Pindelski_Competitive_Strategies
.pdf•The legal barrier is represented by the laws, duties, concessions, permits, contingents, certifications and other regulations effectively closing the access to numerous markets. The more repressive the state is the larger the number of such regulations usually appear. The more the governments wish to regulate the economy the more closed will be the markets for new market players. It also happens in the case when the market access issues are taken over by trade selfgoverning bodies. Such a situation is taking place in Poland now where legal professions are strongly regulated by the regulations providing the trade selfgoverning bodies with almost full powers at making decisions on closing the market against ones and opening for others, at their sole discretion.
•The market shares or the number of network participants is a barrier on the market on which the market leader position is of crucial importance, which other competitors are marginalized. It takes place in internet businesses operating under the network logic. The more participants there are here the more valuable is their share and the more willingly further participants join. This is the case of Facebook and other social networking services. Only the leading firm may count on development and revenues. It appears with slightly less intensity on the fmcg [fast moving commercial goods] market where two or three basic brands count, e.g. deodorants or hair dyes.
•Access to technology may represent a significant barrier to entry. Some large corporations apply the method of technology “trolling”. They buy out all the patents and available technologies, however not in order to use them, but to prevent any other entity from using them. This largely impedes the access to new technologies, but also new discoveries requiring the application of one of the solutions, already patented. The barrier built in this way, particularly among hitec businesses may represent a serious problem. In 2012 Apple vs. Samsung court proceedings were in progress, when Apple petitioned Samsung for the use of technologies earlier patented by Apple. Although Samsung won the proceedings, it significantly delayed the launching of new models of phones, thus being exposed to substantial losses.
These are obviously just a few of the numerous market entry barriers. It happens sometimes that a barrier disappears, for example due to changes in the law, which opens
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it for new businesses. This is a very unfavourable situation for those who had been on the market by date and a very attractive opportunity for those who entered it.
Case study 13
Automotive industry
The automotive industry, although well conditioned historically, nevertheless it is characterized with significant development dynamics, highly developed technologies and innovative solutions. However the entry barriers that have arisen here are very high. Obviously, it significantly reduces the threat of new competitors’ arrival, however, at the same time, it affects the existing businesses. They are in rivallary with each other introducing more and more new models of cars, improving and modernizing the present ones and also developing various technical innovations. The rivalry within the close circle of entities present therein brings about a relatively short-sighted perception of the market as a whole. The methods of competing that are formed are not necessarily desired by the customers, the price fighting between the suppliers takes place and fixation of the number of suppliers whose offer can be used. It also indirectly affects the closing of the suppliers’ market, as the basic supplier for them is a single car manufacturer. The consolidation on the market also appears resulting in single owners’ becoming the owners of a large number of automotive brands, e.g. .
Volkswagen is also Skoda and Seat, BMW is also Mini and Rolls Royce, and Renault is also Dacia. Alpine, Samsung Motors, Lada and Moskvitch. Such a situation also takes place on the part of the suppliers where one type of engine, manufactured by one company is used in numerous car makes. Undoubtedly, it is difficult to threaten such market giants, dictating almost everything that is going on therein. Huge plants, immense funds invested, one hundred or more years of tradition, experience and the acquiring of knowledge, their own distribution channels and influence on the regulations protecting the industry form just a few of the conditions that have occurred here.
Discussion questions:
1.Which entry barriers into the sector can be enumerated here?
2.What do such barriers result from?
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3.What threats to the businesses already being within the sector arise as a result of the occurrence of strong entry barriers and almost no possibility for new players to appear thereon?
The barriers to exit the sector describe how fast and possibly without losses one may withdraw from an investment, should such a business change its mind or the business activity appear insufficiently attractive. In some cases the exit is not easy at all or requires incurring substantial losses. A waste water treatment plant, or open-cut mine must not only consider the high costs of land reclamation after finishing their operations, but they will not recover much from the funds invested, either. Therefore, the very closure of such a business may last a few years and the court proceedings related thereto may last even longer. The high exit barriers increase the investment risk level and should be well analyzed before taking up business operations.
On the other hand, there are businesses that do not invest in fixed assets, the fixed assets are leased, the staff is employed under temporary agreements, offices are let, etc. In this case exit from the business may only mean some losses on investments and the possible lack of return of the costs incurred. However, they may withdraw from the market promptly and without any special difficulties.
Substitutes are another force acting on the market. Substitutes are products and services that, although not originating from the specific market, satisfy the same customers’ needs.
In competition analysis, in addition to direct competitors, substitute suppliers should be considered. For restaurants, a local grocer’s store may be a substitute and if the customers seek for interesting pastimes, a swimming-pool or a book may substitute the cinema.
The intensity of competitive fighting also is conditioned by the sector’s attractiveness.
The more competitors there are, the more difficult it is to stay thereon. The stronger they fight with one another, the more advanced products they launch and offer at lower prices, the higher the risk and necessity for incurring higher expenses. It is often correlated with the industry’s life cycle. Along with obtaining maturity, the competitors’ fighting becomes more and more fierce. The more so, because as long as the market grows, the growth of sales is largely related to the growth of the market potential. However, on the market saturation, satisfying all its needs and stopping the development, the growth of sales largely results from taking over the competitors’ market shares. This means that all
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the actions are to a great extent directed against other suppliers and they do not only consist in encouraging the customers to use the offer. However, along with the consolidation in the industry and establishment of oligopolies, the competition normally softens. Such competitive fights are conducted on the pharmaceutical market or that of cheap airlines. However, they are by far weaker among the suppliers of mobile telephony, home appliances or air time on TV.
So, to summarize it to some extent, the general attractiveness of the sector is described by its size measure and the volume of needs and cash amount, which results in the turnover in a sector, its future size and development perspectives and profitability, i.e. specification of revenues in a sector against the cost of presence therein.
Exercise 10
How do you assess the entry and exit barriers?
A relatively easy to copy business model is the rental of premises and their furnishing on a medium level. However the rental of premises in the best locations of big cities is relatively difficult. The necessary technologies and equipment are generally accessible. The opportunity to acquire credits for such an activity is limited. Holding a recognized brand towards which the customers are loyal is an important barrier.
The exit barriers are not so high. There is a secondary market of used furnishings, the premises are usually let. The possible costs of layoffs remain.
Discussion questions:
1.Should a business present in such sector be afraid of new competitors?
2.Which sector could have been described in this way?
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Questions and discussions
1.What entry barriers affect the competition? What kind of market with particularly high entry barriers are you aware of?
2.How could one reduce the exit barriers from the market? What measures should be taken to make the exit from the market fast and with minimum losses?
3.Which businesses have particularly high exit barriers?
Case study 14
Arkia
Arkia (עיקרא), Airpolonia, AirBerlin, CentralWings, Wizz and Ryannair in Poland www.arkia.com
Along with the development of the aviation market and the simultaneous growth of people’s mobility, numerous new airlines have been established. However, in many cases, as in Poland, the aviation market has been strongly regulated by the law and until 2001 was practically reserved for some major airlines and no entry by any new carrier was possible. When the market was deregulated only to a certain extent, some new airlines arrived. However, as was shortly shown, the very fact of opening the market did not make it easily accessible. The businesses had a serious problem with access to ticket sales service, airports and with filling the aeroplanes with passengers. After all they had operate regular flights as scheduled. So the number of passengers should be significant so as to cover the costs with the money that had been spent on tickets. The latter, however, appeared to be difficult to achieve. The wealthiest customers continued to use the existing operators, while there were too few people willing to fly among the others. It was particularly conspicuous in domestic flights. Moreover, the purchase of airplanes was a problem as well. By the end of the 20th century the market of lease businesses offering the possibility to lease a few aircraft for US$ 200 mio each was not too expansive. After the period of the stock exchange boom, the assets of the financial investors grew to the sufficient extent, however, whch made it possible. However, the funding of further aircrafts was still an issue for smaller airlines. This was actually the
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case until the end of 2012. So it was no wonder that numerous carriers could not cope with such a situation and either went bankrupt, e.g. Central Wings and Airpolonia or have temporarily withdrawn from this market, e.g. AirBerlin or Arkia.
Discussion questions:
1.What entry barriers were encountered by airlines in Poland between the years 2001-2013?
2.How could such entry barriers be handled? Was the situation hopeless for new airlines?
3.How could the entry barriers be used by the existing aviation carriers?
4.What exit barriers from this industry may occur?
5.How could an airline lower exit barriers?
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7.3. Analysis of substitutes.
Principles of an industry defence from substitutes.
Pre-class readings:
1.Anderson Soren T., The demand for ethanol as a gasoline substitute, Journal of Environmental Economics and Management, Vol.63, Issue 2, March 2012, pp.151–
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Article available on: http://news.msu.edu/media/documents/2012/02/3e304492-c03c-4270-9a6d- 6864f188a84d.pdf
Task: Prepare a short presentation demonstrating the main thesis, assumptions and conclusions of the article.
Additional questions to be answered and/or discussed after pre-class readings:
1.What is a substitute?
2.How can substitutes influence the industry?
3.Why do the customers switch to substitutes?
4.How does the market behave after the substitute’s arrival?
5.Can you name some other pairs (or groups) of substitutes on different markets?
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The difference between a new service on the market or a new product and the substitute is sometimes difficult to be defined. Generally it is assumed that a totally new offer, however slightly different from the present one, is a new product or service, whereas something largely diverging from the known solutions, however satisfying the same needs as the existing ones, are substitutes.
Referring to the sector’s life cycle analysis, the substitutes usually appear with particular intensity during its maturity phase. The existing offer, has somewhat been exhausted, desires change and the search for new forms of satisfying its needs, formed in the previous phases. So the substitute solutions are the result of the industry evolution, but also the expansion of its binds with related industries, search for new directions of the other sectors’ expansion, intensive research-development activity, development of technology, the rise and impact of new market trends, joining of various industries and rise of new ones and a number of other factors. This is also sometimes a method to omit the entry barriers into the market.
Exercise 11
Substitutes
In numerous cities worldwide, taxi corporations built entry barriers for themselves by means of lobbying directed towards the issue of regulations beneficial for them. The legal market closure seems to be a barrier impossible to be passed. However, as it appears, in numerous places a number of substitutes were produced. Let alone the simplest one, i.e. using one’s own car, motorcycle or bicycle, also paid or courtesy forms of giving a lift to work by other commuters have been developed. It has been assisted by the development of web portals enabling announcement of the time, place and destination of a driver and the number of people he/she invites to the car. Various services, similar to taxi, appeared, offered by individual drivers, available on the phone. The number of substitutes effectively threatened the existing solutions and lifted the level of competition in this industry.
Discussion questions:
1.What other substitutes for taxi services could be created here?
2.What substitutes of fast food diners occur on the market?
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There are a number of methods applied by businesses particularly threatened by substitutes. They refer to both the strategy of basic assumptions and the operating question of sales and also marketing sometimes. Principally almost everyone of the strategies proposed, whether by Miles and Snow, Porter or Ansoff enable the gaining of the advantages strong enough that a substitute threat may even disappear in some areas or groups of customers.
Stress on the search for the new and the development of existing technologies may prevent substitutes and form a barrier difficult which would be difficult for them to break. The innovations continuously appearing, satisfying new needs from time to time or rising them to a higher level would require the substitutes to follow the same path and keep up with the innovations. Although theoretically such a situation cannot be excluded it happens extremely rarely in reality. Along with the development of washing powder the role of soap as a substitute disappeared. It was unable to keep up with the progress of powders. Now such situation may await washing powders overpowered by liquids. This, however, depends on the development of the latter.
The development of basic resources of knowledge, information and brand, for example, may also build strong limitations for substitutes. A strong brand, for example, may be a strong offer selection criterion. So strong that the buyers, and their basic group, in particular, do not even think of buying a substitute. An example may be the manufacturer of WD-40 spray lubricant. Its secure position for years was subjected to attacks by both direct competitors and various substitutes. The combination of a good brand name and innovativeness of solutions provides particularly good results. IMMOQEE combines a brand name with innovativeness on the market of consulting and HR management solutions. So it establishes standards in this scope on the Central and Eastern European market, copied by other businesses, rather than threatened by substitutes. This is the situation within the employee satisfaction and commitment offer, outsourcing of processes and taking over employees on the Payroll (a position in the intermediary company). So IMMOQEE effectively fights substitution solutions, at the same time setting the standards on the HR market. The web retailers, such as Amazon, Netflix or Merlin operate in a similar way. They combine the expansion of a unique resource, i.e. customer databases and their shopping preferences with innovations in the scope of the analysis thereof and drawing conclusions.
To some extent, fighting substitutes or perhaps reduction of threats to their operation may be carried out through the reduction of costs and offering low prices This is a cost leader
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strategy, one which should be prepared for another price reduction. An issue in this case can be, however, solutions not so much cheaper, but requiring significantly less commitment and effort. Thus post cards have been replaced to a large extent by sms and mms messages. Although their price was close to that of cards, nevertheless, the effort of buying, writing and mailing a card was by far higher than that of transmitting a picture taken by a phone’s camera accompanied by a short text from the mobile phone. In numerous cases, however, the solutions that can be applied as substitutes are only cheaper, but often less convenient. Some of the people, in spite of the ecological trend and urban environment protection, uses alternative solutions to cars for financial reasons only. Savings due to traveling by bus or underground do not have to mean that such a solution is more comfortable and as easily accessible than driving a car.
The analysis of substitutes refers to establishing the extent they are able to threaten in relation to the strategy performed or competitive advantages. Obviously, there is always a threat that a solution of significantly preferential usable value might arise. In this case we may talk about a technological breakthrough rather than substitutes. Substitutes, however, restrict the level of prices in the industry, may determine the directions of its development, combine industries and represent a bridge linking technologies. This was the case of mobile phones and mobile music players. Telephone as a player’s substitute not only represented a threat to it, but, combining the functionalities and technologies, determined the development trends on the market of mobile multimedia players.
The analysis of substitutes also applies to the question of which characteristics and values are particularly preferred by the customers. This is a permanent search for the new and their confrontation with the particular market desires. Substitutes are often a particularly painful threat, due to setting a new standard. They satisfy the needs somewhat omitted by the existing suppliers. It may be the comfort of use, easier accessibility, etc. with simultaneous maintenance of the basic need satisfaction level.
In relation to the threat created by new substitutes’ arrivals seemingly include to a large extent the entry barriers characteristic to the whole sector. In numerous cases, however, alternative products and services originate from outside and are able to omit such barriers. In this case the threat created by them is particularly substantial, because there is no method of analysis enabling one to foresee the direction a competitor might arrive from.
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