Class #5

The Role Of Competition

Competition what is it
 Competition is often thought of in a narrow sense (rivalry) but it is for more
comprehensive than that
 Competition is any force that makes it difficult for a company to achieve its
financial and market goal
 To understand competitive threats we must determine the source of the
threat
 After identifying the competitive threat, a company’s policies usually take on
an offensive or defensive.
o Michael Porter 5 force model.

Rivals

New
Substitutes
Entrants

Suppliers Buyers

 A new entrant comes to an existing market with new capacity and a desire to
gain market share. New Entrant = New Competitor
 Example: ICE to Coke and Pepsi
 When new entrants pose a high threat, incumbents must fold down their
prices or boost investment to hold off the competitors
 It is the threat of entry- not whether the actual threat occurs-that holds down
profitability
 The threat of new entry is difficult because new entrants must address
barriers to entry in the industry. But, it can be done.
o Barriers to entry is any condition that makes it difficult to come into
an existing market
 The threat of new entrants is low and high
 Barriers of entry
 o Economies of scale
 Economies of scale occur when a company produces larger
volumes that drive down costs per unit because the company
can spread fixed cons over more units, use more efficient
technology or command better terms from suppliers
 So, new entrants either have to enter on a large scale or accept
a con. Disadvantage. Typically new entrants come in on a small
scale.
 The bigger you are you can drive down per unit costs
o Network Effects
 Network Effects relate to the number and intensity of buyers
and tell others of their buying decisions
 Put another way, a buyers willingness to pay for a company’s
products increases with the number of other buyers
 Strong brand loyalty and lots of loyal buyers can serve as a
barrier to entry for newcomers
o Switching Costs
 Switching costs are those buyers face when they change
suppliers. The larger the switching cost, the stronger it serves
as a barrier to entry
 Switching Costs (hard dollar and soft dollar) exist for both
business and consumers. Examples: re-training costs,
adaptations to existing systems and processes, disruption to
existing work flows, and of course “pain in the neck” costs
 Switching generates risk since the new vendors or
technologies may be unproven
o Capital Requirements
 New markets
o Incumbency Advantage
 Independent of Size
 Intellectual property, established brands, cumulative
experience, and access to the best raw material and geographic
locations are incumbent advantages. Might not be available to
new entrants
o Distribution Channels
 Even the best new products must move through a distribution
channel from factory to truck/ship to warehouses to retail
shelves. Establishing infrastructure take time and capital
o Government policy
 On the one hand, government can subsidize new entrants
making it easier for them to enter a market. Governments
might do this for reasons of national security, anti-trust or to
protect declining industries.
 On the other hand governments can enact regulations (safety,
licensing)
Substitutes
  A substitute looks to provide the same or similar utility as another( the
original ) industry or product
 High substitute threat reduces industry profitability by placing a ceiling on
prices. The industry has to invest in added product performance or
marketing to stand apart from substitutes
 Characteristics of Substitutes
o They are credible alternative to the incumbents product
o They offer an attractive price-performance trade-off to the industry’s
product. The better the relatives value of the substitute the bigger the
threat to the incumbent
o The buyers cost of switching to the substitute is low
o The underlying industry is changing through technological or
production shifts.
o Substitutes aren’t always clearly labeled as substitutes In the same
industry,
Rivalry

 Rivalry among existing companies is a familiar way to look at comparison

 Rivalry drives down an industry’s profit potential depending on how intense
the competition is
o Rivalry is intense when:
 Competitors are numerous or roughly equal in sixe and power
 Industry growth is slow thus leading to intense market share
wars
 There are no or Few switching costs
 There is lack of differentiation
 Exit Barriers are high (specialized assets, managements desire
to stay in a business.
 Rivalry are deeply committed to the business
 Solution to Rivalry
o Price wars-no body wins
o Product Differentiation
o Better distribution
o Network effect
o Carved niches

 Generic policies to address Rivals

o Offensive policy
 Offensive polices seek to take market share away from
competitors. This is used when:
 Industry growth is slow so competitors can only grow
by taking away from each other
 Incumbent firms have a clear point of weakness such as
a ‘product leakage” or an un-served market area
  Incumbents are experiencing negative publicity
(product recalls) for Example
 Defensive Policies
o Defensive Policies seek to protect market position from competitors.
This used when
o Competitors have a unique value proposition
o Incumbent firms have a clear advantage over competitors

Supplies
 Suppliers provide critical inputs to the production of goods. They can exert
competitive pressure when they capture more of the value for themselves by
charging higher prices, limiting quality or services, or shifting costs to the
industry.
o It is more concentrated than the industry it sells to (few suppliers)
o The supplier group does not depend heavily on the industry for its
revenue
o Industry participants face switching costs in changing suppliers
o Suppliers offer products that are differentiated
o The supplier group can credibly integrate forward into the industry

Sells finished
components
Producer good (end
supplier
users)
  How would Cotton king become a supplier threat to Hanes?
 Why doesn’t Cotton king integrate forward?
 Can Hanes become a threat to cotton king?
 How do you rate the intensity of supplier competition given:

Buyers
 Powerful customers can force down prices, demand better quality or more
service (thus drive up costs) and play industry participants against one
another
 A buyer group is powerful when
o There are few buyers or when they are large volume buyers of a single
supplier
o The industry’s products are standardized or undifferentiated
o Buyers face few switching costs in changing vendors
o The buyer group can credibly integrate backward into the industry
(produce themselves)