Principles of Marketing (activebook 2.0 )  
   
   
 

  
Today's companies face their toughest competition ever. In previous chapters, we argued that to succeed in today's fiercely competitive marketplace, companies will have to move from a product-and-selling philosophy to a customer-and-marketing philosophy. John Chambers, CEO of Cisco Systems, put it well: "Make your customer the center of your culture."
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This chapter spells out in more detail how companies can go about outperforming competitors in order to win, keep, and grow customers. To win in today's marketplace, companies must become adept not just in managing products, but in managing customer relationships in the face of determined competition. Understanding customers is crucial, but it's not enough. Building profitable customer relationships and gaining competitive advantage requires delivering more value and satisfaction to target consumers than competitors do.
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In this chapter, we examine competitive marketing strategies—how companies analyze their competitors and develop successful, value-based strategies for building and maintaining profitable customer relationships. The first step is competitor analysis, the process of identifying, assessing, and selecting key competitors. The second step is developing competitive marketing strategies that strongly position the company against competitors and give it the greatest possible competitive advantage.
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Competitor Analysis

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To plan effective marketing strategies, the company needs to find out all it can about its competitors. It must constantly compare its products, prices, channels, and promotion with those of close competitors. In this way the company can find areas of potential competitive advantage and disadvantage. As shown in Figure 18.1, competitor analysis involves first identifying and assessing competitors and then selecting which competitors to attack or avoid.
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Identifying Competitors

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Normally, identifying competitors would seem a simple task. At the narrowest level, a company can define its competitors as other companies offering similar products and services to the same customers at similar prices. Thus, Coca-Cola might view Pepsi as a major competitor, but not Budweiser or Kool-Aid. Bookseller Barnes & Noble might see Borders as a major competitor, but not Wal-Mart or Costco. Buick might see Ford as a major competitor, but not Mercedes or Hyundai.
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But companies actually face a much wider range of competitors. The company might define competitors as all firms making the same product or class of products. Thus, Buick would see itself as competing against all other automobile makers. Even more broadly, competitors might include all companies making products that supply the same service. Here Buick would see itself competing not only against other automobile makers but also against companies that make trucks, motorcycles, or even bicycles. Finally, and still more broadly, competitors might include all companies that compete for the same consumer dollars. Here Buick would see itself competing with companies that sell major consumer durables, new homes, or vacations abroad.
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Companies must avoid "competitor myopia." A company is more likely to be "buried" by its latent competitors than its current ones. For example, for many years, Kodak held a comfortable lead in the photographic film business. It saw Fuji as its major competitor in this market. However, in recent years, Kodak's major new competition has not come from Fuji and other film producers. It has come from Sony, Canon, and other makers of digital cameras, which don't even use film. Because of its myopic focus on film, Kodak was late to enter the digital camera market. And even though Kodak is now the market share leader in the digital segment, its digital camera business still isn't profitable.2
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Figure 18.1
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Figure 18.1 
Steps in analyzing competitors  Play
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Similarly, 230-year-old Encyclopaedia Britannica viewed itself as competing with other publishers of printed encyclopedia sets selling for as much as $2,200 per set. However, in the mid-1990s it learned a hard lesson. It seems that computer-savvy kids were now most often finding information online or on CD-ROMs such as Microsoft's Encarta, which sold for only $50. In 1996, the company dismissed its entire 2,300-person door-to-door sales force and introduced its own CD-ROM and online versions. However, Britannica is still struggling to regain profitability. Sales of its print edition dropped 80 percent during the 1990s, and revenues from the CD-ROM and online versions have not made up the difference. Thus, Encyclopedia Britannica's real competitors were the computer and the Internet.3
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Companies can identify their competitors from the industry point of view. They might see themselves as being in the oil industry, the pharmaceutical industry, or the beverage industry. A company must understand the competitive patterns in its industry if it hopes to be an effective "player" in that industry. Companies can also identify competitors from a market point of view. Here they define competitors as companies that are trying to satisfy the same customer need or build relationships with the same customer group.
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From an industry point of view, Coca-Cola might see its competition as Pepsi, Dr Pepper, 7UP, and other soft drink makers. From a market point of view, however, the customer really wants "thirst quenching." This need can be satisfied by iced tea, fruit juice, bottled water, or many other fluids. Similarly, Hallmark's Binney & Smith, maker of Crayola crayons, might define its competitors as other makers of crayons and children's drawing supplies. But from a market point of view, it would include all firms making recreational products for children.
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In general, the market concept of competition opens the company's eyes to a broader set of actual and potential competitors. One approach is to profile the company's direct and indirect competitors by mapping the steps buyers take in obtaining and using the product. Figure 18.2 illustrates their competitor map of Eastman Kodak in the film business.4 In the center is a list of consumer activities: buying a camera, buying film, taking pictures, and others. The first outer ring lists Kodak's main competitors with respect to each consumer activity: Olympus for buying a camera, Fuji for purchasing film, and so on. The second outer ring lists indirect competitors—HP, cameraworks.com, and others—who may become direct competitors. This type of analysis highlights both the competitive opportunities and the challenges a company faces.
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Assessing Competitors

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Having identified the main competitors, marketing management now asks: What are competitors' objectives—what does each seek in the marketplace? What is each competitor's strategy? What are various competitors' strengths and weaknesses, and how will each react to actions the company might take?
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Determining Competitors' Objectives

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Each competitor has a mix of objectives. The company wants to know the relative importance that a competitor places on current profitability, market share growth, cash flow, technological leadership, service leadership, and other goals. Knowing a competitor's mix of objectives reveals whether the competitor is satisfied with its current situation and how it might react to different competitive actions. For example, a company that pursues low-cost leadership will react much more strongly to a competitor's cost-reducing manufacturing breakthrough than to the same competitor's advertising increase.
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Source: Jeffrey F. Rayport and Bernard J. Jaworski, e-Commerce (New York: McGraw-Hill, 2001), p. 53.
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A company also must monitor its competitors' objectives for various segments. If the company finds that a competitor has discovered a new segment, this might be an opportunity. If it finds that competitors plan new moves into segments now served by the company, it will be forewarned and, hopefully, forearmed.
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Identifying Competitors' Strategies

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The more that one firm's strategy resembles another firm's strategy, the more the two firms compete. In most industries, the competitors can be sorted into groups that pursue different strategies. A strategic group is a group of firms in an industry following the same or a similar strategy in a given target market. For example, in the major appliance industry, General Electric, Whirlpool, and Maytag all belong to the same strategic group. Each produces a full line of medium-price appliances supported by good service. In contrast, Sub-Zero and Viking belong to a different strategic group. They produce a narrower line of higher-quality appliances, offer a higher level of service, and charge a premium price.
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Some important insights emerge from identifying strategic groups. For example, if a company enters one of the groups, the members of that group become its key competitors. Thus, if the company enters the first group, against General Electric, Whirlpool, and Maytag, it can succeed only if it develops strategic advantages over these competitors.
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Although competition is most intense within a strategic group, there is also rivalry among groups. First, some of the strategic groups may appeal to overlapping customer segments. For example, no matter what their strategy, all major appliance manufacturers will go after the apartment and home builders segment. Second, the customers may not see much difference in the offers of different groups—they may see little difference in quality between Whirlpool and Viking. Finally, members of one strategic group might expand into new strategy segments. Thus, General Electric's Monogram line of appliances competes in the premium-quality, premium-price line with Viking and Sub-Zero.
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Strategy Segments
Expanding into a new strategy segment: General Electric's Monogram line of appliances competes in the premium quality, premium price line with Viking and SubZero.
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The company needs to look at all of the dimensions that identify strategic groups within the industry. It needs to know each competitor's product quality, features, and mix; customer services; pricing policy; distribution coverage; sales force strategy; and advertising and sales promotion programs. And it must study the details of each competitor's R&D, manufacturing, purchasing, financial, and other strategies.
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Assessing Competitors' Strengths and Weaknesses

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Marketers need to assess each competitor's strengths and weaknesses carefully in order to answer the critical question: What can our competitors do? As a first step, companies can gather data on each competitor's goals, strategies, and performance over the last few years. Admittedly, some of this information will be hard to obtain. For example, B2B marketers find it hard to estimate competitors' market shares because they do not have the same syndicated data services that are available to consumer packaged-goods companies.
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Companies normally learn about their competitors' strengths and weaknesses through secondary data, personal experience, and word of mouth. They also can conduct primary marketing research with customers, suppliers, and dealers. Or they can benchmark themselves against other firms, comparing the company's products and processes to those of competitors or leading firms in other industries to find ways to improve quality and performance. Benchmarking has become a powerful tool for increasing a company's competitiveness.
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Estimating Competitors' Reactions

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Next, the company wants to know: What will our competitors do? A competitor's objectives, strategies, and strengths and weaknesses go a long way toward explaining its likely actions. They also suggest its likely reactions to company moves such as price cuts, promotion increases, or new-product introductions. In addition, each competitor has a certain philosophy of doing business, a certain internal culture and guiding beliefs. Marketing managers need a deep understanding of a given competitor's mentality if they want to anticipate how the competitor will act or react.
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Each competitor reacts differently. Some do not react quickly or strongly to a competitor's move. They may feel their customers are loyal; they may be slow in noticing the move; they may lack the funds to react. Some competitors react only to certain types of moves and not to others. Other competitors react swiftly and strongly to any action. Thus, Procter & Gamble does not let a new detergent come easily into the market. Many firms avoid direct competition with P&G and look for easier prey, knowing that P&G will react fiercely if challenged.
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In some industries, competitors live in relative harmony; in others, they fight constantly. Knowing how major competitors react gives the company clues on how best to attack competitors or how best to defend the company's current positions.
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Selecting Competitors to Attack and Avoid

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A company has already largely selected its major competitors through prior decisions on customer targets, distribution channels, and marketing-mix strategy. Management now must decide which competitors to compete against most vigorously.
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Strong or Weak Competitors

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The company can focus on one of several classes of competitors. Most companies prefer to compete against weak competitors. This requires fewer resources and less time. But in the process, the firm may gain little. You could argue that the firm also should compete with strong competitors in order to sharpen its abilities. Moreover, even strong competitors have some weaknesses, and succeeding against them often provides greater returns.
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A useful tool for assessing competitor strengths and weaknesses is customer value analysis. The aim of customer value analysis is to determine the benefits that target customers value and how customers rate the relative value of various competitors' offers. In conducting a customer value analysis, the company first identifies the major attributes that customers value and the importance customers place on these attributes. Next, it assesses the company's and competitors' performance on the valued attributes. The key to gaining competitive advantage is to take each customer segment and examine how the company's offer compares to that of its major competitor. If the company's offer exceeds the competitor's offer on all important attributes, the company can charge a higher price and earn higher profits, or it can charge the same price and gain more market share. But if the company is seen as performing at a lower level than its major competitor on some important attributes, it must invest in strengthening those attributes or finding other important attributes where it can build a lead on the competitor.
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Close or Distant Competitors

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Most companies will compete with close competitors—those that resemble them most—rather than distant competitors. Thus, Chevrolet competes more against Ford than against Lexus. And Target competes with Wal-Mart and Kmart rather than against Neiman Marcus or Marshall Field's.
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At the same time, the company may want to avoid trying to "destroy" a close competitor. For example, in the late 1970s, Bausch & Lomb moved aggressively against other soft lens manufacturers with great success. However, this forced weak competitors to sell out to larger firms such as Schering-Plough and Johnson & Johnson. As a result, Bausch & Lomb now faced much larger competitors—and it suffered the consequences. Johnson & Johnson acquired Vistakon, a small nicher with only $20 million in annual sales. Backed by Johnson & Johnson's deep pockets, however, the small but nimble Vistakon developed and introduced its innovative Acuvue disposable lenses. With Vistakon leading the way, Johnson & Johnson is now the top U.S. contact lens maker, while Bausch & Lomb is struggling.5 In this case, success in hurting a close rival brought in tougher competitors.
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"Good" or "Bad" Competitors

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A company really needs and benefits from competitors. The existence of competitors results in several strategic benefits. Competitors may help increase total demand. They may share the costs of market and product development and help to legitimize new technologies. They may serve less-attractive segments or lead to more product differentiation. Finally, they lower the antitrust risk and improve bargaining power versus labor or regulators. For example, Intel's recent aggressive pricing on low-end computer chips has sent smaller rivals like AMD and 3Com reeling. However, Intel may want to be careful not to knock these competitors completely out. "If for no other reason than to keep the feds at bay," notes one analyst, "Intel needs AMD, 3Com, and other rivals to stick around." Says another: "Intel may have put the squeeze on a little too hard. If AMD collapsed, the FTC would surely react."6
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However, a company may not view all of its competitors as beneficial. An industry often contains "good" competitors and "bad" competitors.7 Good competitors play by the rules of the industry. Bad competitors, in contrast, break the rules. They try to buy share rather than earn it, take large risks, and in general shake up the industry. For example, American Airlines finds Delta and United to be good competitors because they play by the rules and attempt to set their fares sensibly. But American finds Continental and America West bad competitors because they destabilize the airline industry through continual heavy price discounting and wild promotional schemes.
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The implication is that "good" companies would like to shape an industry that consists of only well-behaved competitors. A company might be smart to support good competitors, aiming its attacks at bad competitors. Thus, some analysts claim that American Airlines has from time to time used huge fare discounts intentionally designed to teach disruptive airlines a lesson or to drive them out of business altogether.
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Designing a Competitive Intelligence System

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We have described the main types of information that companies need about their competitors. This information must be collected, interpreted, distributed, and used. The cost in money and time of gathering competitive intelligence is high, and the company must design its competitive intelligence system in a cost-effective way.
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The competitive intelligence system first identifies the vital types of competitive information and the best sources of this information. Then, the system continuously collects information from the field (sales force, channels, suppliers, market research firms, trade associations, Web sites) and from published data (government publications, speeches, articles). Next the system checks the information for validity and reliability, interprets it, and organizes it in an appropriate way. Finally, it sends key information to relevant decision makers and responds to inquiries from managers about competitors.
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With this system, company managers will receive timely information about competitors in the form of phone calls, e-mails, bulletins, newsletters, and reports. In addition, managers can connect with the system when they need an interpretation of a competitor's sudden move, or when they want to know a competitor's weaknesses and strengths, or when they need to know how a competitor will respond to a planned company move.
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Smaller companies that cannot afford to set up formal competitive intelligence offices can assign specific executives to watch specific competitors. Thus, a manager who used to work for a competitor might follow that competitor closely; he or she would be the "in-house expert" on that competitor. Any manager needing to know the thinking of a given competitor could contact the assigned in-house expert.8
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