Management Help

8 Competitive strategy

Businesses generally either dwell on their competitors’ activities or

ignore them on the grounds that they are unable to exert any direct

control. The amount of attention that needs to be paid to competitors

varies according to the nature of the industry and market, and usually

lies between these two extremes. Decision-makers may be guided by an

overall vision and specific objectives, but competitive pressures can also

be decisive in determining their decisions.

The impact of competition

Michael Porter has identified five forces affecting competition in an

industry, and these provide an interesting lens through which to view

current and potential competitors. The five forces are industry rivalry,

market entry, substitutability, suppliers and customers.

Industry rivalry

Companies in the same industry – be it banking, car manufacturing,

travel and tourism, retailing or whatever – are the most obvious and

prominent source of competition. The cola wars fought by Pepsi and

Coca-Cola are just one example of this.

When competitors get fizzical: fighting the cola wars

In 1975, Pepsi directly targeted its long-term competitor, Coca-Cola, with the “Pepsi

Challenge”, claiming that in taste tests people preferred Pepsi. After Coca-Cola

conducted its own tests rumours spread that Coke did indeed have a taste problem.

In public, Coca-Cola appeared unconcerned. But senior executives knew that they

could not afford to ignore Pepsi’s latest marketing offensive, given that Coke’s

market share had fallen substantially in the face of competition from Pepsi and from

new beverages such as diet drinks, citrus flavours and caffeine-free colas. Indeed,

Coca-Cola, realising that tastes were changing and competition was getting tougher,

was itself marketing many of these new products. However, Coca-Cola’s taste

problem was a serious issue for a core product, and Coke’s shrinking lead in the cola

market convinced senior executives of the need to act. In the New York Times, Brian

Dyson, head of Coca-Cola USA, commented:

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There is a danger when a company is doing as well as we are … to think

that we can do no wrong. I keep telling the organisation, we can do wrong

and we can do wrong big.

During December 1984 the company decided to proceed with a new formula for

Coke. The target date for the launch of the new formula, new Coke, was April 1985

and Dyson involved Coca-Cola’s senior marketing and public relations officials, who

were given the vital (and secret) task of co-ordinating new Coke’s debut.

New Coke, new problem

Technically, the launch went well. However, even before they had tasted it millions

of Americans disliked new Coke. Across the country and especially in the South, the

birthplace of Coca-Cola, consumers reacted angrily and emotionally to the new

formula. Thousands contacted the organisation’s headquarters in Atlanta.

Remarkably, many were not Coca-Cola drinkers, simply American consumers

disappointed at a major change to an iconic American product.

By mid-July, the pressure had become enormous, and Roberto Goizueta, the

chairman, together with other senior executives announced that classic Coke would

return. The news was leaked the previous day, and ABC News had interrupted

daytime programming to break the story. The next morning headlines were filled

with what insiders called “The Second Coming”. On the day of the official

announcement, Coca-Cola’s hotline recorded 18,000 calls. For the first time in over

two months people were positive, glad that their voices had been heard and that

such a change had been aborted.

The company’s executives might have feared the consequences of reintroducing

classic Coke, resulting as it did from unhappy customers, bad press and ignominious

defeat. But the opposite occurred: it proved massively popular. Against all

expectations, classic Coke outsold new Coke, and sales overtook Pepsi early in 1986.

Attempting to explain the renewed popularity of classic Coke, senior executives told

the Wall Street Journal:

It’s kind of like the fellow who’s been married to the same woman for 35

years and really didn’t pay much attention to her until somebody started

to flirt with her.

Although a clever analogy, it masked the total surprise that engulfed everyone at

Coca-Cola. No one could explain the renewed appeal of the old formula. New Coke

was supposed to be exciting, popular and built upon a century of success, whereas

classic coke was thought of as satisfying the traditionalists. By overly focusing on

what the competition was doing and on its own market research (designed in the

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light of what the competition was doing) Coca-Cola had lost sight of the strength of

its brand and the unpredictability of the customer. New Coke declined in popularity,

shrinking to a 3% market share, and classic Coke began selling with renewed

vigour.1

The lesson for competitors

Coca-Cola introduced new Coke after taste tests proved it more popular than Pepsi

and the original Coke. However, the launch of new Coke contained an untested

assumption: that flavour mattered more than image. The information gathered

built upon this flawed notion, confirming the decision that classic Coke needed to

be replaced. This view was contrary to what customers – past, present and future –

actually wanted. Interestingly, this goodwill was so powerful that the cause of the

company’s failure was also the source of its salvation, as consumers forgave Coca-

Cola and realised that they appreciated classic Coke, or else tried it for the first

time.

Market entry

New entrants to a market pose a competitive threat that firms under-

estimate at their peril. So firms should always think hard about who

might enter the market, how and when this might happen, and who

has the resources, technical skills and ingenuity to move in on your ter-

ritory with a more attractive product offer. (This level of understand-

ing and insight can be developed with scenario thinking, outlined in

Chapter 6.)

Substitutability

Businesses with a product or service for which customers might

choose an alternative face a competitive threat, especially if the alter-

native is cheaper. For example, an airline may face competition from

a high speed rail operator. What matters is recognising that some

organisations need only to redefine their business in slightly broader

terms for it to become a competitor. This was highlighted in the

1960s by Theodore Levitt, a business writer and marketing guru, who

warned of the dangers of marketing myopia: seeing a business in

simple, narrow terms, rather than from the perspective of the market.

It is important to a business in broad terms that are understood by

the market: for example, an airline company is a transport company,

and may therefore enter the rail or shipping business; a theatre is in

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the leisure industry, and may start competing with cinemas or restau-

rants, and so on.

Suppliers

Suppliers wield significant power if the item they provide is scarce or

unique, or if there are only a few suppliers. They have considerable

power to damage a competitive position. One response is to build close

relations with important suppliers to secure delivery and control prices.

In the long term, the solution may be to move into the supplier’s indus-

try to safeguard supplies.

Customers

The power of the customer is another source of competition. The issues

that need consideration are how dependent the business is on individ-

ual customers, the ease with which customers can move to another sup-

plier, the customer’s knowledge of the business’s competitors and the

conditions (price, quality, overall offer) that are prevailing. The growth

of the internet as a sales channel has empowered customers. In an

increasingly networked, global marketplace, prices become transparent

and it is much easier to discover when prices for the same thing are dif-

ferent in separate geographic markets. Price transparency became even

more of a strategic issue for businesses in euro zone countries when

they adopted a single currency.

Factors intensifying competition

Decision-makers should be able to recognise when competition may

arise or when it is gathering pace. Competition can intensify in several

circumstances:

� When a market is expanding or new, as with computers and

software over the past 20 years or with the mobile

telecommunications industry during the past ten years.

� When the stakes are high and there are big profits (or losses) to be

made, notably when there are few organisations in a large

market as, for example, with Coca-Cola.

� When a market is about to change, perhaps as a result of

developments affecting patents and intellectual property rights

(for example, when the patent for a drug expires), or political or

legal developments, such as privatisation.

� When a market is shrinking, especially when there is

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overcapacity in an industry (usually one that is mature), with

firms chasing fewer and fewer customers. This is apparent in a

number of long-established manufacturing industries such as

ship-building, steel-making and car production.

Building competitiveness

The following checklist provides a framework to ensure decisions help

build a firm’s competitive strength.

Develop market awareness

Developing a keen sense of market awareness requires keeping up-to-

date with what your competitors are doing, how they are perceived in

the market, and why. Decisions should take the following into account

according to the importance attached to each:

� pricing policies and product offers;

� brand reputation and recognition;

� customers’ perceptions;

� product quality;

� service levels;

� product portfolio;

� organisational factors such as size, economies of scale, type of

employees, training, expenditure on product development and

distribution channels;

� organisational culture;

� staff loyalty;

� promotional campaigns, timing, nature and channels used;

� customer loyalty;

� financial structure and performance and cash reserves.

Build and exploit sources of competitive advantage

Developing and maintaining a keen awareness of the market will help a

firm identify its sources of competitive advantage and disadvantage,

and then to build on strengths and minimise its weaknesses. There are

many ways to do this and tangible and intangible resources that can be

used in the process.

� Cash reserves can be used to finance sustained marketing

campaigns, innovative development programmes or price

reductions.

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� Purchasing power and the ability to secure reliable supply at low

costs develop competitiveness. Costs, quality, prices and delivery

can be improved by building close working relations with

preferred suppliers.

� People are invariably the decisive factor in achieving success: an

organisation can only be as good as the people who work for it.

If there is typically a high staff turnover in the industry, the

business should be geared to recruiting the best employees. If

flexibility and speed of response are valuable (and they usually

are), the organisation should be able to anticipate major

decisions, making the right choices and implementing them.

Effective leadership is essential; its absence is a source of

competitive disadvantage.

� Product factors inevitably have a significant impact on

competitiveness. They include pricing and discounts, distribution

channels, marketing methods, brand reputation and appeal,

product quality and how the product relates to others (for

example, the popularity of film merchandise rests largely on the

success of the film).

� Market awareness – understanding who the customers are and

what they want (and do not want or need) – is also decisive in

determining competitiveness. Few markets are clearly defined,

and although a business may be open to any potential customer,

it is important to know exactly who the core customers are so

that their interests can be given priority.

Understand the issues affecting the organisation’s competitiveness

A strategy may be well conceived and executed, and it may even suc-

ceed in achieving its aims, but it may still be vulnerable to a competitor’s

actions. To be robust, decisions need to take account of potential com-

petitive threats, and so it is useful to consider worst-case scenarios to

make decisions.

Consider the example of a small sandwich bar with a regular, local

clientele. Suddenly, a film crew comes to town and, because of its exclu-

sive patronage, business booms. Is this good for the sandwich bar? In

the short-term, definitely. In the longer term, possibly not. Regular cus-

tomers may go elsewhere, tired of waiting longer than usual to be

served, and when the film crew leaves, the sandwich bar will be in a

weaker position than it was before they came, if its original customers

have discovered better or cheaper competitors. One solution may be to

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deliver orders (or at least the film crew’s), and have more pre-prepared

sandwiches to minimise delays. A more desperate and less satisfactory

measure might be (after the film crew has left town) to reduce prices or

increase marketing with the extra cash made during the boom. In any

event, market awareness is vital to competitiveness.

The fast and the furious: competing in difficult times

Air France, in common with other established carriers in Europe and North America,

found its traditional markets threatened by the downturn in the airline industry and

the increase in low-cost carriers. To remain competitive, the company paid special

attention to four techniques:

� Reacting rapidly. All Air France’s main decisions following the crisis of

September 11th 2001 were taken on September 18th. They were later adjusted

and developed, but the new strategy was formed and implemented quickly.

� Acting collectively. The board meets to react quickly, considering how best to

respond to events and how to co-ordinate their response.

� Constantly looking at all competitors. This keeps the business lean and focused

on what matters. In France, there has been an established lower-cost competitor

to Air France since 1981: the TGV high-speed train. This has meant that many of

the disciplines needed for competing with low-cost operators have been

developed over many years.

� Using all available resources. Competing has meant employing all the assets

and advantages that a big industrial carrier has in order to counter low-cost

operators, including its brand, market position and operational strengths. Often

a competitor’s strategy is to build market share with temporary low prices and

then to raise them. An active and patient approach can help to reduce or remove

the threat of competitors.

Be a SWOT

swot (strengths, weaknesses, opportunities and threats) analysis is

most effective and beneficial when it forms part of an overall manage-

ment audit. It can be done from the top, or each department or division

can conduct a swot analysis of its operations which is then reviewed

at departmental or divisional level and themes and conclusions are

developed. The results can be assessed alongside a larger picture of the

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Table 8.1 Sources of strength and weakness

Financial issues

Cash flow and cash management

Financial structure

Financial reporting systems

Ability to raise capital

Credit-control activities

Risk-management systems

People issues

Quality (meaning the ability, experience and attitude) of managers and employees

Concentration of skills and expertise (to what extent is the fate of the business in the hands of a talented few?)

Levels of motivation

Rates of pay

Ability to attract and retain the best people

Scope and effectiveness of training methods

Flexibility of people and their ability to adapt to changing situations

Organisational culture: does it promote efficiency or frustrate it?

Organisational structure: is it still relevant and effective?

Levels of delegation and empowerment, and productivity in terms of quality and quantity of work completed

The degree of initiative that is both allowed and taken

Levels of pressure (a strength) and stress (a weakness)

Effectiveness of communication channels

Operational issues

Current product portfolio

Research and technical expertise, and the ability to develop popular new products

Market research systems

Information management systems

Supply chains

Production lead times and efficiency

New processes that reduce costs and increase efficiency

Stock control

Product and market issues

Warehousing, transport and logistical factors

Distribution channels, including discount structures and dealership or franchise operations

Pricing

Brand perception

Customer service

Overall market potential for the product

Experience of the marketing mix (knowing which sales activities are most effective)

market that takes into account current and potential developments for

the whole organisation.

Strengths and weaknesses are typically found within an organisation

whereas opportunities and threats are most often outside it. Some factors

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Table 8.2 Sources of opportunity and threat

Opportunities

New markets (including export markets)

New technologies

New products and product enhancements

Mergers, acquisitions and divestments

New investment

Factors affecting competitors’ fortunes

Commercial agreements and strategic

partnerships

Political, economic, regulatory and trade

developments

Threats

Industrial action

Political and regulatory developments

Economic issues

Trade factors

Mergers and other developments among

competitors

New market entrants

Competitors’ pricing actions

Competitors’ market innovations

Environmental factors

Natural disasters

Crises, notably including health and safety

issues, product quality issues, product

liability problems

Key staff attracted away from the business

Security issues, including industrial

espionage and the security of IT systems

Supply chain problems

Distribution and delivery problems

Bad debts (resulting from the misfortunes of

others)

Demographic factors and social changes

affecting customers’ tastes or habits

can be sources both of strength and weakness. Take the age of employees,

for example. Older employees may denote a stable organisation able to

retain employees and maintain a wealth of experience, or it may simply

mean that the organisation is too conservative. Some of the most

common areas of strength or weakness are detailed in Table 8.1. All of

these can be either strengths or weaknesses, and they often change from

one to the other surprisingly quickly.

External factors are more difficult to assess than internal ones. Exam-

ples of sources of opportunities and threats are detailed in Table 8.2.

Key questions

Assessing an organisation’s competitiveness is a complex, demanding

and continuous task. What matters is the ability to create in the organi-

sation an atmosphere of acute awareness of the market, where people

sense developments and signals and possess the ability to act on them.

Consider the following questions:

� How effectively does the business sense developments in the

market? Market sensing goes well beyond market research. At its

core is a determination to derive unique insights into the needs of

customers and the opportunities within markets. It includes:

All actions, formal and informal, systematic and random,

active and passive, engaged in by all members of an

organisation which determine and refine individual or

collective perceptions of the marketplace and its dynamics.2

� How well does the business translate market insights into

competitive advantage? Understanding customers and their

shifting needs is difficult. Employees close to the market should

be encouraged to develop their insights by:

– emphasising informal rewards;

– co-ordinating the work of different departments;

– influencing the views, values and overall approach of managers

in the organisation;

– fostering a healthy disregard for industry norms and

encouraging experimentation and learning;

– promoting trust and openness among individuals so that

information and ideas are shared and discussed in an apolitical

manner.

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� What are the main sources of competition (for example, is it

industry rivalry, substitutability or something else)?

� How effectively are competitors monitored? Who decides how

and when to respond to competitors, and how effective have

those responses been in the past?

� How competitive is your industry, and what is the trend (more

competition or less)?

� How competitive is your organisation, and most importantly,

how does it compare with others in the eyes of the customer?

The next chapter builds on these issues, focusing on techniques for

ensuring that commercial decisions reflect market realities and cus-

tomers’ needs.

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