Pindelski_Competitive_Strategies

6.1. Competition in industry

The attractiveness of a sector is determined by numerous variables whose mutual relations form its specifics and nature. However, one of the key variables is the intensity of competition taking place in a given sector.

The market share distribution is a factor that partly enables the determination of the situation in the sector. The information on the competition in that sector, the way the market is formed, the number of competitors, whether there is monopoly or oligopoly, can be obtained thanks to analyzing them considering the particular entrepreneurs functioning therein. In a situation when the market shares are approximately evenly distributed, the market leader’s position often changes and passes from one entity to another, while there are a lot of competitors, we may presume that the conditions are close to free competition. Such a situation may also induce other entities to enter the sector.

The market share analysis also suggests the extent of concentration of businesses in the sector. High diversification of the market (numerous competitors with low market shares) creates conditions that facilitate competition. Although sometimes the lack of a distinct leader or large competitor may destabilize the situation on the market, nevertheless it is usually not a serious threat for all the entities active in the sector. However, the dynamic analysis of this factor refers to time lapse and enables the determination which businesses regularly increase their market share and which are losing it. With the use of e.g. statistical methods, we may also find out who loses to whom, i.e. the directions the shares are moving towards. This, in turn, leads to the conclusions concerning which of the businesses may become the strongest competitor in the future, the determinant and point of reference of all the others.

The competition on the market is the mutual rivalry of each enterprise for:

•The best sales conditions possible. It is assumed that each business tends to obtain the best selling conditions for their products and services. This means both economic and appropriate legal conditions.

•The best turnover and sales volumes possible. The assumption here is that obtaining the top sales results is particularly desired by a business. Along with the turnover growth the profit enabling the business development at the further stages.

•Winning as many customers as possible. Winning, efficient service and general satisfaction of the customers with the cooperation and offer is one of the more important market success indicators or the business as we may hope that the

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customers’ willingness to use the services of a given business and to recommend it to

others would grow along with their satisfaction with the service.

•Acquisition of access to the resources in general or under preferential principles. Any entities that base their strategy on the access to the resources also compete in this scope. Along with the access to the resources followed by fighting for exclusiveness or preferential conditions may gain competitive advantages or even a monopolistic position. Such resources may include raw materials, knowledge, information in the form of e.g. databases or upgraded and updated customer bases. It may also include profiled employees who become such a competitive advantage of the business they work for upon signing loyalty clauses to the contracts.

Exercise 8

Smart Media

For numerous businesses the databases of their customers represent the most important resources. A database that is verified, well segmented, updated, including numerous potential and active customers and upgraded by a number of useful information pieces cannot be overestimated. Sometimes serious market fights take place for such resource, resembling the plots originating from the 007 movies. So businesses spend fortunes not only on creating and updating the bases but also for their protection against hacking and thefts. Such actions targeted at the protection of the business interest on the one hand and the customers and their data on the other are provided by an archiving software supplier, SmartMedia from Gdańsk.

Although the resource is desired by numerous competitors, its acquisition is rather impossible. The company is aware that the loss of this base could be equal to its decline.

Discussion questions

1.What actions may be taken by businesses in order to obtain access to unique resources?

2.How can businesses protect the access they have to the resources ?

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6.2. Strategic groups analysis

Strategic group is defined as a group of businesses applying similar strategies of action13, operating in one sector and distinguishable by the same criteria, directing their offer to the same target groups, carrying out promotion in a similar way, using approximate distribution channels, similar technologies and are vertically integrated to the same extent. They compete with one another in a similar way, on similar platforms, sometimes with some deviations in intensity and pressure on both of them. They offer, for example, products similar in terms of price and quality and different by other parameters (e.g. brand) or sometimes they do not differ from competitors’ products at all.

Businesses of a specific strategic group usually have a similar market share and, due to the similar strategy, they also respond to external events and competitors’ activities in a similar way.

Similarities in the scope mentioned above are called strategic dimensions.

Strategic dimensions – the definition

The strategic dimensions are determinants defining the activity and strategies occurring

in a sector

An important term in the analysis of strategic groups is also the mobility barrier.

The mobility barrier determines the business strategy flexibility, its response to changes and action opportunities that in effect may influence the possibility of the business transfer from one strategic group to another.

In order to determine the strategic groups functioning in a given sector, the following needs to be defined:

•set of significant competitors who operate in a given sector/industry14.,

•significant strategic variables that distinguish the businesses in a given sector/industry,

•the extent such variables suit the buyers’ demands,

•on this foundation, the set of businesses competing within one strategic group. The next step is the definition of a strategic group model functioning in a given industry.

13M.E., Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York, 1998

14 K. Obłój, Strategia organizacji. Analiza grup strategicznych, PWE, Warszawa 2007, s. 265

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Exercise 9

Price comparers on the Internet

Price comparers on the Internet, enabling the comparison of mainly the price and delivery costs of standard products, have introduced the formation of strategic groups of distributors. The online stores, but also traditional ones that only use the online store platforms started a strong competition with prices and delivery terms. The leaders in such criteria appeared promptly who began to be chosen by masses of customers looking for the most beneficial price offer. Another group started to compete by the speed of delivery and the number of favourable recommendations from the customers. It allowed for the diagnosis of two basic strategic groups. The first one offers its products at the lowest price, however, with less stress put on the quality and delivery speed. Another group, although offering more expensive products, guarantees delivery terms, they are quick, the service quality is high, there are numerous options of communication between the client and the supplier, the firm offers additional services, such as special packaging and delivers the goods using the best couriers, at the same time they do not object to the returns or possible complaints. As a rule, the latter is expressed by the number of positive recommendations and e.g. “stars” given to such firms by their customers. The two groups of businesses actually do not compete with one another reaching the slightly different needs of their customers. Those who want to buy at the lowest price cannot expect extended service or additional services. Those who need the goods at an exact moment and with current access for example to the application enabling the parcel tracing, agree to pay higher prices. The strategic groups of competitors are built here based on the price and service quality.

Discussion questions

1.What criteria may be the foundation for building a model of strategic groups in the sector delivering mineral water directly to offices?

2.What criteria may help with building a model of an economic universities strategic group?

The definition of an appropriate strategic group may become the key for the businesses entering the sector. As it may appear that the main environment in which they will

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function is a specific strategic group and what is going on around it, not the entire industry and all the entities participating in the market competition.

Classifications of strategic groups

Usually three basic approaches to strategic groups are distinguished:

1.The nominalistic approach. It is assumed here that strategic groups practically do not exist and they are a theoretical entity, weakly anchored in the real world. They cannot be examined and the idea to distinguish them appeared to be hardly useful, either in theory or in practice.

2.The theoretical approach based on presumed and somewhat imposed strategic variables that enable the differentiation of the methods or competition dimensions of a business within a sector. The usual opinion is that it originates from strategic groups definition suggested by S. M. Hunt. The author stated that strategic group represents a group of businesses that hold similar assets, which suggests they follow similar competition strategies15. Following this way of thinking, the explanation of business competition within a sector consists in indicating the most significant competing variables in the sector. On this foundation the division of the sector into strategic groups is made.

3.The empirical approach based on research work. According to its guidelines, building strategic groups is possible based on the market research results analysis. Such results enable the drawing of such conclusions that would allow for the presentation of the balance of power in the sector and distinction of the groups. This serves to reflect the actual strategic dimensions the competitors move within. Such research may be of a historically analystic nature and almost photographic statistical analysis of the figures. The research of the historic development of the sector consists in tracing its development in time. The statistical research is based on factor methods or variable sets analysis.

In spite of the large similarities, however, the businesses usually functioning within one sector, choose different functioning strategies. This in turn affects their development and location within a given strategic group. Such authors as M.S.Hunt mentioned above,

15 S. M. Hunt, Competition In the Major Home Appliance Industry 1960 – 1970, Harvard University 1972 (unpublished Ph.D. dissertation); M. E. Porter, Strategia konkurencji, s. 140

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M.Porter, or K.Obłój distinguish key factors that affect the establishment and dynamics

of strategic groups.

1.The history of the development of business and the sector the business functions within. Practically each of the sectors includes some key stages of development, representing a breakthrough to them. The first is the business establishment stage. The potential customer preferences are not recognized well and sometimes entirely unknown. It is not always known who could become such a customer, the segmentation criteria undetermined or verified. This impedes the planning of at least an optimum production technology and service provision, business size or nature. At this stage, based on the market research carried out, the entities decide on the competition methods, selection of strategy and definition of what they are going to deal with in the periods to come. The foundations for the competition principle in the sector are also determined at this stage. The other breakthrough moments in a sector life are, for example, the crises that occur, revolutionary innovations implemented, entry of new, particularly large competitors, bankruptcies and problems of businesses playing important roles in the sector, changes in the law and politics as well as changes of customer preferences, tiredness with some offers and growth of interest in others.

2.The approach, method of identification and response of businesses and managers to the environment elements. Here we may specify the risk level, appearing competitors, etc. The responses to the information coming from the sector, even in the form of market research and analyses results do not explicitly define the strategic decisions. They only represent an indication to the managers, somewhat facilitating the decision making to them. The immensely interesting and significant thing for sector formation is the fact that different persons can draw conclusions towards different directions, based on the same data. So in effect, the same information, however interpreted differently, is the foundation for diverse strategies. This contributes to establishing strategic groups based on collective decision making and strategy performance styles.

3.The regulations affecting the decisions made by a business also form the way of its operation as well as the method of operation of all the entities in the sector. Government intervention, depending on the extent of its oppressiveness and authoritarianism may refer, for example, to the support of small and medium enterprises, blocking the establishment of monopolies, redistribution of funds

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towards particular types of business activity, etc. This enables or restricts the concentration, but also sets the dimensions, according to which strategic groups may be established.

4.The customers also influence the formation of strategic groups. Searching for design, for example, applies to beauty sensitive buyers, while others are not willing to pay additional amounts for appearance, just the basic prices for usable features.

Sometimes the buyers groups vary so much that competition arises in consequence, within two separate areas, although concerning the same sector.

Certainly, these are only some factors out of the variety forming the strategic groups of competitors. Nevertheless, it is conspicuous that the way of forming them does not necessarily have to be a conscious and rational selection of businesses, it is usually the sum of the resultants affecting the sector formation and competition within.

Analytic significance of strategic groups

The analysis of strategic groups is of an intermediary nature between the industry analysis and that of each business separately. Thanks to it, the following can be established:

1.Mobility barriers within the sector, i.e. intra-sector regulations restricting either the entrance within or the internal behaviours. Although there are many mobility barriers, their role is not so significant in each sector. For example the watch making industry, where tradition and brand largely influence the occurrence of such barriers, while in the industry of magazines, shops or cafes the said factors are of scarce significance.

2.The nature of the groups functioning within a sector, i.e. establishing dominating and marginal groups setting the tone to the whole sector and those remaining meaningless to its formation. The financial results of businesses, the time of their growth, strategy flexibility or the general directions of the strategic development may become helpful in determination thereof. The manufacturers of luxurious cars with conservative strategies do not usually respond to the opportunities and threats appearing in the environment, while they focus on a narrow group of buyers who expect some rather traditional and well proven solutions.

3.A possible strategic shift of the business within a sector. The business may consolidate its own position or that of its strategic group, which often enables measurable benefits to be achieved by the whole group. The automotive manufacturers from the EU, while lifting the standards of their own group, often try

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to consolidate its position on the local or European as well as the global market. It may try to move to the strategic group being the better one in its opinion. Toyota, while moving on the strategic map towards the high quality and high price group, created the brand of Lexus. Promoted by Toyota, it has shifted towards the manufacturers concentrating such brands as Jaguar, Maserati, Mercedes or BMW. It may also create one’s own strategic group, so very different that the other businesses would not be able to approach it. This is due to creating high barriers for entry into such group. For example, Timex and Swatch, and Xerox in the copiers industry. They created a group standard so strong that the watch brands are synonyms of high quality and medium price, while on the copiers market the photocopying procedure is named after the brand name – “xeroxing”.

6.3. The map of competitors‘ groups

The map of strategic groups is an analytical method also including the option of its graphic presentation. As a tool used in the determination of the key competitors operation strategy within the sector, it enables the settlement of strategic groups and plotting them on the map. A characteristic of the analysis using the map or strategic groups is the examination of competitive relationships within such groups and between the groups. The strategic groups’ analysis is carried out in the structural and substantial aspect. The strategic groups of a defined sector may be presented in a map.

The structural aspect directs the analysis onto16:

•carrying out the classification of businesses belonging to the sector, distinguishing the groups and subgroups,

•identification and examination of relationships between the businesses of the particular groups and between the groups: such relationships can be of a cooperative link nature or formalized organizational relationships (hierarchical and functional),

•examining the groups’ dynamics, consisting in the assessment of sales growth rate in the groups throughout a period of time,

•comparison of the changes in the structure of various sectors.

16 A. Stabryła, Zarządzanie strategiczne w teorii i praktyce firny, WN PWN, Warszawa 2012, p. 158.

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The substantial aspect is determined by the following scope of research17:

•development of characteristics of the strategies applied in various groups, their effectiveness and durability,

•assessment of the operational risk of the strategic group activity,

•group development analysis in terms of their average competitive position (rankings and categorization),

•detecting market niches,

•developing multi-variant projections determining the type and chronology of a new groups appearance.

The sector’s internal structure analysis consists of five stages:

1)identification of strategic groups and drawing a map thereof,

2)determination of the height and components of the entrance barriers that protect the particular groups,

3)assessment of the bargaining power of the groups in relation to their suppliers and customers,

4)assessment of threats represented by substitutes to each group,

5)analysis of competition between the particular groups.

Drawing a map according to the predetermined procedure18:

1.Identification of the major characteristics that distinguish competitive businesses (e.g. the type of market segment served, product category, type of distribution channels, price, quality, etc.).

2.Drawing a 2D diagram (map of strategic space), whose coordinates may be determined by selected pairs of different variables mentioned above.

3.Dividing the particular businesses into groups by similarity classes, characteristic for the particular strategic space.

4.Plotting particular strategic groups on the map (by circles). The circles’ size indicates the share of a strategic group in the total value of the whole sector sales.

17A.Stabryła, ibid., p. 159

18A.Stabryła, ibid., p. 160

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5.In the case of using a greater number of strategic variables, several maps are drawn (changing the pairs of coordinates), showing the alternative location of competitive positions of particular strategic groups.

Fig.9 Strategic groups’ map in a hypothetical sector.

X values of X variable (e.g. number of sales channels used)

Source: own elaboraion based on: K. Obłój, Strategia organizacji, Analiza grup strategicznych, PWE, Warszawa 2007, p. 265

The drawing analysis shall help understand the strategic groups’ map better (see fig.9). Assuming that the Y-axis means the extent of a business specialization (the higher the business is on the Y-axis the lower specialization extent it has), while the X-axis means the extent of vertical integration in the business (the further to the right the business is the higher vertical integration it has), the following strategic groups in the sector can be obtained:

The first group consists of businesses that have a low specialization extent, offer a wide product range, high prices, performs the final assembly of the products.

The second group businesses are ones that are characterized with very high specialization extent, narrow product range, high technology level, high prices and they perform the final assembly of the products.

The third group consists of businesses with high vertical integration level, which translates into low production costs, low price, poor quality, bad customer service.

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