Structural Analysis of Competitive Environment
Undoubtedly one of the major contributions in recent years to our understanding of the ways in which the competitive environment influences strategy has been provided by Porter Porter’s works is based on the idea that competition in an industry is rooted in its underlying economics, and competitive forces that go well beyond the established combatants in a particular industry. Porter has also emphasized that the first determinant of a firm’s profitability is the attractiveness of the industry in which it operates.
Take the example of India’s booming retailing industry. Organized retailing m India occupies only 3 per cent of the total market volume (which is estimated to be around Rs8 lakh crores annually). Organized retailing is currently growing at 30 per cent per annum.
The second determinant is competition: here the average shopper spends 45 per cent of his/her monthly budget on food and grocery items and no national brands are operating except Food-world and Spencer that too in a fistful of places like Bangalore, Hyderabad, Chennai, Kolkata and Mumbai. In this scenario a company like Reliance considered its market position and ventured into retailing as part of its diversification strategy.
The second central question in competitive strategy is a firm’s relative position within its industry. Positioning determines whether a firm’s profitability is above or below the industry average Here Reliance Fresh should take Fab mall, Big Bazaar, Subhiksha, Apna Bazaar, Monday to Sunday, Daily Fresh (family mart), Kovai Fresh, Namdhari Fresh, Food-world and Spencer’s into consideration while framing its positioning strategy in the south. The basis of above average performance by Reliance Fresh is the sustainable competitive advantages gained through contract farming and backward integration with suppliers by providing stable bulk business.
This is what lead Porter to suggest that the nature and intensity of competition within any industry is determined by the interaction of five key forces:
- The threat of new entrants
- The power of buyers
- The threat of substitutes
- The extent of competitive rivalry and
- The power of suppliers
Competition at various levels:
It is possible to see competition operating at four levels:
- Competition consists only of those companies offering a similar product or service to the target market, utilizing a similar technology, and exhibiting similar degrees of vertical integration, e. g Reebok, Adidas and Nike (in sportswear and shoes).
- Competition consists of all companies operating in the same product or service category Malls like Garuda and Forum in Bangalore; PVR Cinema and Innox in theatres, banks like HDFC, ICICI and SBI with their retail, corporate and investment banking service; and insurance companies like HDFC Life, SBI Life, ICICI Prudential and ICICI Lombard.
- Competition consists of all companies manufacturing or supplying products which deliver the same service (Nokia, Motorola and Sony Ericsson in the GSM handset market).
- Competition consists of all companies for cornering the same spending power of the target group (Visa and MasterCard) while making electronic payment either through credit or debit card. This may be for various purpose like travel ticket, hotel and utility bills and so on.
It should be apparent from above that marketing strategies need not only identify those competitors who reflect the same general approach to the market, but also consider those who ‘interact’ the with company suppliers in each market, who possibly approach it from a different perspective, and who ultimately might pose either a direct or an indirect threat.
As part of this, one need also to identify potential new entrants to the market and, where it appears necessary, develop contingency plans to neutralize their competitive effect. Taking all facts into consideration leads to two distinct viewpoints on competition: the industry point of view and the market point of view.