Existing competitors

What advantages do competitors have?

Last, but not least, rivalry between existing competitors leads to tactics such as aggressive pricing and promotion, battles for customers or channels, and increased service levels. If there is an escalation of moves and countermoves (e.g. price wars), all industry rivals may end up losing. However, advertising battles may also be of benefit as it makes clear the differentiation between companies and brands.

Although rivalry and its intensity change as the industry expands its marketing and technologies, the following are indicators of a competitive threat from existing industry rivals:

l many and/or equally strong competitors;

l slow industry growth, leading to a focus on dividing, rather than expanding the industry;

l high fixed-costs and asset-bases making rivals compete to turn stock and fill capacity;

l products are considered to be commodities and made available at low cost, which encourages buyers to switch supplier at no risk, and buy by price;

l diversity of competitors and their strategies, making it difficult to anticipate competitive moves;

l high stakes, for example, the challenge of building a customer base in cellular communication or sales on the Internet;

l high exit barriers for economic, strategic, emotional or legal reasons. Major exit barriers are specialised assets that are difficult to sell, fixed cost of exit (e.g. labour agreements, settlement costs) and the strategic importance of activities or brands for the corporation or its partners.

COMPETITIVE ANALYSIS: PORTER’S FIVE FORCES 17 One of our clients, a national railway company, encountered many existing and

potential competitive forces that could be described by Porter’s five forces model.

The market was deteriorating and government subsidies had declined rapidly.

New local railway companies had made timely entries into the market, focusing on the most profitable travel segments. Commercial customers could switch easily to road or water transportation to increase flexibility or lower costs, whichever was desired. The company was under pressure from the government to increase its return on investment for a future public offering, while simultaneously maintaining

KEY MANAGEMENT MODELS 18

Final analysis

Although it is arguably the most widely used and recognised model for strategic analysis, this powerful model has one major disadvantage, namely that it tends to emphasise external forces and the ways that a company can counter these forces.

An organisation’s intrinsic strengths and ability to develop its competencies inde-pendently of these forces are given much less consideration. The model can therefore be classified as reactive rather than pro-active, and is best used in com-bination with an inside–out approach. It is argued that Porter’s five forces model combined with the Resource-Based View (RBV) could be more successful in devel-oping a much more sound strategy.

certain services. Advanced management of alternative transportation by means of regulated and private road transportation was starting to pose a serious threat to our client. Deregulation also invited foreign railway companies to explore the profitable opportunities in the client’s domestic market. The company’s personal travel cus-tomers were (and still are) represented by a powerful interest group. On the supplier side, fuel prices, transportation material and labour costs were increasing. Porter’s five forces model has helped our client to identify and structure its competitive playing field as part of its strategy development process.

Note: the illustration and description have been altered to provide a suitable example and do not therefore represent all the relevant facts.

5. Existing competitors

3. Buyers

• Interest group pressure 4. Suppliers

• Higher fuel prices

• Increaed labour

• New local railway companies on profit segments

Figure 4.2 Example of Porter’s five forces

Reprinted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from CUSTOMER MARKETING METHOD: How to Implement and Profit from Customer Relationship Management by Jay Curry with Adam Curry. Copyright © 2000 by The Customer Marketing Institute BV. All rights reserved.

Reference

Porter, M.E. (1980) Competitive Strategy. New York: Free Press.

Porter, M.E. (1990) The Competitive Advantage of Nations. New York: Free Press.

(Republished with a new introduction, 1998).

COMPETITIVE ANALYSIS: PORTER’S FIVE FORCES 19

The big picture

A core competence is something unique that a firm has, or can do, strategically well (Prahalad and Hamel, 1990). The concept of core competencies is based on Barney’s idea that an organisation’s inimitable and valuable tangible and intangible assets are key aspects of a firm’s sustainable competitive advantage (Barney, 1991).

When to use it

The core competencies model is a strategic tool to determine the unique assets that can be used to create and offer value to customers. The process of defining core competencies encourages management to think about the strengths and capabili-ties that set the company apart from competitors. Whereas Porter’s five forces model (see page 14) takes an outside–in approach and places the external environ-ment at the starting point of the strategy process, the core competence model of Prahalad and Hamel (1990) does the opposite. It builds on the assumption that competitiveness derives ultimately from a company’s ability to build core compe-tencies that spawn unanticipated products at lower cost and more speedily than competitors can. In this way, the core competence model can be used to create sustainable competitive advantage.

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