the ‘micro’ environment, to provide the basic infra- structure for an organization to meet the demands of its customers and the marketing environment.
There is a key marketing tool that we can use to help us bring the main elements and components of the marketing analysis together. It is commonly known as the SWOT analysis.