Competitive Analysis Vademecum

A report of class speech, debate, home

readings and personal thoughts

By Carlo R. M. A. Santagiustina Master in Science

(carlosantagiustina@msn.com)

with the assistance of Professor Andrea Stocchetti

1

Preface

If we want to explain a phenomenon like the decline of IBM, we seem to oscillate

between two modes of explanation. The first is to presume that if something is

going wrong, somebody did something wrong and the appropriate remedy is to

find out who it was and get rid of him-. Thus, the "cause" is at the level of individual

action. The second mode is to find some "law" operating at the aggregate, market-

level, like: it's inevitable that well-established, successful firms, locked into the

behaviours that led them to success, will eventually succumb to changing

competitive conditions for which these behaviours are inappropriate. Neither of

these interpretative modes searches for cause in the relation between the structure

of interactions at the individual level and emergent patterns at the aggregate level

(D. A. Lane, 1994). In this report, we will try to explain why and how competitive

analysis gives us the possibility to understand, and therefore to reconcile, the two

viewpoints previously mentioned by D.A. Lane (1994). This can be done through

an investigation on the competing conducts in the employee-to-market

intermediate levels of action, interaction and decision; which range from a single

products management strategies often decided at the divisional level- to the

corporate mission and value system decided by the CEO and board of directors of

a holding company. Hence, we will describe a set of techniques and tools that will

support us in the analysis of competition, to identify the features (means) of

competiveness and to elaborate competing strategies coherent to the competitive

situation taken into account. The above mentioned conjointly determine present

and upcoming successes or failures of competing business agents at each

strategic level of analysis.

2

SummaryPage Section Title

1 Pre. Preface

2 Sum. Summary

4 How. How to read this report

5 1st Part The process of competing

6 Intro. An introductive puzzle on competition

7 I. The concept of Competition

8 a. Agents

8 b. Objectives

9 c. Context

9 d. Strategies

9 e. Interactions and relationships

10 II. Competition in Markets

11 a. Agents

12 b. Objectives

13 c. Context

14 d. Strategies

15 e. Interactions and relationships

16 III. Two divergent views of market competition

16 a. Perfect competition

17 b. Factual competition

3

Page Section Title

19 2nd Part Competitive Analysis vade-mecum

20 I. Outlining a Competitive Analysis

21 a. Step One: Choosing the scale and perspective of analysis

25 Focus 1 Defining the competitive context with the Abell Model 26 b. Step Two: Gathering and interpreting information

28 Focus 2 The Kano Questionnaire

30 c. Step Three: From analysis to strategy

32 Focus 3 Five Forces to identify the structure of inter-firm competition and shape the business strategy 39 Focus 4 Quality Function Deployment

43 II. When values become competitive dimensions

43 a. CSR and the benefits for being sustainable

45 b. Towards a possible integration of values in products and firms? 46 Focus 5 Means-Ends Chain

49 Ref. References

52 App. Appendix: Tasks Time Table

4

How to read this report:

Textboxes in this report (with hypertext links):

Topic precedence/preference symbols:

Precedence (time spent): time needed for reading, thinking and writing about the topic measured through Task timer application for Google Chrome browser;

Preference: preference/interest for the topic;

\Precedence Preference

Introduced (-5 hours)

Argufied (5-10 hours)

Developed (+10 hours)

Less

Somewhat

Most

Web pages,

Web articles,

Other online resources;

Case-studies;

Examples,

(Flash considerations)

Definitions;

Explanations;

(Useful related to argument Web Resources)

(Insights)

(Focus on reality) (Standalone/related

quotations)

Thoughts, Suggestions, brief ideas

Quotation

Author

5

First Part:

The process of competing

An excursus on the notion of competition: from natural

phenomenon to socio-cultural performance

6

An introductive puzzle on competition:

A is some natural number [1 to +infinity];

B is some natural number less than A.

Competition arises when A people want what only B people can have.

Competition is what drives us to become the best we can be; to try to become better at something than everyone before us. This is what drives people to discover new things, and build the most sophisticated things possible.

Life is competition, so, shouldn't there

be a philosophy about it?

What we call competition is first a natural phenomenon, an instinct of living beings, which refers to an innate impulse to overcome the problem of allocation of scarce resources and possibilities

through the contrast and comparison of abilities. The performance of competing is triggered by

environmental stimuli that give rise to incompatible desires and needs. Competition is therefore a

contest, a demonstration of one's fitness to the environment and power over it. As for other

natural phenomenon (for example natural selection), men tried to conceptualize competition and

assign socio-cultural and ethical functions and roles to it. These competition philosophies either

stimulate or restrain mens competitive nature. In such a way competition has become more than

a natural phenomenon; it is also a rationalised and therefore intentional socio-cultural

performance. Since in this paper we will try to analyse both the phenomenon and the socio-

cultural concept of competition, it is worthwhile to see how people nowadays debate the very

notion of competition. Therefore, here follow nine interpretations of competition from a web forum

(Online Philosophy Club), which summarizes the widespread socio-cultural opinions and ideas on

the subject:

Competition only leads to inflated self-worth. It is a

flaw in design. There is no answer in competition

itself, but only to succeed. It's a mindless desire, with no logic. to be the best", explain

being the best. What does that even mean?

Some simply enjoy the act of competing - testing

themselves against the skills of others. Those who seek to better themselves need competition to sharpen their skills but also to

assess them against the skills of others. 'Healthy' competition is a

fine thing

I believe that not all competition is good.

However, competition is the best way for the human race to

advance, and it keeps people happy,

occupied and satisfied, and seems

like a worthwhile thing to have. Competition can be subtle

(which the majority is), or it can be obvious (sports, business, school, courtship). The former is the more tangible manifestations, which makes competition appealing. The latter is hidden within everything you do.

We compete all of the time 100%, whether we like it or not. Living is competition; our reason for blindly competing is to "be" and be happy. We find any

reason that can drives us to happiness, no matter how superficial.

Typing this sentence

efficiently is a competition with

my brain to advance/

maintain my coherence

7

I. The concept of Competition

Tivation to wi

In nature, competition exists because of the incompatibility between paths and situations that

different agents undertake for reaching their objectives. Competition takes place when an agent

undertakes an action -to approach or achieve an objective- that can undermine the possibility of

other agents to approach or achieve their own objectives (Deutsch M., 1949); consequently, in

competition if one or more players will reach their target/goals, one or more other players will

not; so, the most desired situation (preferred outcome) will be impossible to be obtained by all

agents at the same time. Research has sometimes used rivalry as simply a synonym for

competition; by contrast, we treat it as a distinct construct. We conceptualize rivalry as a

subjective competitive relationship that an actor has with another actor that entails increased

psychological involvement and perceived stakes of competition for the focal actor, independent of

the objective characteristics of the situation. [.] rivalry exists when an actor places greater

significance on the outcomes of competition against certain opponents as compared to others, as

a direct result of his or her competitive relationships with these opponents [] this conception of

rivalry captures the extent to which competition is relational (Kilduff G. J. et al., 2010).

The following scheme summarizes the main implications of what has been formerly alleged

about the psychology of competition and rivalry:

An etymologic definition of To Compete (verb) from:

1610s, " to enter or be put in rivalry with," from Middle French compter "be in rivalry with" (14c.), or directly from Late Latin competere "strive in common," in classical Latin "to come

together, agree, to be qualified," later, "strive together," from com- "together" (see com-) + petere "to strive, seek, fall upon, rush at, attack" (see petition (n.)). Rare 17c., revived from late 18c. in sense "to strive (alongside another) for the attainment of something" and regarded early 19c. in Britain

as a Scottish or American word. Market sense is from 1840s (perhaps a back-formation from competition); athletics sense attested by 1857.

Source: From figure 1 page 947 in Kilduff G. J. et al., 2010

8

Competiton

AGENTS OBJECTIVES STRATEGIES CONTEXT INTERACTION

Agents try to achieve their objectives by reasoning with bounded rationality -as defined by

Simon H. A. in his decision making studies- to interpret information, evaluate alternative

plans (paths of choices) and then perform the one considered the best for reaching the

predetermined objective. The rationality of agents is considered bounded because of: limited

computation capacity; limited ability to evaluate possible consequences of alternative

behaviors (and give objective probability values to events); asymmetric/imperfect information

and transaction/decision costs. Agents are generally separated in two categories:

Players: are agents directly competing for an objective or award;

Non-players: are agents not directly competing for an objective or award but affecting

competition result. Those actors can be functional or dysfunctional to the reaching of

objectives by players;

b. Objectives

Core theme of this report

Objectives are planned and desired states of existence that an agent wants to obtain. When

an agent has multiple objectives, those can be ordered (or weighted) by hierarchies or

priorities, with pre-conditions. Some objectives can be incompatible, other can be shared,

but even in the latter situation Nash equilibriums are not always first bests for agents. The

following of mutually dysfunctional goals therefore denotes the capacity of prioritizing and

pondering different objectives.

Behaviors can be:

Dysfunctional Functional

Objectives can be:

Same COMPETITION PARTNERSHIP

Different OBSTRUCTION COOPERATION

a. Agents

9

d. Strategies

c. Context and boundaries

e. Interactions and relationships

Interactions and relationships among agents are normally structured according to some

behavioral codes and tacit rules, which can be either imposed by one of them or codetermined

by the dynamics of interaction between agents. Those structures of interaction govern as

restrictions, controls and instructions- the means by which agents actions and decisions

can/should influence others players decisions and strategies. Players possibilities are both

empowered and confined by their contacts, clusters and networks. Accordingly, interaction rules

determine the way in which agents react to others decisions in order to prevent or facilitate

them in reaching their objectives. The most significant interaction rules are therefore the ones

which have a direct impact on others potential effectiveness and possibilities of succeeding in

their missions;

Strategies are implementable sets of planned and non-random actions, instrumental for the

achievement of ones objectives. A Strategy, to be so called, must be more effective (in a

competitive performance sense) than uncontrolled or totally random behaviors, for the reaching

of predetermined goals or paths towards goals. Strategies are often at sens unique (path

dependent decisions), they are never walk-back situations, because their results are time

sensible and time has a unique sense of deployment. Timing in implementing a strategy, defines

the overall outcome of the strategy, because time passing changes the competitive environment

by leading to new development all actions and situations. Hence, strategies that change the

context can prevent, obstruct or delay other players decisions and actions;

The context is an amalgamation of constraints, opportunities and boundaries that shape the

competitive environment. A agents environment is made of elements that influence competitors

actions and outcomes; like obstacles, moderators, facilitators, and more others. The same

element can affect different players efficiency and effectiveness in dissimilar ways.

Furthermore, since all elements of an environment are generally interdependent, they act as

combined parts of a single system. Therefore, any element in the context can significantly alter

the specific effects of other elements. As a result, the effect of a single isolated element is

usually different from the effect of this same element as part of a specific context. Accordingly,

all action that changes the context can subsequently change the other elements effects, and

adjust players strategic positioning and possibilities to reach their objectives;

10

II. Competition in Markets

Firms are alike leaving beings constituted by individuals, artifacts, knowledge and most of all

organization. The ultimate, but not unique, objective of firms is to maximize their present and

forthcoming profits; this is the basis of inter-firm competition within markets. Rivalry is a

powerful force that pushes firms to continuously renovate themselves. Firms compete by giving

to consumers goods and services increasingly capable of responding to their needs and desires,

both rational and impulsive. The strategies to succeed in such a mission are the most diverse.

In general, the intensity of a competition between firms determines the degree to which

investment inflows drive returns to the free market level, hence the ability of firms in the

industry to sustain above average returns (Porter M. E., 1980). The more a group of

goods/services, used to meet a given need or fulfill a given desire is homogenous; the better is

the substitutability between those goods for customers, and the greater is the intensity of the

competition between the firms producing those goods/services. As a result, the more

competition is intensive, the more the competing firms must undertake a great effort to fit the

needs and requirements of consumers better than their competitors. Therefore, firms try to give

themselves the most effective and efficient organization of functional elements to their scopes,

to maximize their share of sales and profits, at the detriment of their competitors. Firms

characterizing resources, which are functional to competition, can generally be subdivided in

five categories:

Financial capital: cash and deposit money, lines of credit, financial assets and liquid

investments;

Material capital: real estate, plants, facilities, machinery, et.;

Immaterial capital: brands, patents, internal organization, codified corporate knowledge,

technology and other intellectual property rights;

Social capital: reputation, status and trust relationships within the social network of

the firm and its employees;

Human capital: ability of attracting, employing, retaining and giving value to manual

and cognitive abilities or knowledge of employees.

First, competition is a matter of relations, not [only] player attributes.

Second, competition is a relation emergent, not observed.

Third, competition is a process not just a result.

Fourth, imperfect competition is a matter of freedom, not just power.

(Burt R., 1995)

11

a. Agents

Market Competiton AGENTS:

Organizations customers,

suppliers, final clients

OBJECTIVES: Objective management

techniques

STRATEGIES: level and unit

dimension

CONTEXT: legal, institutional, political, economical,

cultural, social, technological and

demographic

INTERACTION: business network,

relationshps, centrality,

reputation and social capital

Once we have chosen a focal business organization, for which we want to study the competitive

situation (generally a private firm, but could also be a publicly own company or an individual

company), which shall be our first player. We can find which agents are parts of this context,

both with the role of players or non, by:

looking to agents in the supply chain, like suppliers, customers and their respective

prospects;

looking to market participants or influencers, like business rivals(players)/partners,

regulators, etc.;

looking to other stakeholders, like the community, government, investors, etc.;

Consumers pay an important role in most of the competitions, because they oftenly are the

ultimate judges of a products performance, we can classify them in the following categories:

Clients and prospects: agents who have done business with you, and/or who will

probably do so in the future;

Anti-clients: agents who will not engage in transactions with you, who will actively

reject to your engage themselves in any way with your organization and will incite

others to do the same (they have an obstruction role );

Ex-clients: agents who have been clients, but no longer engage in transactions with the

business;

Source: From Tom Graves Web-blog, NOTES

12

b. ObjectivesFirms are complex multi-agent organizations that generally pursue at the same time multiple

objectives; some of these can be complementary, but a large majority of them will be mutually

dysfunctional. This means that resources invested in reaching a goal will be deprived from the

pursuit of other goals. A consequence of this is the creation of tradeoffs and path-dependency

(old decision affect the viable options for the future). In addition to maximizing actual and

forthcoming profit, a firm generally pursues other common or particular goals (brand

leadership, employment stability, dissemination of corporate values and vision, sustainability,

CSR, other) conveyed to it by its stakeholders: owners/shareholders, managers, clients,

employees, public institutions. In several situations resources and effort be must be invested in

activities whose outcome is uncertain or variable, to deal with those situations managers have

to model the uncertain situation/event with specific technical instruments, like Bayesian

networks and decision graphs (Namwongse P. & Limpiyakorn Y.,2011). In addition, managers

use objective management techniques to prioritize the firms objectives, and subsequently

choose how allocate the scarce resources of the firm to accomplish the chosen objectives as

efficiently as possible. Objective management techniques generally include:

It is the process of organizing,

employees tasks and prioritize/

optimize them as functions of time.

Criteria of optimization can be single or multiple:

urgency, importance, profit, opportunity,

feasibility and other.

Further concept explanation by:

www.mckinsey.com/insights/organization/making_time_management_the_organiz

ations_priority

It is the process of determining and

monitoring the state of progress of a

planned strategy, to verify its coherence

and compliance with prearranged conduit

and schedule. Feasibility checks

are accomplished to determine if a strategy is still practicable and

worth of pursuing for the fulfillment of an

objective, before spending additional

resources on it.

Further concept explanation by:

en.wikibooks.org/wiki/Business_Strategy/The_Three_Proces

ses_of_Strategy

It is the process of defining and

formalizing the roadmap towards

the fulfilment of the objectives. Through the construction and implementation of a project plan/path for the realization of pre-

requisites and the overcoming of

obstacles/impediments.

Further concept explanation by:

www.pmhut.com/category/time-

management/project-milestones

It is the process of identification and removal of habits

and ways of thinking that can hinder creativity,

undermine cooperation and any other psychological attitude that can

demoralize employees and

damage the business working

environment.

Further concept explanation by:

www.mckinsey.com/insights/organization/the_irrational_side_of_change_manage

ment

Time Management

Consistency, suitability, feasibility , acceptability

checks

Definition and adjustment of

milestones and paths

Dissolution of personal or collective

blocks to change and success

13

Market

Industry

Business Area

Segment

Product

Defining the context and boundaries for an analysis:

When we talk about competition, we must decide our level of analysis (see scheme on the

right). Since competition takes place at different levels, for each

one we can identify a distinct context made of elements,

agents, interactions, objectives and strategies; whose specificity

will shape and confine the particular competitive

situation/arena taken into account.

c. Context

The context is the ensemble of the environmental elements and forces, which jointly determine

the rules and payoffs of a competition. The legal, institutional, political, economical, cultural,

social, technological and demographic systems in which businesses are embedded, set up the

lively arena in which any competition takes place. Legal, institutional, political, economical,

cultural, social, technological and demographic trends are powerful and often relentless forces,

which persistently influence and inspire the actions and decisions of agents that therein live and operate, both at the local and global level. Trade standards, intellectual property rights

protection, business regulation, public policies and investments, administrative and registry

offices efficiency, tax and tariff regime, contract enforcement, trade union power, labor law,

official corruption, consumers culture and education, labor force training, productivity and

vision of life jointly shape the mechanisms and boundaries of competition and the horizon of

possibilities of competitors. Market power dynamics are also affected by these surrounding

environmental forces.

There are several which can be used to analyze and model the context (competitive

environment), Here follows a brief description of two, which I consider particularly interesting

because complementary in their approach and perspectives:

PESTLE: audit of an organizations environmental influences (for detail see: CIDP,PESTLE analysis)

AGIL: structural functionalist sociological analysis of the environment (for details see:

Parsons T., 1970);

14

d. Strategies As Beard D. W. & Dess G. G. (1981) pointed out, strategic decision making is a crucial part of the process by which organizations adapt to their environments according to the aforementioned authors, business policy should always be distinct in three levels of organizational strategy:

Concerned with questions about what businesses to compete in. It is defined interms of variationi n the deployment of a firm's resources among the portfoliosof industries within which all business firms compete.

The corporate-level (inter-industry) strategy

Concerned with questions of how to compete within a particular business. It isdefined in terms of variation in firm characteristics relevant to competitivesuccess or failure within a given industry.

The business-level (intra-industry) strategy

The first is concerned with questions of how to achieve better results comparedto the other divisions and how to compete with substitute products/lines ofother firms; while the latter is concerned with questions of how to increase thecompetitiveness of the firm through the improvement of the performance of aparticular business function.

The functional/divisional level (intra-industry and intra-business) strategy

In addition to the organizational strategy dimension, we have a hierarchical unit dimension (that determines the impact/action scale of a strategy) the latter can be subdivided into four kinds of units:

The choice of bounding a problem to a particular strategic level or unit of analysis is critically important. But if problems are not bounded, they remain intractable. The process of identifying and bounding a problem is intimately connected with the generation of alternative decision choices [and paths] to be considered. When we assume that the alternative decision strategies are prespecified, we seriously misrepresent the art of formal [strategic] analysis. In practice the process is iterative. The analyst might bound his problem one way only to find out that hes in an impossible morass, so he backs up and redefines his problem area [and its unit impact/action dimension] by bounding it differently and generating new restricted alternatives(Keeney R. L.,1993). Each strategic level and unit affects, in a distinct manner, the businesss possibility of generating profit, achieving specific objectives and increasing the competitive performance.

Directly linked

environment

Organization as a whole

Management Decision makers

Indirectly linked environment

15

Embeddedness is a central characteristic of business networks whereby social relations

strongly influence firms activity and strategy, as well as their outcomes, by facilitating or

disrupting cooperation, competition, synergies, trade and other viable multi-agent initiatives,

either between firms or between a firm and its environment (Uzzi B., 1996). Embeddedness

occurs because the competitive arena has a social structure: players trusting certain others,

obligated to support certain others, dependent on exchange with certain others, and so on. []

The rate of return [on business investments] is keyed to the social structure of the competitive

arena. [] Each player has a network of contacts in the arena. Something about the structure

of the player's network and the location of the player's contacts in the social structure of the

arena provides a competitive advantage in getting higher rates of return on investment. As a

result the social structure renders competition imperfect by creating entrepreneurial

opportunities for certain players and not for others. This is the so called social capital of a

firm, which is a thing owned jointly by the parties to a relationship. No one player has

exclusive ownership rights to social capital. If you or your partner in a relationship withdraws,

the connection, with whatever social capital it contained, dissolves. (R. Burt, 1995). The

relational influence/power of a firm over its environment is a combination of:

1. Centrality: that is a measure of the interaction activity and capability of an organization

(node), it grows together with the quantity of relations (links) and the centrality of directly

linked interlocutors (neighbors).

2. Reputation: capability of being distinguished and thus preventively recognizable by other

organizations within the network and environment, that gives to the organization the

opportunity to create and maintain personalized interactions and relations with other

organizations.

In business, we generally distinguish between three broad forms of competitive

relations/interactions between firms:

i. Direct competition between firms which produce services/goods which perform the

same function and therefore directly compete against each other (high multimarket

contact values).

ii. Indirect competition between firms which produce services/goods which are close

substitutes for one another (average multimarket contact values).

iii. Budget competition - between firms which produce services/goods that compete for acommon share of a group of customers budget (low/nil multimarket contact values).

e. Interactions and relationships

16

III. Two divergent views of market competition

homogeneus products

atomism of players

no entry or exit

barriers

perfect information

and no transaction

costs

costant returns to

scale

In the mainstream neoclassical microeconomic perfect competition theory, to be Pareto-efficient,

market agents (firms and consumers) should have perfectly symmetric information. Firms

should produce homogenous goods, should have no barriers to entry/exit, no transaction costs

and constant returns to scale. In the long-run, all markets should be in perfect equilibrium

(unitary prices equal to average unitary costs) and consequently all firms should make zero

profits. Firms, for which the unitary costs are above the price level, should be immediately

knocked out of market. As a result, the selection of the better performing firms should be

almost instantaneous. Since all firms have the same technology, information and costs

structure, choices (production problems) have a unique ex-ante optimal choice (more efficient

solution), obvious to all agents.

Therefore, the neoclassical microeconomic theory represents a market system where firms have no incentive to develop and adopt alternative strategies, because there is a clear and common

one best strategy for all competing firms, time and space are irrelevant variables. In such a

system, where firms have no reason to formulate distinctive competitive strategies, there is no

discretional space for firms to improve their capabilities, creativity, skills and expertise. As a

result, in the Neoclassic Perfect Competition theory, the commonly recognized raison dtre

of market competition -that is to use the profit reward as an incentive to encourage and

stimulate the growth of those firms which are able to efficiently develop and implement

improvements and innovations that increase the ability of their products to satisfy human

needs and desires- is totally absent. For that reason, the idea of Perfect Competition is

actually the antonym of factual competition between firms.

Additionally, according to the perfect market theory, agents should behave as the so-called

Chicago Men. The aforementioned has perfectly congruent inter-temporal rational preferences

Characteristics of markets in Neoclassical perfect competition theory

a. Perfect competition

17

differentiated products

distinctiveness of players

entry or exit

barriers

imperfect information

and transaction

costs

variable returns to

scale

Characteristics of markets in industrial economics and management studies

However, Simons impossibility theorem about perfect rationality in choices, demonstrates that,

even if all the other neoclassical assumptions were true, imperfect information in markets is a

sufficient condition to make such a theory misrepresentative, and unsuitable to understand the functioning of market competition. In real markets there are hidden (that necessitate an

effort/cost to be understood or revealed) or unobservable or invaluable alternatives, which limit

and distort the choosing capability of individuals and organizations, limiting the overall

productive and allocative efficiency of the market system. Besides this, and beyond any repair,

the limitedness of computational capacity, the asymmetric access to information, the

inhomogeneous distribution of knowledge and interpretive skills, can make agents and firms

behave inefficiently or ineffectively even when rationally performing or taking logically

consistent decisions.

Since human agents behave far less mechanistically than the all-seeing and simple-minded

Chicago Man; agents true needs, desires and behaviours are much less straightforwardly

predictable and easily satisfiable by firms, in respect to what is said in perfect competition

theory. Unlike neoclassical economists, who believe that an invisible hand (directed by the

perfect competition axioms) is sufficient to shape a perfectly efficient and effective market;

Industrial economists and other theorists of the organization and management of firms try to

recognize and model the great sophistication of the functioning mechanisms of the business

world. Those lasts generally acknowledge that, despite the limitedness in the agents capacity

to predict others behaviours, it is not a good idea to relegate to the role of exogenous factor the

decisional mechanisms, the internal organization and structure of interactions of those

different agents that operate in markets.

and perfect (instantaneous, unbiased, free access) information on goods qualities and relative

prices in all moments; the constraints and possibilities of these agents are determined by their

utility functions and endowments. As a result, ones desire to maximize its own one-

dimensional ordinal utility is its sole incentive to consume and therefore work.

b. Factual competition

18

In market competition, social capital is as important as competition is imperfect and

investment capital is abundant. Under perfect competition, social capital is a constant in the

production equation. There is a single rate of return because capital moves freely from low-yield

to high-yield investments until rates of return are homogeneous across alternative investments.

When competition is imperfect, capital is less mobile and plays a more complex role in the

production equation. There are financial, social, and legal impediments to moving cash between

investments. There are impediments to reallocating human capital, both in terms of changing

the people to whom you have a commitment and in terms of replacing them with new people.

Rate of return depends on the relations in which capital is invested. Social capital is a critical

variable. This is all the more true when financial and human capital are abundant -which in

essence reduces the investment term in the production equation to an unproblematic

constant. (R. Burt, 1995)

In view of that, in Competitive Analysis, when we want to identify the degree of rivalry between

firms operating in the same market/sector/segment, we can start by identifying which, in a

specific case, are the breaches in the assumptions of perfect competition theory. By doing so,

we can evaluate how, each competing firm, plans and implements strategies to leverage in its

favour the concrete breaches and holes of the theoretical economic utopia that is perfect

competition. Accordingly, market imperfections allow firms to differentiate their identity,

relations, capabilities and competing schemes; to create or maintain a strategic advantage in

respect to other competing organizations. These strategic advantages, determine the

possibilities of a firm to attain the preferred outcomes and achieve its objectives, in this

ceaseless struggle between organizations for survival, profit and leadership, that we call market competition.

19

Part Two:

Competitive Analysis vade-mecum

Procedures, techniques and instruments for assessing the

positioning and performance of competing firms and products

20

I. Outlining a Competitive Analysis

A competitive analysis is an investigation on a market competition. It examines by what means

market organizations, mainly firms, try to improve their performance and achieve their

objectives by shaping their strategies to take advantage of all of the potentially exploitable

forces, assets and mechanisms at work in their business environment; to find and secure a

long-term economic success and leading position for their business activities and products.

According to this approach, firms define and execute their strategies:

Competitive analysis:

definition from:

Identifying your competitors and evaluating their strategies to determine their strengths and weaknesses

relative to those of your own product or service

definition from:

Assessment of the strengths and weaknesses of current and potential competitors. This analysis

provides both an offensive and defensive strategic context to identify opportunities and threats. Profiling

coalesces all of the relevant sources of competitor analysis into one framework in the support of efficient

and effective strategy formulation, implementation, monitoring and adjustment.

To improve their fitness to their

environment;

To reap competitive advantages

of/from other competitors;

To influence competitors

economic results, limit their

possibilities or influence their

strategies payoffs;

To remodel their organization,

structure and redefine their

objectives, as an autopoietic

complex system;

To reshape and reorganize the

boundaries, interactions and

content of their business

context.

As we will see later on, market organizations try to steer and the competitive forces around

them to take advantage of environmental trends. Consequently, it is considered inopportune for

a firm to stabilize and standardize to much its decisional mechanisms and reactions to others

strategies, because these would become easily foreseeable and imitable by rivals. As a result

competing firms act as inventive organizations, which ceaselessly redesign their organization

and recombine their decisional instruments and strategies, to win a business contest that goes

far beyond the simple share out of consumers earnings.

21

a. Step One: Choosing the scale and perspectiveof analysis

The first next step of a competitive analysis is the choice of the strategic perspective that will be

used to identify and classify the current and potential competitors of a corporate/firm/product.

To do so, in general firms use either an industry perspective or a marketing perspective:

The industry perspective identifies competitors as organizations that are

producing/selling the same product or service.

The marketing perspective identifies competitors as services/products with the ability to

satisfy a common need of a common group of customers.

In Industrial Economics, the key issues are the determinants of the behavior, scale, scope, and

organization of business (Schmalensee R., 1988), which are studied to evaluate the intensity of

a competition in a specific market area i.e. industry. In view of that, firms are subdivided in

groups by business activity, each of which is recognized by a set of characteristics of its

competitive structure (see next page):

Accordingly, competitive market systems are heterarchies, which, for the previously mentioned

reasons, are almost impossible to be knowingly governed in the long run by a centralized entity.

Since these business environments and their constituents and features are continuously

reorganized and redefined via the incessant repositioning and engagements of its ever-evolving

habitants, firms behaviors are very difficult to be precisely foreseen. In view of that, the core

idea of Competitive Analysis is to develop and implement a set of managerial tools and models

able to identify firms and markets dynamics and recognize the agents strategies.

Consequently competitive analysis is as fundamental activity for the characterization of any

competitive business reality, and for the understanding of its functioning:

1) To recognize a competition / competitive situation;2) To identify and delineate the agents, objectives, strategies, context and boundaries,

influencing a specific firms competitive situation;3) To evaluate the strengths, weaknesses opportunities and threats of/for a product, firm

or corporate vis-a-vis its competitors;4) To rationally interpret and explain the basic elements of a competitive situation and in

some cases forecast the possible outcomes of such situations or measure the effect ofalternative strategies;

By examining the business environment with competitive analysis tools and models firms can

improve their understanding of the outcomes of their strategies, and therefore try to use this

knowledge to perform better; for instance:

By developing/reinforcing identified distinctive competitive advantages; By developing/reinforcing entry barriers/obstacles for potential competitors, in order to

prevent them from incoming a market/industry/business area/segment/product; By seizing opportunities and exploiting competitors weaknesses to gain market shares

or to entry a new market/industry/business area/segment/product;

22

Concentration: Differentiation: Innovation trajectories: Vertical/horizontal

integration:

Concentration is defined by the distribution of

production within an industry (industrial concentration) or a

market (market concentration). It

indicates the distribution of

production shares or income among

competing firms.

Perfect market implies the lowest possible level of

concentration, while monopoly implies the highest possible level

of concentration.

Further concept explanation by:

www.econlib.org/library/Enc/IndustrialConce

ntration.html

Differentiation occurs when in a market

consumers perceive as differentiated (with different

values) products with the same

function/purpose, this difference can be

technical or sensorial.

Consumers consequently

evaluate the value of such goods with a multi-dimensional perspective, their

preferences for some attributes/characteri

stics mustnt necessarily be

justifiable.

Further concept explanation by:

http://www.economicswebinstitute.org/glossary/product.htm

Innovation trajectory are defined by an

industrys scientific and technological trends, clusters of

micro-improvements and the momentum of the technological heuristics, intended

as the set of paradigms used in a determined field to

solve the most significant problems

recently encountered.

Further concept explanation by:

www.thinkbigmagazine.com/wealth/216-

innovation-trajectory-understand-make-informed-decisions

A firms upstream (suppliers) and

downstream (buyers) control/ownership in

a supply chain define vertical

integration. The variety of outputs

produced by single firm, which

controls/owns different production

units/divisions at the same stage of the production process defines horizontal

integration.

Further concept explanation by:

www.economist.com/node/13396061

Those characteristics can be measured to outline the intensity of a competition in an industry,

as if it was a homogenous set of interdependent economic organizations. As a result, industries

are regarded as stable and circumscribable market sub-systems, clusters of similarly

organized and structured competing firms.

Another approach to identify competitors is to define a strategic group, which is a collection of

firms in the same industry/business-area/segment who follow similar strategies at the

business or product level. Within a single industry/business-area/segment, we can find few or

several strategic groups depending on which and how many strategic factors at a time we

consider important to discriminate between firms. Commonly, we can recognize strategic

groups by using the following strategic dimensions: Price; Quality (perceived, technical,

production process/ISO certification, other); Level of integration (vertical and horizontal);

Geographic scope; Market share; Size (number of employees, assets value); Consumer basin; etc.;

23

The core idea of Competitive Analysis is to shift from the Industrial Economics paradigm of

explanation, based on the industry considered as almost stable and standardized set of

competing firms, to a new perspective, that looks to firms innovation dynamics and inter-

industry/segment/business/product distinctive capabilities of firms as fundamental

apparatuses for the characterization and understanding of any actual and prospective

competitive reality.

The reason of this shift in the perspective of analysis is due to the fact that, in recent years,

more and more firms and corporates differentiate their business by entering new

markets/industries/business areas in which they can exploit synergies with the original

business activity and technologies. Therefore, we can expect growing competition between

market organizations that have a common technological infrastructure or possess

overlapping/similar sets of critical competitive factors -that can range from technical know-

how, to customer's perception of the brand-, rather than between firms that produce similar

outputs using similar inputs and processes. Recently, a corporate like Disney has in such a

way exploited its brand attractiveness, its TV entertainment technology and its oiled logistic

structure to launch itself in the Sport TV business with ESPN. Another suggestive example of

this kind of diversification, based on capabilities, comes from the overcrowded and

hypercompetitive auto industry, in which Audi has used its latest motor technology and sporty

design abilities to conceive and produce high-end sporty bicycles, with lightweight electric

engines that can make them run up to 80 km/h (for details click here).

As a result, the very concept of market and industry competition is no more based only on

common outputs and inputs and similarities in the production processes, but also on the

likenesses in the critical competitive factors of firms and products; that we call capabilities.

Accordingly with what said previously, two corporates like Apple and Disney can be considered

in competition:

Globalizedorganizational and logistic structure

Cool and high quality brand image

Strong ICT innovation

and creativity

In this case, brand image is not an entry barrier but a differentiation facilitator

24

We can thus define a competition not only at the product or firm level, but also at corporate

level. In this case, the key elements of competition are corporate distinctive capabilities. These

lasts are compound groups of codependent competitive factors, which are generally molded as

specific and often unique combinations of resources, abstract knowledge, know-how,

organizational configurations and customers feelings for a corporate. Generally, when we look

at the joint effect of those unique combinations of competitive factors, we can see that they offer

unique benefits and inter-industry synergies to the corporates that possess them. For this

reason, corporates who possess overlapping capabilities and related technologies are a threat to

each-other, because they can easily enter one-anothers business areas, becoming dangerous

competitors even if at the moment they dont seem to operate in same markets/areas.

Therefore, when a corporate/firm/division wants to understand its competitive arena, there are

three main questions to answer:

1. Which are the market agents who have the same target, mission or strategy?

2. Which are the critical (most relevant/unique) competitive factors for those market

agents?

3. Who, besides the market agents already identified in 1), has similar or substitute

factors?

The answer to those three questions is clearly a reduction of reality, which demonstrates that

this kind of approach to competition can overlook to competitive capabilities and overshadow

strategic interactions between players; structural, organizational and process advantages and

synergies. Moreover, when answering those three questions we should always keep in mind

that a firms current competitors, are not always the most important threat to a firms survival,

the key potential competitors, it is thus important to understand who can become a competitor

and which are its entry barriers, even if at the present state the firm doesnt operate in the

same market or segment of the market.

The inter-firm similarity (across cases) and development/evolution similarity (across time) of

crucial competitive factors (product attributes, production organization, knowledge and skills)

or capabilities, -which are unique and evolving combinations of competitive factors-, make

competitive analysis a case and time dependent study. Fortunately the instruments for doing

such analysis that we will soon introducecan be used with little need of adaptation to the

particular case study.

25

Focus 1: Defining the competitive context with the Abell Model

As previously said, finding the boundaries of a competition and identifying the context can be

very problematic since we have an almost infinite number of possible business variables to take

into account. The Abell model (Abell D. F. & Hammond J. S.,1979) provides us an intuitive

simplification by considering only three different dimensions. Given that the basic goal of every

firm is selling its products, Abell model start the definition of a firms market by assessing the

benefits that customers are looking for and that the product is looking forward to satisfy. The

other two variables that are taken into account are the group of customers that the firms

targeting and the technology/competences used to produce the goods/services. Combining

these three aspects of competition gives us a better understanding of the boundaries of a firms

business and its market, that can be represented on a graph:

Group of costumers (which segment of the market is being satisfied?)

Costumers needs/requirements fulfilment (what is being satisfied?)

Competences/Technology used (how is the customer being satisfied?)

Consequently the Abell model considers only currently competing

products, the ones that are here and known (time is not a dimension of

the model). It focuses on the intersection of homogeneities or proximity

in one of the three described dimensions as the cause and defining

element of the competition between products.

This model gives us an intersection point that defines the products

business arena, the nearer are the other competing products to the

three aforementioned characteristics of the considered product the

most the competition in intense between them. The limits of this three

dimension analysis are the firms needs variable, that is a to broad

dimension variable to efficiently define a product/firm in its

environment.

A step further:

Using the Abell model for

choosing how to expand the

business

http://www.cnaexporter.it/percorso-

2d.php

Those three variables

dimensions can be both

quantitative and

qualitative. Since the

competitive

environment is time and

space dependent, to be

correctly used the

models data need to be

updated at each

environmental change.

26

We can obtain feedback and information:

b. Step Two: Gathering and interpretinginformation

In a system, you cannot control something unless you have a feedback, and that means

measurement of the outcomes of actions. Therefore, one of the most important skills needed to

undertake a competitive analysis is the capability of collecting useful data about the competitive

environment. The flip side of the aforementioned statement, is the false promise that with

feedback you can control anything. Even if business intelligence (BI) systems seem to be the

arch embodiment of this cybernetic principle, it is clear that there are non-trivial costs,

technical hitches and limitations of all processes of gathering and interpreting data. Moreover,

as the Nobel prized Canneman and Tuersky observed: even if the data used to build a

competitive analysis can be unbiased, the information issued from data can never be

independent from the subject that interprets it. As a result, it is the interpreter, which provides

meaning and use to the data. Therefore, data is always biased by the experience, knowledge

and interpretative structure of the actors, which attribute significance to it, and this is the

reason why the competitiveness of firms depends more on the interpretation ability of the

aforementioned actors, than on the amount of data about the competitive environment to which

they have access through their BI systems.

There are a variety of methods and instruments that firms can use to gather information and

obtain feedback. The methods and instrument one chooses and the ways they are used depend

greatly on what the type of feedback one desires to obtain and for which kind of analysis or

From Employees

Competitors

Customers

Other Sources of Market Research Information/data

Using Surveys and

questionnaires (by telephone, mail, e-mail, online, in-home, mall or

street intercept)

Comment Cards, focus groups and interviews

Other documentation (financial statements,

reports, brochures, catalogs, web-pages,

advetising)

On Costumers' opinions, needs, satifaction and

complaints

Best Practices

Technical carachteristics of

competitors' products

Competitors' ressources

27

Moreover, as Burt (1995) outlines, the value any information and the potential benefits it can

generate, depend on the following three characteristics, which describe the relationship

between the information and its environment (i.e. networks, agents, situations):

Access: Since players are unevenly connected with one another, information does not

spread uniformly across the competitive arena. Accordingly, access refers to receiving a

valuable piece of information and knowing who can use it and how.

Timing: early warning and access gives the opportunity to first act on the information,reinterpreting or distorting it; and then investing it back into the network by

passing/selling it to whom could benefit from it, or to whom would conceivably act

(directly or collaterally) in favour of the firm after receiving the information;

Referrals: The firms network of employees and relating agents directs, filters,

concentrates, and legitimates incoming information; and outgoing information

about/from the firm. Given the limit to the volume of information that men and

machines can process, the firms network becomes also a significant screening device. It

is an army of people processing information who can call attention to key events;

keeping the firm up to date on developing opportunities, and warning it of imminent

threats and adversities;

28

Focus 2: The Kano Questionnaire The Kano Model (Berger C. et al., 1993) is a customer

satisfaction questionnaire developed in the 80s. With this

questionnaire, Professor Kano challenged the conventional

belief that customer satisfaction increases only by improving

every attribute of a product or service. Accordingly, the

questionnaire classifies product features and attributes

according to their significance for the customers. When the

fulfillment of product requirements does not imply

automatically a high level of customer satisfaction, the Kano

model questionnaire is a very useful instrument to

discriminate in categories the different features/attributes of a

product, on the basis of their relative importance and weight

on the customers satisfaction.

In the Kano questionnaire we distinguish product features/attributes in five categories:

Must-be (M) attributes: are taken for granted features, which are expected inasmuch

they are considered essential attributes, which are always required by customers. They

cause dissatisfaction if they arent available. It is unlikely that they are going to tell the

company about them when asked about quality attributes.

Attractive (A) attributes: provide satisfaction when achieved, but do not cause

dissatisfaction when they are not fulfilled. These attributes are a plus, and therefore they

are often unexpected and unspoken by customers; as a result they give a more than

proportional (exponential) satisfaction if achieved by the product. They have the inverse

effect of basic attributes.

One-dimensional performance (P) attributes: provide satisfaction (dissatisfaction) if

achieved (missing), the degree to which they contribute to customers judgment of the

product depends on their number and quality;

Indifferent/irrelevant (I) attributes: These attributes refer to aspects that are neither

desired nor unwanted; accordingly, they do not result in either customer satisfaction or

dissatisfaction. Therefore if costly those attributes should be ignored /not considered in

the design of the product.

One-dimensional reverse (R) attributes: provide dissatisfaction (satisfaction) if achieved

(missing). They have the inverse effect of performance attributes.

Double-edged (D) attributes: These attributes can provide either satisfaction or

dissatisfaction depending on the specific character/needs/desires of a particular

customer.

A step further:

How to use the Kano Model for research

direction and product innovation

http://www.ijest.info/docs/IJEST10-02-12-089.pdf

29

Customer delighted

Performance attributes

Reverse attributes

Attractive attributes

Expectations exceeded

Must-be attributes

Expectations not fulfilled

Customer dissatisfied

Irrelevant attributes

The more the satisfaction function is steep for a given attribute, the more the fulfillment and

exceeding of expectations has to be considered important for the overall competitiveness of the

product and fitness to customers requirements. The Kano survey evaluates the importance of

each attribute of the product by asking to the costumer to answer a dual (one functional, one

dysfunctional) multiple choice question, for each conceivable attribute F(X) of the product,

due to the presence of the feature X on the product, the question is the following:

How do you feel if the product performs/possesses the attribute F(X)?

How do you feel if the product doesnt perform/possess the attribute F(X)?

List of possible answers: 1. I like it that way; 2. It must be that way; 3. I am neutral; 4. I can live with it that way; 5. I dislike it that whay)

The answers to the Kano questionnaire are then interpreted through a matrix which categorizes

each attribute according to the answer to the two previously mentioned questions:

Costumer Requirements Dysfunctional question answer

1)Like 2)Must be 3)Neutral 4)Live with 5)Dislike

Functional question answer

1)Like Double-Ed. Attractive Attractive Attractive Performance

2)Must be Reverse Irrelevant Irrelevant Irrelevant Must-be

3)Neutral Reverse Irrelevant Irrelevant Irrelevant Must-be

4)Live with Reverse Irrelevant Irrelevant Irrelevant Must-be

5)Dislike Reverse Reverse Reverse Reverse Double-Ed.

Source: from Kanos model of

customer satisfaction in

Berger et al. (1993);

30

c.Step Three: From analysis to strategy

A second step may well consist in classifying competitors according to critical competitive

dimensions/capabilities in which they are particularly strong or weak compared to others. In

the following example, we will briefly compare Microsofts operating systems key capabilities

(strengths) respect to Apples and IBMs ones, to explain the main reasons behind Microsofts

leadership in the personal computers OS Market.

Microsoft

If Microsoft reigned as leader in the OS market with DOS and Windows for the last 20 years; it

is because, the aforementioned has been able to establish its dominance in this industry

thanks to its marketing and research skills; as well as its superior ability to develop and

maintain key strategic partnerships with a large majority of the hardware vendors that

produce personal computers. This has allowed Windows to become the operating environment,

maybe not of choice, but of necessity for the majority of personal computers in the world.

Microsofts primary competitors, Apple and IBM, both have more stable and light operating

systems with a great deal of promotion to accompany them. However, both suffer the same

weaknesses that Microsoft has been able to exploit: Apple's operating system for its Macintosh

line of computers, while superior in many ways (design, reactivity, functioning intuitiveness) to

DOS and Windows, is limited to the Macintosh personal computers. In addition, it does not run

many of the popular applications and games that are readily available to DOS and Windows.

To an extent, IBM's OS/2 operating system suffers for the same problem; even if it will run on

all of the personal computers DOS and Windows can run on, the number of programs

produced for IBMs OS/2 in its native environment is very limited.

Once we have identified the competition and gathered sufficient information on the business

environment, we can have a first outlook of the potential intensiveness of the competition by

assessing some macro-characteristics on the previously identified competitive situation:

Number of players: the higher i the number of players, the more intensive is generally the competiiton

Concentration: the lower is the concentration rate, the more intensive is generally the competition. Normally when we talk about concentration we talk about the distribution of shares in the market, shares of the market are often quantified by the shares of sales (see Herfindell e E. Lorentz)

Growth rate: the lower is the sales growth rate, the more intensive is generally the competition

31

An organizations capacity to improve existing skills and learn new ones is

the most defensible competitive

advantage of all.

C. K. Prahalad

The aforementioned strengths and weakness analysis can be integrated with an opportunities

and threat analysis in what we call a SWOT analysis (for details see: Harvard Business School, 2005). By listing favourable and unfavourable internal and external issues in the four

quadrants of a SWOT analysis grid, planners can better understand how strengths can be

leveraged to realize new opportunities and understand how weaknesses can slow progress or

magnify organizational threats. [In addition] it is possible to postulate ways to overcome threats

and weaknesses (Helms M. M., 2010). Accordingly, by doing a SWOT analysis for each of the competing firms which are object of study we can recognize the differences in the competing

perspectives of the different players in competition; and understand the relative threat,

influence and power that each competitor exerts or could exert on others (relationship which is

generally asymmetric). Since there is a causal relation between competitors

strengths/weaknesses and the presence/absence of key skills, assets or capabilities needed to

compete in a specific market. An analysis of strong performers in a group of competitors

should reveal us the foundations behind a successful record of business accomplishments.

This kind of analysis, in conjunction with an examination of unsuccessful companies and the

reasons behind their failures, should provide us good understanding of which are the critical

factors for success required in a given competition. As a result, such analysis reveals to be a useful basis for choosing with whom you should or shouldnt create a benchmark (for

benchmarking techniques see: Boxwell R. J., 1994).

In the following pages we will introduce the Five Forces model by

Porter, which can give us an comprehensive overview of the main

competitive forces at work in the competitive environment of a

firm.

Here follow a set of competitive analysis tools that for reasons of

brevity have been omitted in this report, which that can result

complementary to the business level competitive analysis tools

that we will describe in this report.

Balanced Scorecard

Balanced Scorecard Basics

http://www.balancedscorecard.org/bscresources/aboutthebalancedscorecard/tabid/55/

default.aspx

SWOT Analysis

SWOT analysis method and

examples, with free SWOT template

http://www.businessballs.com/swotanalysisf

reetemplate.htm

SOSTAC Model

What Is The SOSTAC Model Of

Marketing?

http://corporateskills.co.uk/?p=315

Ansoff matrix

The Ansoff Matrix - Understanding

the risks of different options

http://www.timeanalyzer.com/lib/ansoff.ht

m

32

Focus 3: Five Forces to identify the structure of inter-firm competition and shape the business

strategy

In his articles Porter (1980, 2008) illustrates by what means the industry structure has a strong

influence in defining the rules of the competitive game as well as the strategies potentially

available to a company (M.E. Porter, 1980). To do so he identifies five major forces that jointly

shape the competitive environment of a firm. According to the author, those forces should be

carefully considered and evaluated when designing and planning a competitive strategy;

because strategies pay-offs are determined or at least biased by those forces.

1. Rivalry among existing firms;

2. Threat of new entrants;

3. Threat of substitute products;

4. Bargaining power of suppliers;

5. Bargaining power of buyers;

As we can see from the scheme above, for each of the five forces identified by Porter we have a

category of agents affecting directly (competitors in the industry) or indirectly (suppliers, buyers,

substitutes and potential entrants) the competitive arena of a firm, and its economic

performance. To undertake a structural analysis of companys competitive position, and

recognize the way in which the five forces are affecting its business performance and strategies,

we need to identify the collection of factors that jointly determine the intensity of each of the

aforementioned forces. Some of these factors are common to all or many firms, but, their

specific weight and relevance changes from industry to industry, segment to segment, firm to

firm and product to product. Thus, the importance of each of these factors that affect the

intensity of competition is case specific/dependent; and, is influenced by a firms objectives,

strategies, relations with other agents in its environment, constraints, opportunities and

boundaries of the context in which it operates. Therefore, the weaknesses and strengths that

emerge from any structural analysis of the five forces change from case to case. Nevertheless,

for each competitive force we can recognize some general factors that commonly affect

(positively or negatively) the intensity of the competitive forces to which a firm is subject (see next page):

The "industry"

Potential entrants

Buyers

Sobstitutes

Suppliers

33

Intensity of r ivalry among existing

-High fix costs/exit barriers; -Intense marketing battles/retaliations

between competitors; -Several competing firms of similar

size/ with balanced resources; -Chronic overcapacity; -Slow industry growth;

-Small differentiation of products/firms;

-Low fix costs/exit barriers; -Polite or gentleman competitors;

- Few competing firms of dissimilar size/ with unbalanced resources;

-Fast industry growth; -Strong differentiation of products/firms;

Concreteness of threat of new entrants

-Permissive regulation of patents, licenses and open-source technology;

-Small capital requirements; -Small minimum efficient scale (MES);

-Open/unsecured distribution channels;

-Perception of new technological possibilities.

-Extensive regulation of patents, licenses and proprietary product technology;

- Experience/scale economies; -Large MES;

-Vigorous retaliations to entrants; -Joint costs and switching cost;

-Brand identification and customer loyalty;

Concreteness of threat of substitutes

- Existence of function/use substitutes; - Attractive price/performance tradeoff

of substitute products; -Government regulations, subsidies and

standards; -Small switching costs for buyers;

-Effectiveness of collective industry action; - No substitute product for the

usage/function; -Trend analysis ability;

- High switching costs for buyers and distributors;

Bargaining power of buyers

-Large purchase volumes relative to sellers sales;

-Buyer has information about market conditions and suppliers costs of

production; -Backward integration threat.

-Tapered integration;

-Small purchase volumes relative to sellers sales;

- High switching costs for the buyer; -High impact of suppliers product on the

quality of buyers products. -Forward integration threat;

Bargaining power of suppliers

-Large purchase volumes relative to sellers sales;

-Buyer has information about market conditions and suppliers costs of

production; -Backward integration threat.

-Tapered integration;

-Small purchase volumes relative to sellers sales;

- High switching costs for the buyer; -High impact of suppliers product on

the quality of buyers products. -Forward integration threat;

34

Generally, the more the five forces are intense for a given

firm/industry, the more the potential profitability is narrow and

subject to uncertainty. Still, the point of industry analysis is not to

declare the industry attractive or unattractive but to understand the

underpinnings of competition and the root causes of profitability.

[Therefore, if possible] analysts should look at industry structure

quantitatively, rather than be satisfied with lists of qualitative factors.

[Moreover,] while a myriad of factors can affect industry profitability

in the short runincluding the weather and the business cycle

industry structure, manifested in the competitive forces, sets industry

profitability in the medium and long run. [Consequently, a] good

industry analysis looks rigorously at the structural underpinnings of

profitability [and] distinguishes temporary or cyclical changes from

structural changes (Porter M. E., 2008).

Porters Five Forces

Assessing the Balance of Power

in a Business Situation

http://www.mindtools.com/pages/article/newTMC_08.

htm

Yet, analysing mathematically the factors influencing each of the forces necessitates very

detailed quantitative or qualitative information and the ability to perform a multicriteria

analysis for each force. Therefore, in many Five Forces competitive analysis, as in the

following example of Porters Five Forces Analysis of Coca-Cola (personal review of the example

from: Valuation Academy) we only define and briefly describe the main factors constituting

each of the forces, to recognize their overall intensity/pressure. In view of that, we will be here

concerned only with the relative positioning of Coca-Cola in the soft drink bevarege industry

and appraise the forces to which it is subject.

Coca- ColaRivalry among existing firms:

In the soft drink beverage industry the level of rivalry is relatively moderate. The main reason for this is the small number of major global players controlling the beverage market. The leaders are Coca-Cola and PepsiCo.

Brand loyalty is a determinant of the rivalry between competitors. In the end theconsumers chooses the product, so the rivalry comes in the form of advertising andmarketing strategies to gain market value.

Products in the industry are easily differentiated (brand logo, casing colours, bottleshape, flavours). This differentiation lowers the level of rivalry because all majorcompanies try to develop unique products with high consumer appraisals and fidelity.

The ability for end-consumers to control the market greatly boosts rivalry betweencompetitors. For the reason that stores stock their shelves with the most popularproducts, competitors are always fighting for their product to be the most visible andeasiest to recognize.

Expansion opportunities are moderate. The best way to gain market shares in thebeverage industry is to enter into a market segment that is not already occupied bystrong competitors.

35

Threat of new entrants:

The level of new entrants is measured by multiple factors including: brand loyalty, advertising ability, access of distribution channels, and supplier availability. These factors create a high threat for new entrants in the soft drink beverage industry.

Customer and brand loyalty make it very problematic for new competitors to enter intothe beverage industry. Coca-Cola is the most famous beverage brand throughout theworld, which has been made possible through endless advertising and marketingcampaigns.

Advertising and marketing are a key component for a new company to gain recognitionfrom consumers. However, both these components require large amounts of funding toproduce broad scale marketing campaigns that will gain the recognition needed tocompete with industry leaders, such as Coca-Cola.

Access to distributing channels is an important factor when entering into a new market.It can be tiresome for new entrants to find retailers that will carry their product beforethey are established. Shelf space will rarely be made for products that cannot prove theyhave consumers to regularly buy their product.

Coca-Cola and other industry leaders have strict bottling contracts in all of their salesareas. These contracts block the bottling company from doing business with companiesproducing a similar product. One of the only alternatives for the new company is to dothe bottling themselves, which requires high amounts of capital.

Threat of substitute products:

In the beverage industry there are many substitutes for each category of soft drink. This allows the consumer to help shape what the retailers put on the shelves. Examples of substitute products to Coca-Cola are Pepsi products, , tea, coffee, energy drinks, beer, wine, etc. The substitute products create a moderate threat in the industry.

Marketing and advertising have a major impact on the substitute products. If the consumersdo not know about a particular product, then retailers do not want to stock that product.

The switching cost for retailers is low, so retailers can easily switch to more appreciatedproducts. This can create an advantage for the retailer from a cost standpoint and for theproducers of the substitute product.

Throughout the beverage industry, competing product lines of products have very similarprices. Consequently differentiation practices are very important to maintain fidelizedconsumers, which otherwise would experience substitute product. This can give substituteproducts the opportunity to use promotional influences to gain consumers favor.

Bargaining power of buyers:

Buyers, especially retailers, are the key to success of the soft drink beverage producers. Buyers include fast foods, fountain vending, convenience stores, and super markets. The bargaining power of the buyers ranges from low to moderate (depending on the relative size of the buyer).

Fast food chains have the highest bargaining power, because they buy in bulk. This methodof purchasing provides least profit for unit for Coca-Cola due to small mark-up margins.

Vending machines provide a straight line approach from getting the product directly into thehands of the consumer. There is literally no bargaining power for the buyer.

Convenience stores, bars, shops and local wholesalers have low bargaining power and payhigh unitary prices for the products since they are buying small quantities.

Super markets have low bargaining power. The contractual power they possess originatesfrom the size of orders and shelf space exposure/placement decisions.

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Bargaining power of suppliers:

The bargaining power of the suppliers, in the soft drink beverage industry, is very low because the ingredients used to create these beverages are readily available.

The basic ingredients (sugar, water, caffeine, caramel, coca extract, glycerine)used to make Coca-Cola products are coomon and easily found. This ease ofaccess gives a huge advantage to Coca-Cola because the company can setprices with the suppliers. Switching costs are very low, so drink manufacturerscan easily change their suppliers.

The industry utilizes large quantities of raw materials, accordingly thesuppliers must remain in good standing with the buyers.

As alleged previously, since industries structure evolves over time, industries and markets

should be considered and therefore analyzed as dynamic open systems. This has to be done in

order to identify long-lasting trends, predict forthcoming transformations and anticipate and

prepare to compete in upcoming competitive scenarios. Accordingly, once the structural factors

affecting each of the forces have been detected, measured, weighted, examined in their trends

and causally related one another with systemic approach; analysts and managers can develop

new competitive strategies, designed specifically to:

Increase the present and upcoming market/profit shares of the firm;

Reduce or redistribute the present and upcoming share of profits/revenue of

competitors/buyers/sellers/substitutes;

Improve the posture (ability/facility to react to others strategies) of the firm within in its

competitive arena;

Improve the positioning (concrete strategic advantage over competitors) of the firm

within in its competitive arena;

Limit the threat of substitutes;

Other;

By using the information about the five forces gathered in porters analysis, firms can take

consequently benefit of this informative advantage while designing their strategies.

Thus, firms who undertake the difficult task of examining each competitive force and

forecasting their intensity and causes will be able to create a meticulous and all-inclusive

representation of their business environment, which can be used to shape the industry itself,

and thereby overcome the profit potential limits due to the competitive structure of the industry

in which a firm operates. As a result, firms capable of finding a distinctive position in their

context by understanding, coping-with and governing the competitive forces identified by

Porters model will most likely reveal to be successful in designing effective strategies and

realizing their objectives. In reshaping structure, a company wants its competitors to follow so

that the entire industry will be transformed. A firm can [in such a way] lead its industry toward

new ways of competing that alter the forces for the better (Porter M. E., 2008).

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TECHNICALS

Durabil i ty; Warranty;

Water resistance;

FUNCTIONALS

Ease of use; Safety;

Originali ty; Novelty;

EMOTIONALS

Artistic quality; Design;

Sentiment and memory revival;

PERSONALS

Color; Flavor; Size; Materials;

VARIABILITY ABOUT THE OPINIONS AND PREFERENCES FOR A CHARACTERISTIC/FEATURE OF A PRODUCT

HOMOGENEUS DIFFERENTIATED

MEASURABILITY AND DISTINGUISHABILITY

OF A CHARACTERISTIC/

FEATURES OF A PRODUCT

DIFFICULT/ SUBJECIVE

EASY/ SHARED CRITERIA

When analysing a competition at the product level the previously mentioned tools are no

longer useful, because their approach is too broad and doesnt considerate the importance of

consumers in the process value/quality recognition. As Rossi F. (2013) clearly outlines in his

Competitiveness Assessment report: the most simple way to find out which product is the

more effective for customers is to find out which of the products gets sold the most. Even if

simple, this method doesnt give us any information on how to improve the competitiveness of

our products, because it focuses only on the outcomes of competition and not on its means.

To better understand what determines competitiveness we have to understand that products

are sets of features [attributes] and consequently proceed to analyze these characteristics of

products separately or in bundles. [] Indeed not all of these characteristics are easily

measurable and sometimes their perception may vary from customer to customer.

Consequently to perceive these subjective / objective perceptual differences in the process of

assessment and recognition of consumers preferences we should classify attributes

according to two strategic dimensions for products competitiveness assessment:

1. The Variability in preferences;

2. Measurability and distinguishability of preferences;

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For each of the four categories of characteristics/features of products, previously

differentiated in the Measurability/Variability matrix, we should choose the specific

competitive analysis technique/tool that fits the best to the characteristics taken into

account. If the product is complex, it possesses several characteristics belonging to different

categories. Then, to be properly examined the product could require the use of several

techniques. Otherwise, the use of a single technique, the most suitable to the characteristics,

is generally sufficient. We have already presented the Kano Model, and we will soon introduce

two other instrument (Means-End Chain, Quality Function Deployment) to analyse the

competiveness of products. Each one is particularly appropriate to understand the

competing dynamics of a particular kind of product; the following matrix summarizes this

relationship:

TECHNICALS:

Technical Comparison

FUNCTIONALS:

Kano Model

EMOTIONALS:

Means-End

PERSONALS:

Quality Function

Deployment

VARIABILITY ABOUT THE OPINIONS AND PREFERENCES FOR A CHARACTERISTIC/FEATURE OF A PRODUCT

HOMOGENEUS DIFFERENTIATED

MEASURABILITY AND

DISTINGUISHABILITY OF A

CHARACTERISTIC/ FEATURES OF A

PRODUCT

DIFFICULT/ SUBJECIVE

EASY/ SHARED CRITERIA

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Focus 4: Quality Function Deployment

Quality in a product or service is not what the supplier puts

in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a

lot of money, as manufacturers typically believe. This is

incompetence. Customers pay only for what is of use to them and gives them value. Nothing

else constitutes quality.

Drucker P.

The key assumption of the Quality Function

Deployment model is that product quality is a

multidimensional concept dependent on customers

experiences. As a result, we can talk about quality

products and compare them only if we can

understand how specific (valuable/measurable)

engineering characteristic of products are satisfying

customers needs. This because, technical and

conceptual engineering aspects are visible in a

unique form for the customers: the usage experience

form. The usage of products by customers is