Anticipating competitor’s actions and reactions to your moves may be the key determinant of success for any marketing strategy. One competitor cuts prices, undermining your pricing strategy. Another may decide to offer new products and services, possibly, over the Internet that have the potential to completely undermine your existing strategy. Could you have anticipated such moves? How do you respond?
Competitive Marketing Strategy teaches you how to anticipate your competitor’s moves during the planning stage, so that you’re not caught off guard. This article will address the issue of developing a competitive advantage and the sources of such advantages to services.
A Sustainable Competitive Advantage:
Competitive advantage (CA) is a position that a firm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, i.e., their earnings exceed their costs (including cost of capital).
That means that normal competitive pressures are not able to drive down the firm’s earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents drives competitors to duplicate the competitive advantage held by any one firm.
A firm possesses a Sustainable Competitive Advantage (SCA) when it has value-creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. An SCA is different from a competitive advantage (CA). In that it provides a long-term advantage that is not easily replicated.
But these abnormal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above-normal rents or a superior financial performance. The processes and positions that engender such a position are not necessarily non-duplicable or inimitable.
Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.
In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. The source of the advantage can be something the company does that is distinctive and difficult to replicate, also known as a core competency—for example, Procter & Gamble’s ability to derive superior consumer insights and implement them in managing its brand portfolio. It can also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra. It can also simply be a result of the industry’s cost structure—for example, the large fixed costs that tend to create natural monopolies in utility industries.
To be sustainable, the advantage must be:
(i) Distinctive; and
(ii) Proprietary.
In the past decades, IT is becoming more and more important. Especially, the internet plays a major role in today’s world and not to forget in businesses. The ability to manage information effectively helps organizations dealing with changes in the environment, which can result in a competitive advantage over other firms. An example of gaining competitive advantage – Organizations makes information available for each other in an efficient way in order to reduce all difficulties of purchasing, marketing and distribution.
Society’s move towards sustainability is still widely regarded as a subject that is at best unrelated to business, but in most cases bad for business and for the economy. Green products have not become widely available on the marketplace, and becoming green is viewed as creating a competitive disadvantage for businesses that engage in these activities. At the same time, these companies experience a less positive correlation with their market return which reflects the negative attitude of investors towards Corporate responsibility if it is not integrated into a clear mission and vision of the organization.
Porter’s Five Forces Model:
In the classical resource-based view of the world, competitive advantage exists when a firm is able to sustain profits that exceed the average of the industry. The goal of much of business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage: Cost advantage and Differentiation advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage).
Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. According to Porter, every industry is under the influence of five forces. A business manager trying to gain competitive advantage over rival firms can use the five forces model to better understand the industry context in which his firm operates.
The five forces are defined as:
(i) Rivalry among existing firms striving for competitive advantage over each other.
(ii) The bargaining power of suppliers, especially related to their ability to influence firms competitive position through the power they hold over cost or availability of inputs a firm needs.
(iii) The bargaining power of buyers, especially related to their ability to influence a firms existence due to their ability to switch to rival firms or to substitutes.
(iv) Threat of new entrants that are able to overcome barriers to entry into the market creating potentially powerful new rivals to the firm.
(v) Threat of substitutes as defined by the availability of alternative products or services outside the industry that can satisfy a firms’ customer’s needs.
In order to leverage its strengths over, and to defend against the negative impacts of the five forces, Porter identifies three so-called generic strategies that businesses can choose to follow within their industry.
These are—
(i) Cost leadership,
(ii) Differentiation, and
(iii) Focus strategies.
(i) A cost leadership strategy calls for striving to be the lowest cost producer in an industry for a given level of quality.
(ii) A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers, and that customers perceive to be better than or different from the products of the competition.
(iii) The focus strategy concentrates on a better serving a narrow segment of the industries’ market, and within that segment attempts to achieve either a cost advantage or differentiation.
Before investigating how it applies to sustainability, it is relevant to understand the perspective from which one would apply the five forces framework. According to Porter, “Five forces analysis is done from the perspective of an incumbent. When a company is an outsider, it must add to its analysis the cost of overcoming entry barriers. The ability to do so can only be understood from a textured understanding of the company’s unique situation and whether it can come up with a distinctive positioning for competing in the industry.”
Thus, five forces analysis can be a useful tool for firms that are operating in a specific industry and that are examining whether a move toward sustainability will provide them with competitive advantage. It can also be useful for firms that are contemplating the use of sustainability, specifically the delivery of sustainable goods or services as a way of entering an industry.
It is interesting to note that after more than 20 years of working with the five forces theory, Porter believes that his framework is still valid and current. He has considered adding forces over the years, but has thus far not done so. One force Porter has looked at is Government. Government can impose regulation, create or remove barriers to entry through legislation, fund projects, etc. Porter’s conclusion about government is that it is not a monotonic force as defined in his model.
Government has an impact on the five forces (as the examples indicate) and these impacts should be included when examining the forces themselves. Porter treats government and regulation as something that just is, without putting a value judgment on it. In the September 1995 issue of Harvard Business review he wrote that the widely held view that environmental regulation has an inherent trade-off between social benefit and private (industry) cost is incorrect.
If technology, products, processes, and customer needs were all fixed, the conclusion that regulation must raise cost would be inevitable. But companies operate in the real world of dynamic competition, constantly finding innovative solutions to pressures of all sorts. Properly designed environmental standards can trigger innovations that lower the total cost of a product or improve its value, making companies that anticipate and work with regulations more competitive compared to those who fight them. Porter seems to subscribe to at least some of the principles of sustainability when he goes on to argue that pollution often is a form of economic waste, a sign that resources have been used incompletely, inefficiently, or ineffectively.
A second force that Porter contemplated adding as the sixth force to the five forces model is that of complementary forces, such as firms whose products and services add to the products and services of the managers’ firm, resulting in an increased pie. Again, Porter decided not to include this force for lack of a monotonic relationship to the position of a firm in its industry.
He states that “Clearly, complements have much to do with the size of the pie, but their role in the division of the pie is dependent on other factors.” In his interview, Porter credits the work of Adam Brandenburg, who has written about value networks similar to ecosystems that for whom will discuss later in this text. Brandenburg believes in co-operation and looking at the world beyond the immediate world your firm is experiencing. “To figure out if somebody is your competitor or your complementor, you must see the world from the customers’ and suppliers’ perspective. You must be allocentric — centred on others, rather than egocentric — self-centred.”
By limiting the application of the five forces model, Porter may be setting it up for not being the dominant shaper of managerial thinking in the future. The five forces model will be a tool that is valuable for analysing parts of a companies business, but not that which determines the ultimate strategy of a company. It will rather guide partial choices a company needs to make while building a strategy, turning Porter’s generic strategies into strategy elements.
Porter seems to recognize that, but defends his position by claiming the high ground of keeping focused on profitability. “It is interesting that we lost sight of profitability as the goal and substituted shareholder value measured by stock price. This has not only destroyed many companies but gave credence to a number of management ideas that are not robust.”
On the other hand, the five forces model has withstood many attacks and still holds a prominent position in the world of business and politics today. This is due to the fact that limits experienced when using the framework may often be more related to the limited vision of those applying the model, than to limits in the model itself. When treating the model as a living, evolving framework, one gains the freedom to go beyond the initial definition of the five forces to becoming able to think about an aspect one is missing and trying to place it in its proper position in the framework.
For example – Jelatianranat writes about limits to Porter’s model saying that it lacks in appreciation of people’s philosophies and core values, evolving technologies, societal complexities, and ever changing business dynamics. While there is truth in some of these statements, the author could have asked how this fits into an evolving view of the five forces model rather than discarding the model itself. While the original descriptions and attributes of the five forces may have become out-dated, this does not mean that the forces themselves have become out-dated. They have evolved with the way we do business, and need to be put into that light when applying the model to determine our competitive positions today.
Five Forces and Sustainability:
The applicability of the five forces model to companies seeking to become more sustainable and to deliver more sustainable products and services is especially relevant to incumbents of, and new entrants in existing industries. The model can be used to validate the viability of sustainability ideas and strategies. It will indicate whether competitive advantage can be achieved within the industry of the firm, and identify where potential weaknesses and threats lie.
If the five forces model tells a manager that striving for sustainability will lead to competitive disadvantage, this is certainly a red flag that must not be disregarded. In a business environment where the competition and the market has not yet subscribed to sustainability, the forces a firm is dealing with, will not care about the good intentions behind a sustainability trajectory.
A firm will, therefore, either have to work on strengthening the impact of positive forces and weakening the impact of negative forces, seek out a different market or industry, or choose not to become sustainable. The latter choice is the default choice of most companies today but with the five forces constantly evolving with the world around them, this choice may prove to be the wrong-one at some point in the future when a five forces analysis shows that the landscape has changed.
Porter believes that sustainability innovation, when done right for example through the avoidance of pollution and by increasing efficiencies, can deliver both cost advantages and differentiation advantages.
The five forces model has not been designed to evaluate young new industries, the evolution of new markets, and similar situations where sustainability may have an easier time sprouting up than in existing competitive industries.
Powerful competitive advantages (obvious examples are Coke’s brand and Microsoft’s control of the personal computer operating system) create a moat around a business such that it can keep competitors at bay and reap extraordinary growth and profits. Like Buffett, I seek to identify – and then hopefully purchase at an attractive price — the rare companies with wide, deep moats that are getting wider and deeper over time. When a company is able to achieve this, its shareholders can be well rewarded for decades. Take a look at some of the big pharmaceutical companies as glaring examples of this.
Don’t Confuse Future Growth with Future Profitability:
The value of a company is the future cash that can be taken out of the business, discounted back to the present.
Thus, the key to valuation – and investing in general – is accurately estimating the magnitude and timing of these future cash-flows, which are determined by:
(i) How profitable a company is (defined not in terms of margins, but by how much its return on invested capital exceeds its weighted average cost of capital).
(ii) How much it can grow the amount of capital it can invest at high rates over time.
(iii) How sustainable its excess returns are.
Warren Buffett said it best in his Fortune article last November –
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
The Rarity of Sustainable Competitive Advantage:
It is extremely difficult for a company to be able to sustain, much less expand, its moat over time. Moats are rarely enduring for many reasons – High profits can lead to pleasure and are almost certain to attract competitors, and new technologies, customer preferences, and ways of doing business emerge. Numerous studies confirm that there is a very powerful trend of regression toward the mean for high-return-on-capital companies. In short, the fierce competitiveness of our capitalist system is generally wonderful for consumers and the country as a whole, but bad news for companies that seek to make extraordinary profits over long periods of time.
And the trends are going in the wrong direction for investors anyway. With the explosion of the internet, the increasing number of the most talented people leaving corporate America to pursue entrepreneurial dreams, and the easy access to large amounts of capital from the seed stage onward, moats is coming under assault with increased ferocity.
As Michael Mauboussin writes in The Triumph of Bits’, “Investors in the future should expect higher returns on invested capital (ROIC) than they have ever seen, but for shorter time periods. The shorter time periods, quantified by what we call ‘competitive advantage period,’ reflect the accelerated rate of discontinuous innovation.”
Strategy:
In this environment, how can one identify companies with competitive advantages that are likely to endure? It’s not easy and there’s no magic formula, but a good starting point is understanding strategy. In his article “What is Strategy?” Harvard Business School professor Michael Porter, distinguishes between strategic positioning and operational effectiveness, which are often confused – “Operational effectiveness means performing similar activities better than rivals perform them,” whereas “strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.” When attempting to identify companies whose competitive advantages will be enduring, it is critical to understand this distinction, since “few companies have competed successfully on the basis of operational effectiveness over an extended period.”
Sources of Competitive Advantage:
There are many sources of competitive advantage. Size is one – large companies that can do things that smaller ones can’t, whether you’re Wal-Mart, Home Depot, or General Motors. Installed base is another – just ask Microsoft. In retail, location is the killer competitive advantage. And access to capital, distribution networks, supply chains, R&D, and timing all have been proven effective at creating advantage at one time or the another.
But in each and every case, a one-time competitive advantage is not sustainable. It does not endure beyond the cycle of one market structure. When the market structure shifts, the advantage is often lost. Numerous companies have failed to recognize this simple fact, and have failed to adapt to changing conditions, and have consequently driven themselves into the ground.
Professor Porter argues that, in general, sustainable competitive advantage is derived from the following sources:
(i) A unique competitive position.
(ii) Clear tradeoffs and choices vis-a-vis competitors.
(iii) Activities tailored to the company’s strategy.
(iv) A high degree of fit across activities (it is the activity system, not the parts that ensure sustainability).
(v) A high degree of operational effectiveness.
Business Economics and Competitive Advantage examine the economics of a company’s business focusing primarily on its competitive advantage. A company’s competitive advantage largely determines its ability to generate excess returns on capital and links the business strategy with fundamental finance and capital markets. In the end, it is a company’s competitive advantage that allows it to earn excess returns for its shareholders.
Without a competitive advantage, a corporation has limited economic reason to exist-its competitive advantage is its staff of life. Without it, the corporation will wither away. Creating a sustainable competitive advantage may be the single most important goal of any corporation and may be the most important single attribute, on which each corporation must place its most focus.
Market Defender Strategies:
There are three market defender strategies in service life-cycle i.e., blocking strategies, retaliation strategies, and adaptation strategies, which are described below in brief:
(1) Blocking Strategies:
Blocking strategies would consist of performance guarantees, intensive advertising, controlling location or access to distribution, high switching costs, and satisfied customers. The purpose of the blocking strategies is to either increase the cost of entering a new market or decrease the attractiveness of the market. If both can be done, then the market is less inviting to potential new entrants. The purpose of retaliation strategies is to reduce the anticipated profits or return. If a new entrant does not earn enough, they may abandon their plans.
(2) Retaliation Strategies:
Retaliation strategies include reducing service trial, fighting aggressively to maintain market share, and developing a reputation for being aggressive. The goal of these strategies is to deny the new entrant the opportunity to make their anticipated or desired profit level. Another strategy is to reduce a new entrant’s profits with aggressive retaliation. Aggressive retaliation forces the new entrant to spend more time and money, which makes the market less attractive to the new entrant.
(3) Adaptation Strategies:
The last defender strategy accepts the new entrant as a member of the industry. The goal of adaptation strategies is to prevent eroding of market share. Adaptation strategies include matching competitors’ offers, expanding the service package, becoming a market specialist, and developing a strong SCA.
The selection of a defender strategy will depend on a firm’s operational position and their competitive advantage. The best strategy is one that builds on their SCA. Not only does this increase the strength of their competitive advantage, it is also their strongest position. Making new entrants fight one’s strength makes a lot more sense than allowing new entrants to use guerilla warfare tactics.
Consumer Positioning Services:
Understanding the concept of product positioning is key to developing an effective competitive posture. This concept is certainly not limited to services—indeed it had its origins in packaged goods marketing—but it offers valuable insights by forcing service managers to analyse their firm’s existing offerings and to provide specific answers to the following questions –
(1) What are the characteristics of our current service offerings (core products and their accompanying supplementary service elements)?
(2) What does our firm currently stand for in the minds of current and prospective customers?
(3) What changes do we need to make to our offerings in order to strengthen our competitive position within the market segment(s) of interest to our firm?
(4) In each instance, how do our service offerings differ from those of the competition?
(5) How well do customers in different market segments perceive each of our service offerings as meeting their needs?
(6) What customers do we now serve and which ones would we like to target for the future?
Although, for simplicity, the terms “firm” or “business” are used, the principles of positioning apply equally to any public and non-profit organisation that must compete for customers. Thus national postal services compete with private courier firms, public and nonprofit hospitals compete vigorously with each other and with private health care providers, and museums compete not only with other museums but also, at a generic level, with alternative forms of education, entertainment and recreation. Repositioning involves changing the existing position.
Such a strategy could mean revising service characteristics or redefining target market segments. At the firm level, repositioning may entail abandoning certain products and withdrawing completely from some market segments, as when Bankers Trust (a large New York-based bank) sought to focus its business exclusively on corporate financial services and private banking. As part of this repositioning effort, the company sold off its retail branch network to National Westminster Bank and used media advertising to clarify its more narrowly focused expertise to prospective corporate customers.
(1) Copy Positioning versus Product Positioning:
In a competitive marketplace, a “position” reflects how consumers perceive the product’s (or organisation’s) performance on specific attributes relative to that of one or more competitors. Customers’ brand choices reflect which brands are even known and remembered and then, how each of these brands is positioned within each customer’s mind.
These positions are, of course, simply perceptual, but we need to remember that people make their decisions based on their individual perceptions of reality, rather than on an expert’s definition of that reality. Many marketers associate positioning primarily with the communication elements of the marketing mix notably advertising, promotions, and publicity. This view reflects the widespread use of advertising in packaged goods marketing to create images and associations for broadly similar branded products so as to give them a special distinction in the customer’s mind — an approach sometimes known as copy positioning.
A classic example is the visual imagery of the rugged Western cowboy created for a major cigarette brand by the Marlboro man. Note, however, that this imagery has nothing to do with the physical qualities of the tobacco; it’s just a means of differentiating and adding glamour to what is essentially a commodity.
Examples of how imagery may be used for positioning purposes in the service sector are found in the distinctive “bullish” theme used by Merrill Lynch (whose symbol is a bull) and the profile of the Rock of Gibraltar that is the trademark of The Prudential (a major insurance company).
Some slogans promise a specific benefit, designed to make the company stand out from its competitors, such as HSBC “The World’s Local Bank” or Metropolitan Bank and Trust Co. (Metrobank) – “You’re in Good Hands”. Our primary concern is the role of positioning in guiding marketing strategy development for services that compete on more than just imagery or vague promises. This entails decisions on substantive attributes that are known from research to be important to customers, relating to product performance, price, and service availability.
To improve a product’s appeal to a specific target segment, it may be necessary to change its performance on certain attributes, to reduce its price, or to alter the times and locations when it is available or the forms of delivery that are offered. In such instances, the primary task of communication — advertising, personal selling, and public relations — is to ensure that prospective customers accurately perceive the position of the service on dimensions that are important to them in making choice decisions.
Additional excitement and interest may be created by evoking certain images and associations in the advertising, but these are likely to play only a secondary role in customer choice decisions unless competing services are perceived as virtually identical on performance, price, and availability.
(2) Role of Positioning in Marketing Strategy:
Positioning plays a pivotal role in marketing strategy, because it links market analysis and competitive analysis to internal corporate analysis. From these three, a position statement can be developed that enables the service organisation to answer the questions, “What is our product (or service concept), what do we want it to become, and what actions must we take to get there?” The principal uses of positioning analysis as a diagnostic tool, providing input to decisions relating to product development, service delivery, pricing, and communication strategy.
Developing a positioning strategy can take place at several different levels, depending on the nature of the organisation involved. Among multisite, multiproduct, service businesses, a position might be established for the entire organisation, for a given service outlet, or for a specific service offered at that outlet. It’s particularly important that there be some consistency between the positions held by different services offered at the same location, since the image of one may spill over onto the others. For instance, if a hospital has an excellent reputation for obstetrical services, this may enhance perceptions of its services in gynaecology, paediatrics, surgery, and so forth.
Because of the intangible, experiential nature of many services, an explicit positioning strategy is valuable in helping prospective customers to get a mental “fix” on a product that would otherwise be rather amorphous.
Failure to select a desired position in the marketplace — and to develop a marketing action plan designed to achieve and hold this position — may result in one of several possible outcomes, all undesirable:
(i) The organisation (or one of its products) is pushed into a position. Where it faces head-on competition from stronger competitors
(ii) The organisation (product) is pushed into a position which nobody else wants because there is little customer demand there.
(iii) The organisation’s (product’s) position is so fuzzy that nobody knows what its distinctive competence really is.
(iv) The organisation (product) has no position at all in the marketplace because nobody has ever heard of it.
Stages in Developing a Positioning Strategy:
Competitive strategy is often narrowly focused at direct competitors—firms which market products offering customers a similar way of achieving the same benefits (e.g., in the case of education, another college offering similar classes). However, there may also be a serious threat from generic competitors, which offer customers a different way of achieving similar benefits (for instance, extension education via broadcast programs or self-study through use of books and video-tapes both offer generic competition to conventional college classes). The research and analysis that underlie development of an effective positioning strategy are designed to highlight both opportunities and threats to the firm in the competitive marketplace, including the presence of generic competitors.
(1) Competitive Analysis:
Competitive analysis identification and analysis of competitors can provide a marketing strategist a sense of their strengths and weaknesses, which, in turn, may suggest opportunities for differentiation. Relating these insights to the internal corporate analysis should suggest which benefits should be offered to which target market segments. This analysis should consider both — direct and indirect competition.
(2) Market Analysis:
Market analysis is needed to determine such factors as the overall level and trend of demand, and the geographic location of this demand. Is demand increasing or decreasing for the benefits offered by this type of service? Are there regional or international variations in the level of demand?
Alternative ways of segmenting the market should be considered and an appraisal made of the size and potential of different market segments. Research may be needed to gain a better understanding not only of customer needs and preferences within each of the different segments, but also of how each perceives the competition.
(3) Internal Corporate Analysis:
Internal corporate analysis requires the organisation to identify its resources (financial, human labour and technical know-how, and physical assets), any limitations or constraints, and the values and goals (profitability, growth, professional preferences, etc.) of its management. Using insights from this analysis, the organisation should be able to select a limited number of target market segments which the organisation is willing and able to serve with either new or existing services.
The outcome of integrating these three forms of analysis is a position statement that articulates the planned position of the organisation in the marketplace (and, if desired, that of each of the component services that it offers). Armed with this understanding, marketers should be able to develop a specific plan of action. The cost of implementing this plan must, of course, be related to the expected payoff.
Positioning Maps:
After segmenting a market and then targeting a consumer, one proceeds to position a product within that market. Positioning is all about ‘perception’. As perception differs from person to person, so do the results of the positioning exercise. For example – what you perceive as quality, value for money, etc. is different to someone else’s perception.
Products or services are ‘positioning map’. This allows them to be compared and contrasted in relation to each other. Marketers decide upon a competitive position which enables them to distinguish their own products from the offerings of their competition (hence the term ‘positioning strategy’).
The marketer would draw out the map and decide upon a label for each axis. They could be price (variable one) and quality (variable two), or comfort (variable one) and price (variable two). The individual products are then mapped out next to each other any gaps could be regarded as possible areas for new products.
Six-step template for successful positioning:
(i) What position do you currently own?
(ii) What position do you want to own?
(iii) Whom you have to defeat to own the position you want.
(iv) Do you have the resources to do it?
(v) Can you persist until you get there?
(vi) Are your tactics supporting the positioning objective you set?
Positioning for Competitive Advantage:
(i) A product’s position is the way the product is defined by the consumers on important attributes; it is the place the product occupies in consumers’ minds relative to competing products. It involves implanting the brand’s unique benefits and differentiation in customers’ minds.
(ii) To simplify the buying process, consumers organize products, services, and companies into categories and “position” them in their minds. A product’s position is a complex set of perceptions, impressions, and feelings that consumers have for the product compared with competing products.
(iii) Consumers will position products with or without the help of marketers. So marketers must plan positions that will give their products the greatest advantage in selected target markets, and then must design marketing mixes to create these planned positions. The service strategy dictates one of two alternative approaches to market positioning – either market sharing or market creation. Market sharing means jumping into an existing market, and dividing it with the existing competitors. Market creation means building a unique market that the organisation can dominate.