CHAPTER THREE

Dealing with Competition

Building strong brands requires a keen understanding of competition, and competition grows
more intense every year. New competition is coming from all directions—from global
competitors eager to grow sales in new markets; from online competitors seeking cost-efficient
ways to expand distribution; from private label and store brands designed to provide low-price
alternatives; and from brand extensions from strong megabrands leveraging their strengths to
move into new categories. Consider how competition has intensified in the jeans market.
To effectively devise and implement the best possible brand positioning strategies, companies
must pay keen attention to their competitors. Markets have become too competitive to just focus
on the consumer alone. This chapter examines the role competition plays and how marketers can
best manage their brands/ depending on their market position.

Competitive Forces
Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or
market segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats
these forces pose are as follows:
1. Threat of intense segment rivalry: A segment is unattractive if it already contains numerous, strong, or
aggressive competitors. It is even more unattractive if it is stable or declining, if plant capacity
additions are done in large increments, if fixed costs are high, if exit barriers are high, or if
competitors have high stakes in staying in the segment. These conditions will lead to frequent price
wars, advertising battles, and new-product introductions, and will make it expensive to compete. The
cellular phone market has seen fierce competition due to segment rivalry.
2. Threat of new entrants: A segment's attractiveness varies with the height of its entry and exit barriers.
The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new
firms can enter the industry, and poor-performing firms can easily exit. When both entry and exit
barriers are high, profit potential is high, but firms face more risk because poorer-performing firms
stay in and fight it out. When both entry and exit barriers are low, firms easily enter and leave the
industry, and the returns are stable and low. The worst case is when entry barriers are low and exit
barriers are high: Here firms enter during good times but find it hard to leave during bad times. The
result is chronic overcapacity and depressed earnings for all. The airline industry has low entry
barriers but high exit barriers, leaving all the companies struggling during economic downturns.

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 Suppl
iers

Industry Potenti
Substit al
Competi
utes Entrant
tors s

Buy
ers

3. Threat of substitute products: A segment is unattractive when there are actual or potential substitutes
for the product. Substitutes place a limit on prices and on profits. The company has to monitor price
trends closely. If technology advances or competition increases in these substitute industries, prices
and profits in the segment are likely to fall. Greyhound buses and Amtrak trains have seen profitability
threatened by the rise of air travel.
4. Threat of buyers' growing bargaining power: A segment is unattractive if buyers possess strong or
growing bargaining power. The rise of retail giants such as Wal-Mart has led some analysts to
conclude that the potential profitability of packaged-goods companies will become curtailed. Buyers'
bargaining power grows when they become more concentrated or organized, when the product
represents a significant fraction of the buyers' costs, when the product is undifferentiated, when the
buyers' switching costs are low, when buyers are price sensitive because of low profits, or when
buyers can integrate upstream. To protect themselves, sellers might select buyers who have the least
power to negotiate or switch suppliers. A better defense consists of developing superior offers that
strong buyers cannot refuse.
5. Threat of suppliers' growing bargaining power: A segment is unattractive if the company's suppliers
are able to raise prices or reduce quantity supplied. Oil companies such as ExxonMobil, Shell, BP, and
Chevron-Texaco are at the mercy of the amount of oil reserves and the actions of oil supplying cartels
like OPEC. Suppliers tend to be powerful when they are concentrated or organized, when there are
few substitutes, when the supplied product is an important input, when the costs of switching suppliers
are high, and when the suppliers can integrate downstream. The best defenses are to build win-win
relations with suppliers or use multiple supply sources.

Identifying Competitors
It would seem a simple task for a company to identify its competitors. PepsiCo knows that Coca-Cola's
Dasani is the major bottled water competitor for its Aquafina brand; Awash knows that Dashen bank is a
major banking competitor. However, the range of a company's actual and potential competitors can be
much broader. And a company is more likely to be hurt by emerging competitors or new technologies
than by current competitors.

Many businesses failed to look to the Internet for their most formidable competitors. Web sites that offer
jobs, real estate listings, and automobiles online threaten newspapers, which derive a huge portion of their
revenue from classified ads.

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Common Mistakes in Identifying Competitors
 Overemphasizing current and known while ignoring potential entrants
 Overemphasizing large competitors while ignoring small ones
 Overlooking potential international competitors
 Assuming competitors will continue to behave in same way
 Misreading signals indicating a shift in focus of competitors
 Overemphasizing competitors’ financial resources, market position, & strategies while ignoring
their intangible assets
 Assuming all firms in industry are subject to same constraints or are open to same opportunities
 Believing purpose of strategy is to outsmart competition, rather than satisfy customer needs

Industry Concept of Competition

What exactly is an industry? An industry is a group of firms that offer a product or class of products that
are close substitutes for one another. Industries are classified according to number of sellers; degree of
product differentiation; presence or absence of entry, mobility, and exit barriers; cost structure; degree of
vertical integration; and degree of globalization.

NUMBER OF SELLERS AND DEGREE OF DIFFERENTIATION

The starting point for describing an industry is to specify the number of sellers and whether the product is
homogeneous or highly differentiated. These characteristics give rise to four industry structure types:
i. Pure monopoly: Only one firm provides a certain product or service in a certain country or area.
An unregulated monopolist might charge a high price, do little or no advertising, and offer
minimal service. If partial substitutes are available and there is some danger of competition, the
monopolist might invest in more service and technology. A regulated monopolist is required to
charge a lower price and provide more service as a matter of public interest.
ii. Oligopoly: A small number of (usually) large firms produce products that range from highly
differentiated to standardized. Pure oligopoly consists of a few companies producing essentially
the same commodity (oil, steel). Such companies would find it hard to charge anything more than
the going price. If competitors match on price and services, the only way to gain a competitive
advantage is through lower costs. Differentiated oligopoly consists of a few companies producing
products (autos, cameras) partially differentiated along lines of quality, features, styling, or
services. Each competitor may seek leadership in one of these major attributes, attract the
customers favoring that attribute, and charge a price premium for that attribute.
iii. Monopolistic competition: Many competitors are able to differentiate their offers in whole or in
part (restaurants, beauty shops). Competitors focus on market segments where they can meet
customer needs in a superior way and command a price premium.
iv. Pure competition: Many competitors offer the same product and service (commodity products).
Because there is no basis for differentiation, competitors' prices will be the same. No competitor
will advertise unless advertising can create psychological differentiation (cigarettes, beer), in
which case it would be more proper to describe the industry as monopolistically competitive.

Market Concept of Competition

Using the market approach, competitors are companies that satisfy the same customer need. For example,
a customer who buys a word-processing package really wants "writing ability"—a need that can also be
satisfied by pencils, pens, or typewriters. Marketers must overcome "marketing myopia" and stop
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defining competition in traditional category terms. Coca-Cola, focused on its soft-drink business, missed
seeing the market for coffee bars and fresh-fruit-juice bars that eventually impinged on its soft-drink
business. The market concept of competition reveals a broader set of actual and potential competitors.

Analyzing Competitors
Once a company identifies its primary competitors, it must ascertain their strategies, objectives,
strengths, and weaknesses.

Strategies: A group of firms following the same strategy in a given target market is called a strategic
group. Suppose a company wants to enter the major appliance industry. What is its strategic group? Here
the marketer has to identify strategies of strategic groups and also other competitive firms.

Objectives: Once a company has identified its main competitors and their strategies, it must ask: What is
each competitor seeking in the marketplace? What drives each competitor's behavior? Many factors shape
a competitor's objectives, including size, history, current management, and financial situation. If the
competitor is a division of a larger company, it is important to know whether the parent company is
running it for growth, profits, or milking it. One useful initial assumption is that competitors strive to
maximize profits. However, companies differ in the emphasis they put on short-term versus long-term
profits.

Strengths and Weaknesses: A company needs to gather information on each competitor's strengths and
weaknesses. A company should monitor three variables when analyzing competitors:
1. Share of market: The competitor's share of the target market.
2. Share of mind: The percentage of customers who named the competitor in responding to the
statement, "Name the first company that comes to mind in this industry.
3. Share of heart: The percentage of customers who named the competitor in responding to the
statement, "Name the company from which you would prefer to buy the product.
Selecting Competitors
After the company has conducted customer value analysis and examined competitors carefully, it can
focus its attack on one of the following classes of competitors: strong versus weak, close versus distant,
and "good" versus "bad."
 Strong versus Weak. Most companies aim their shots at weak competitors, because this requires
fewer resources per share point gained. Yet, the firm should also compete with strong
competitors to keep up with the best. Even strong competitors have some weaknesses.
 Close versus Distant. Most companies compete with competitors who resemble them the most.
Chevrolet competes with Ford, not with Ferrari. Yet companies should also recognize distant
competitors. Coca-Cola states that its number-one competitor is tap water, not Pepsi. U.S. Steel
worries more about plastic and aluminum than about Bethlehem Steel; museums now worry
about theme parks and malls.
 "Good" versus "Bad". Every industry contains "good" and "bad" competitors.A company should
support its good competitors and attack its bad competitors. Good competitors play by the
industry's rules; they make realistic assumptions about the industry's growth potential; they set
prices in reasonable relation to costs; they favor a healthy industry; they limit themselves to a
portion or segment of the industry; they motivate others to lower costs or improve differentiation;
and they accept the general level of their share and profits. Bad competitors try to buy share

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 rather than earn it; they take large risks; they invest in overcapacity; and they upset industrial
equilibrium.

Competitive Strategies for Market Leaders

We can gain further insight by classifying firms by the roles they play in the target market: leader,
challenger, follower, or nicher. Suppose a market is occupied by the firms. Forty percent of the market is
in the hands of a market leader; another 30 percent is in the hands of a market challenger; another 20
percent is in the hands of a market follower, a firm that is willing to maintain its market share and not
rock the boat. The remaining 10 percent is in the hands of market nichers, firms that serve small market
segments not being served by larger firms.

Many industries contain one firm that is the acknowledged market leader. This firm has the largest market
share in the relevant product market, and usually leads the other firms in price changes, new-product
introductions, distribution coverage, and promotional intensity.

Unless a dominant firm enjoys a legal monopoly, its life is not altogether easy. It must maintain constant
vigilance. A product innovation may come along and hurt the leader (Nokia's and Ericsson's digital cell
phones took over from Motorola's analog models). The leader might spend conservatively whereas a
challenger spends liberally. The leader might misjudge its competition and find itself left behind. The
dominant firm might look old-fashioned against new and peppier rivals (Pepsi has attempted to take share
from Coke by portraying itself as the more youthful brand). The dominant firm's costs might rise
excessively and hurt its profits, or a discount competitor can undercut prices.

Remaining number one calls for action on 2 fronts. First, the firm must find ways to expand total market
demand. Second, the firm must protect its current market share through good defensive and offensive
actions. A dominant firm can use the six defense strategies

Position Defense: Position defense involves occupying the most desirable market space in the minds of
the consumers, making the brand almost impregnable, like Tide laundry detergent with cleaning; and
Pampers diapers with dryness.
Flank Defense: Although position defense is important, the market leader should also erect outposts to
protect a weak front or possibly serve as an invasion base for counterattack. When Heublein's brand
Smirnoff, which had 23 percent of the U.S. vodka market, was attacked by low-priced competitor
Wolfschmidt, Heublein actually raised the price and put the increased revenue into advertising. At the
same time, Heublein introduced another brand, Kelska, to compete with Wolfschmidt and still another,
Popov, to sell for less than Wolfschmidt. This strategy effectively bracketed Wolfschmidt and protected
Smirnoff's flanks.
Preemptive Defense: A more aggressive maneuver is to attack before the enemy starts its offense. A
company can launch a preemptive defense in several ways. It can wage guerrilla action across the market:
hitting one competitor here, another there: and keep everyone off balance; or it can try to achieve a grand
market envelopment.
Counteroffensive Defense: When attacked, most market leaders will respond with a counterattack. Counterattacks
can take many forms. In a counteroffensive, the leader can meet the attacker frontally or hit its flank or launch a
pincer movement. An effective counterattack is to invade the attacker's main territory so that it will have to pull back
to defend the territory. Another common form of counteroffensive is the exercise of economic or political clout. The
leader may try to crush a competitor by subsidizing lower prices for the vulnerable product with revenue from its

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more profitable products; or the leader may prematurely announce that a product upgrade will be available, to
prevent customers from buying the competitor's product; or the leader may lobby legislators to take political action
to inhibit the competition.
Mobile Defense: In mobile defense, the leader stretches its domain over new territories that can serve as
future centers for defense and offense through market broadening and market diversification. Market
broadening involves shifting focus from the current product to the underlying generic need. The company
gets involved in R&D across the whole range of technology associated with that need. Thus "petroleum"
companies sought to recast themselves into "energy" companies. Market diversification involves shifting
into unrelated industries. When U.S. tobacco companies like Reynolds and Philip Morris acknowledged
the growing curbs on cigarette smoking, they were not content with position defense or even with looking
for cigarette substitutes. Instead they moved quickly into new industries, such as beer, liquor, soft drinks,
and frozen foods.
Contraction Defense: Large companies sometimes recognize that they can no longer defend all of their
territory. The best course of action then appears to be planned contraction (also called strategic
withdrawal): giving up weaker territories and reassigning resources to stronger territories. Diageo
acquired most of Seagram's brands in 2001 and spun off Pillsbury and Burger King so it could
concentrate on powerhouse alcoholic beverage brands such as Smirnoff vodka, J&B scotch, and
Tanqueray gin.

Other Competitive Strategies

Firms that occupy second, third, and lower ranks in an industry are often called runner-up, or trailing
firms. These firms can adopt one of two postures. They can attack the leader and other competitors in an
aggressive bid for further market share (market challengers), or they can play ball and not "rock the boat"
(market followers).

Market-Challenger Strategies
Many market challengers have gained ground or even overtaken the leader. Toyota today produces more
cars than General Motors and Airbus delivers more aircraft than Boeing. Challengers like Airbus set high
aspirations, leveraging their resources while the market leader often runs the business as usual.

Defining the Strategic Objective and Opponent(S)

A market challenger must first define its strategic objective. Most aim to increase market share. The
challenger must decide whom to attack:
 It can attack the market leader. This is a high-risk but potentially high-payoff strategy and makes
good sense if the leader is not serving the market well. The alternative strategy is to out-innovate
the leader across the whole segment. Xerox wrested the copy market from 3M by developing a
better copying process. Later, Canon grabbed a large chunk of Xerox's market by introducing desk
copiers.
 It can attack firms of its own size that are not doing the job and are underfinanced. These firms
have aging products, are charging excessive prices, or are not satisfying customers in other ways.
 It can attack small local and regional firms.

If the attacking company goes after the market leader, its objective might be to gain a certain share: it is
simply seeking a larger share. If the attacking company goes after a small local company, its objective
might be to drive that company out of existence.

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Given clear opponents and objectives, what attack options are available? Let’s examine the competitive attack
strategies available to market challengers. We can distinguish among five attack strategies: frontal, flank,
encirclement, bypass, and guerilla attacks.
 Frontal Attack: In a pure frontal attack, the attacker matches its opponent's product, advertising,
price, and distribution. The principle of force says that the side with the greater manpower
(resources) will win. A modified frontal attack, such as cutting price visa-vis the opponent's, can
work if the market leader does not retaliate and if the competitor convinces the market that its
product is equal to the leader's.
 Flank Attack: An enemy's weak spots are natural targets. A flank attack can be directed along
two strategic dimensions: geographic and segmental. In a geographic attack, the challenger spots
areas where the opponent is underperforming. For example, some of IBM's former mainframe
rivals, such as Honeywell, chose to set up strong sales branches in medium and smaller-sized
cities that were relatively neglected by IBM. The other flanking strategy is to serve uncovered
market needs, as Japanese automakers did when they developed more fuel-efficient cars.
Flanking is in the best tradition of modern marketing, which holds that the purpose of marketing
is to discover needs and satisfy them. Flank attacks are particularly attractive to a challenger with
fewer resources than its opponent and are much more likely to be successful than frontal attacks.
 Encirclement Attack The encirclement maneuver is an attempt to capture a wide slice of the
enemy's territory through a "blitz." It involves launching a grand offensive on several fronts.
Encirclement makes sense when the challenger commands superior resources and believes a swift
encirclement will break the opponent's will.
 Bypass Attack: The most indirect assault strategy is the bypass. It means bypassing the enemy
and attacking easier markets to broaden one's resource base. This strategy offers three lines of
approach: diversifying into unrelated products, diversifying into new geographical markets, and
leapfrogging into new technologies to supplant existing products. Pepsi used a bypass strategy
against Coke by purchasing orange juice giant Tropicana for S3.3 billion in 1998, which owned
almost twice the market share of Coca-Cola's Minute Maid. Technological leapfrogging is a
bypass strategy practiced in high-tech industries. The challenger patiently researches and
develops the next technology and launches an attack, shifting the battleground to its territory,
where it has an advantage. Sony's PlayStation has grabbed the technological lead to gain almost
60 percent of the video-game market by introducing a superior technology and redefining the
"competitive space." Challenger Google used technological leapfrogging to overtake Yahoo! and
become the market leader in search.
 Guerrilla Warfare: Guerrilla warfare consists of waging small, intermittent attacks to harass and
demoralize the opponent and eventually secure permanent footholds. The guerrilla challenger
uses both conventional and unconventional means of attack. These include selective price cuts,
intense promotional blitzes, and occasional legal action. Normally, guerrilla warfare is practiced
by a smaller firm against a larger one. The smaller firm launches a barrage of attacks in random
corners of the larger opponent's market in a manner calculated to weaken the opponent's market
power. Military dogma holds that a continual stream of minor attacks usually creates more
cumulative impact, disorganization, and confusion in the enemy than a few major attacks. A
guerrilla campaign can be expensive, although admittedly less expensive than a frontal,
encirclement, or flank attack. Guerrilla warfare is more a preparation for war than a war itself.
Ultimately, it must be backed by a stronger attack if the challenger hopes to beat the opponent.
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CHOOSING A SPECIFIC ATTACK STRATEGY The challenger must go beyond the five broad strategies and
develop more specific strategies:

 Price discount: The challenger can offer a comparable product at a lower price. This is the strategy of
discount retailers. Three conditions must be fulfilled. First, the challenger must convince buyers that its
product and service are comparable to the leaders. Second, buyers must be price sensitive. Third, the
market leader must refuse to cut its price in spite of the competitor's attack.
 Lower price goods: The challenger can offer an average- or lower-quality product at a much lower price.
Firms that establish themselves through a lower-price strategy, however, can be attacked by firms whose
prices are even lower.
 Value-priced goods and services: In recent years companies ranging from retailers and airlines such as are
combining low prices and high quality to snag market share from market leaders.
 Prestige goods: A market challenger can launch a higher-quality product and charge a higher price than the
leader. Mercedes gained on Cadillac in the U.S. market by offering a car of higher quality at a higher price.
 Product proliferation: The challenger can attack the leader by launching a larger product variety, thus
giving buyers more choice.
 Product innovation: The challenger can pursue product innovation.
 Improved services: The challenger can offer new or better services to customers.
 Distribution innovation: A challenger might develop a new channel of distribution. Avon became a major
cosmetics company by perfecting door-to-door selling instead of battling other cosmetic firms in
conventional stores.
 Manufacturing-cost reduction: The challenger might achieve lower manufacturing costs than its
competitors through more efficient purchasing, lower labor costs, and more modern production equipment.
 Intensive advertising promotion: Some challengers attack the leader by increasing expenditures on
advertising and promotion. Substantial promotional spending, however, is usually not a sensible strategy
unless the challenger's product or advertising message is superior.
A challenger's success depends on combining several strategies to improve its position over time.
Market-Follower Strategies
Some years ago, Theodore Levitt wrote an article entitled "Innovative Imitation," in which he argued that a strategy
of product imitation might be as profitable as a strategy of product innovation. The innovator bears the expense of
developing the new product, getting it into distribution, and informing and educating the market. The reward for all
this work and risk is normally market leadership. However, another firm can come along and copy or improve on the
new product. Although it probably will not overtake the leader, the follower can achieve high profits because it did
not bear any of the innovation expense.
Many companies prefer to follow rather than challenge the market leader. Patterns of "conscious parallelism" are
common in capital-intensive, homogeneous-product industries, such as steel, fertilizers, and chemicals. The
opportunities for product differentiation and image differentiation are low; service quality is often comparable; and
price sensitivity runs high. The mood in these industries is against short-run grabs for market share because that
strategy only provokes retaliation. Most firms decide against stealing one another’s' customers. Instead, they present
similar offers to buyers, usually by copying the leader. Market shares show high stability.
This is not to say that market followers lack strategies. A market follower must know how to hold current customers
and win a fair share of new customers. Each follower tries to bring distinctive advantages to its target market:
location, services, financing. Because the follower is often a major target of attack by challengers, it must keep its
manufacturing costs low and its product quality and services high. It must also enter new markets as they open up.
The follower has to define a growth path, but one that does not invite competitive retaliation. Four broad strategies
can be distinguished:

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 1. Counterfeiter: The counterfeiter duplicates the leader's product and package and sells it on the black market
or through disreputable dealers. Music record firms, Apple Computer, and Rolex have been plagued with
the counterfeiter problem, especially in Asia,
2. Doner: The doner emulates the leader's products, name, and packaging, with slight variations. For example,
Ralcorp Holding Inc., sells imitations of name-brand cereals in lookalike boxes. Its Tasteeos, Fruit Rings,
and Corn Flakes sell for nearly $1 a box less than the leading name brands.
3. Imitator: The imitator copies some things from the leader but maintains differentiation in terms of
packaging, advertising, pricing, or location. The leader does not mind the imitator as long as the imitator
does not attack the leader aggressively.
4. Adapter: The adapter takes the leader's products and adapts or improves them. The adapter may choose to
sell to different markets, but often the adapter grows into the future challenger, as many Japanese firms
have done after adapting and improving products developed elsewhere.

Market-Nicher Strategies
An alternative to being a follower in a large market is to be a leader in a small market, or niche. Smaller
firms normally avoid competing with larger firms by targeting small markets of little or no interest to the
larger firms.
Firms with low shares of the total market can be highly profitable through smart niching. Such companies
tend to offer high value, charge a premium price, achieve lower manufacturing costs, and shape a strong
corporate culture and vision. New Balance is a classic example of a small company that has successfully
used market-nicher strategies to establish a strong market position.
Why is niching so profitable? The main reason is that the market nicher ends up knowing the target
customers so well that it meets their needs better than other firms selling to this niche casually. As a
result, the nicher can charge a substantial price over costs. The nicher achieves high margin, whereas the
mass marketer achieves high volume.

Nichers have three tasks: creating niches, expanding niches, and protecting niches. Niching carries a
major risk in that the market niche might dry up or be attacked. The company is then stuck with highly
specialized resources that may not have high-value alternative uses.

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