Burning Ideas

If you know that your backpacking trip will take you through snowy mountain roads and swampy hiking trails, you would be wise to put on your snow tires and double up on insect repellant. Similarly, if you know the nature of competitive challenges in your market, you should be sure your firm is adequately prepared to meet them. Every firm has both strengths and weaknesses, but it is how they match up against the competitive structure of the market that determines success.
Three broad types of action plans are implicated by competitive analysis. A firm will want to choose its competitive battlegrounds judiciously. If it is the low-cost producer, it might enjoy profitable business from a large, powerful buyer. A firm that is disadvantaged on the cost side should probably not pursue business from the powerful buyer, but compete in another customer sector where quick response and specialized technical service are critical. Solar Kids, a Cincinnati-based computer training company, faced up to the waning profit opportunities at elementary and high schools: lots of rivals, impoverished and slow-paying customers. It changed its name to Solar Comp and moved into corporate training, where competition pivots on expertise with the latest applications software and personal productivity tools.
Innovative organizations will sometimes pursue a strategy designed to change the competitive structure of the industry. Advertising and a sophisticated means of programmed merchandising for resellers may transform a market characterized by small regional manufacturers into one dominated by a few national marketers. In markets where this has occurred, the new competitive structure creates barriers to entry through new distribution requirements and product differentiation by branding.
The third strategic approach is to anticipate and exploit change in the competitive structure of the industry. Our challenge is to look carefully at each competitive force, understand its root causes, and forecast its impact on the profitability of an industry. Then, with insight and mobility superior to our competition, we try to secure a position to capitalize on the evolution of the field. In the opening vignette to this chapter, we profiled the moves to stake out a commercial presence in the developing digital economy. It is a reasonable bet that its growing experience and reputation will earn it superior profits and up the stakes for potential rivals in these evolving markets.

Profits are the economic rewards to a business for providing value to customers better than the rest and running an efficient operation. If we briefly examine a few sources of profit, we can get a good preview to the upcoming discussion of the anatomy of competition. Competition is more than industrial rivals cutting prices in an effort to gain market share. It has a structure that can be described and analyzed.

Five Forces

The preceding scenarios suggest that firms have improved profit capabilities to the extent that they can withstand price pressures in the business environment. If we pause to reconsider each scenario, we see that price pressures come from five distinct sectors.

Rivalry in the Industry Not all businesses face the same amount of price pressure from their competitors in the same business. In Atlanta during the 1996 Olympics, hotels enjoyed great pricing latitude because demand outpaced the supply of local rooms. Like the lodging business, other industries are partitioned by natural boundaries or customer purchasing constraints.
If industry rivals offer relatively undifferentiated products or if demand is significantly less than overall capacity, firms will tend to find intense rivalry. Price competition frequently intensifies in declining markets because firms try to grab market share to cover fixed expenses that can’t be shrunk as rapidly as the market.

Powerful Suppliers A manufacturer that relies heavily on a unique input for its product becomes vulnerable to price hikes or other means of “holdup” from the supplier. Of course, the unique input may provide a means of differentiation for the manufacturer. The “Intel inside” sticker on a desktop computer provides many buyers assurance of a top-quality Pentium processor, no matter what the brand name on the PC. The buying firm must carefully weigh the benefits from depending on a powerful source of supply. A key question may be what the future supply situation looks like. Perhaps there will be alternative suppliers when patent protection expires or when another source—maybe even one internal to the firm— has been brought up to speed.

Threat of Substitutes Industries are typically defined by their channel position and their output. Are they manufacturers or distributors? Do they sell chemicals or rolled wire? Notice that user considerations get no mention. But clearly, if a buyer regards the products from two different industries as substitutes, the makers of those products must be considered competitors.

Threat of Potential Entrants Rapidly growing or profitable markets tend to attract new sellers. And newcomers can
change the competitive landscape in several ways. First, new participants in the market increase the productive capacity serving the market; therefore the existing demand from customers has to cover more fixed costs. Second, a new rival will fight to increase market share, perhaps displacing incumbents in the assortments of resellers or underbidding the established firms. Third, new rivals can bring new or substantial resources to the fray.

One’s objective in this process is to define good market segments. Good markets are identifiable, accessible, and substantial. These criteria work well to discipline the tasks of gauging opportunities and directing marketing effort. Identifiable members of market segments can be enumerated and evaluated. Imagine a cardiologist who developed a healthy heart program for overworked and overweight executives. Is there a practical way to identify such individuals? The cardiologist might advertise her service and/or invite prospects to a power breakfast seminar or a free risk screening. Prospects might not be so willing to identify themselves, however, if the service were for coping with chemical addictions.

Accessibility means that members of a market can be reached or impacted by some directed marketing activity. American Express knew that to get companies to adopt its corporate card, an American Express sales rep had to get some time with the prospect firm’s chief financial officer. Years of advertising, direct mail, and attempted sales calls still left 400 attractive but inaccessible accounts.
The ability to approach or address known prospective customers is necessary but not sufficient to make an opportunity. That market must be substantial, promising sufficient business to justify the efforts to serve it. Customer lifetime value is a useful criterion in an assessment of a target market. Unfortunately, a firm’s history with its current customers may provide very little basis for estimating the LTV of customers from entirely new markets.

Substantial markets can be revealed by a number of estimation techniques. One very powerful approach is the use of scenarios. Scenarios comprise a forecasting technique that requires managers to write explicit anticipated futures and articulate the chains of events that would need to occur to make the future happen. For example, Royal Dutch Shell tuned its supply strategy when its scenario process in 1973 found no compelling reasons for Arab states to increase their crude oil production. Furthermore, some of the authors helped an environmental management company determine the market for certain types of training. The task involved getting accurate counts of employees in different industries who handled hazardous and toxic materials, plus an assessment of the likelihood of new government regulations that—by fiat or new economic sanctions— would impact the training demand.
A related approach involves hard thinking and analysis of how the product fits into the value-added process. This approach is sometimes called the buildup approach or factoring. Market estimates by this approach come from building up the materials or parts units needed in a specific application or from specific accounts. For example, potential demand for a surgical staple designed for closing Caesarian sections can be estimated from a count of the average number of staples needed to close a typical Csection, times the number of C-sections performed in different countries. Projections in each country are apt to show different trends, based on differences in hospital protocols, fertility patterns, and population distributions.
The same basic approach can be applied using survey responses from prospects or from members of the sales force. Likewise, the volume of certain materials, logistical services, or MRO (maintenance, repair and operating) goods can be compared to finished products output in a statistical series. A statistical series is an estimation technique that uses the correlation between demand and some other set of economic activities to yield a forecast.

Business marketing is an exciting area of study. Students may be more familiar with consumer marketing; after all, everyone is a consumer. Business marketing, however, is new to most students. It is not the same as consumer marketing, and there are several compelling reasons for studying business marketing.

Marketing Majors Begin in Business Marketing
Are you a marketing major? As you can see, more marketing majors find jobs with businesses that sell products or services to other businesses rather than with businesses that sell to consumers. For that reason alone, it seems worthwhile to study business marketing.
Indeed, the majority of business school graduates—whether in accounting, finance, logistics, management, production, real estate, or quantitative methods—will find themselves working at firms doing business with other organizations. Many companies have awakened to the fact that they must be market-driven if they are to survive. Being marketdriven means that customer satisfaction and operational efficiency are the order of the day for every department and individual employee or associate. Market-driven means that at many organizations, individuals with complementary expertise and skills work in teams to constantly strive to serve organizational customers better, to innovate, and to develop the means to approach new institutional markets.

Magnitude of Business Marketing
One reason that more marketing majors begin their careers in business marketing than in consumer marketing is because of the magnitude of business marketing. Purchases by organizations such as companies, government agencies, and institutions account for more than half of the economic activity in industrialized countries such as the United States, Canada, and France, making business marketing an important activity. As mentioned earlier, few consumers have the purchasing power of an organization. Understanding how organizations buy is important to marketers who want to capitalize on the size of the business market.

Business Marketing Is Unique
There would be no point in having a separate business marketing class if business marketing were the same as marketing to consumers. If one type of marketing fits all situations, then only one set of classes would be required. The way organizations buy is radically different from the way consumers purchase products and services, which results in different marketing requirements. Let’s examine some ways in which business marketing is unique.

Decide exactly what you want to do.

Clarity
You must be clear about what it its that you want – what it is your doing – and why you are doing it, at every step of your life. You must know and see how everything you do fits in with your life.

Goal Orientation
Successful people are intensely goal orientated. They know what they want and are working towards the achievement of their goals every single day.

A Simple 7 Part Goal Setting Formula

1. Decide exactly what you want – formulate a goal
2. Then write it down (a goal not written down is merely a wish or a fantasy)
3. Set a deadline and even sub-deadlines if the goal is large and long-term
4. Make a list of everything you will have to do to achieve your goal.
5. Make a plan – organize your list by setting priorities on the list activities
6. Take action – Do this immediately DO IT NOW! And develop a sense of urgency. You must be intensely action orientated.
7. Do something every single day – Maintain momentum by doing something that will move you towards your goal daily.

The Best Goal Setting Exercise
(Practice it over and over again during your life)

1. Start with a blank sheet of paper
2. Make a list of 10 goals that you want to accomplish in the next 12 months (write your goals in the present tense, as if you already accomplished them and start every goal with the word I)
3. Go over your list of 10 goals and select that one goal that will have the greatest impact on your life, if your were to achieve it
4. Take your chosen goal and write it on the top of a separate sheet of paper. Then write down a deadline for it. And then formulate a plan. Take action on the plan immediately, and resolve to do something every day until you achieve your goal.