Chapter 7: Competitor Analysis Flashcards
The purpose of a competitor’s analysis is
is to gain insights into the relevant elements of the overall competition, namely those suppliers who are in direct competition with the company’s own formula.
There are three levels of competition analysis:
- Macro level: focuses on the strategic analysis of the field of competition and possible movements within it.
- Meso level: aims to identify and analyze the current relevant competition.
- Micro level: aims to identify the main direct competitor and to analyze their strengths and weaknesses (e.g. Aldi: main direct competitor is Lidl) (e.g. Action plays in many categories and for each of them it has to find its competitors. For example, Action has as its main category DIY (12%). The more categories you have, the more complex the competitor’s analysis).
Michael Porter’s theory:
- five-forces model
- yield curve
- competitive-strategy matrix
Five-forces model
Companies that have already established a position in their market tend to look at competition on the basis of existing competition - so they only look at the current players in their industry. Porter says that this is a dangerous and limited vision, because there are 4 other forces that may be important over the long term.
four external forces of five forces model:
- Bargaining power of suppliers: Power shift in the relationship between existing vendors and their suppliers.
- Bargaining power of buyer: Power shifts in the relationship between existing vendors and their customers. The transition from a seller’s to a buyer’s market is one example.
- Threat of new entrants: A situation in which existing providers are not aware, or too late in discovering, that a new provider is coming into the scene. (e.g. the rise of Zalando and the impact it has had on the established shoe retail sector). (e.g. Action started silently opening stores in the NL. It opened stores in places where the competition did not yet see them. Then Action grew extremely fast).
- Threat of substitute products or services: An example is the phenomenon whereby consumers started using fast-food concepts such as McDonald’s more and more, reducing visits to the traditional supermarket, which lost market share. Supermarkets are now regaining market share as a result of changing eating and shopping behaviour, in part due to its offer of convenience products and ready-made meals.
Yield Curve
Porter found that: companies with a relatively small market share were often more profitable in terms of return on investment (ROI) than companies with a fairly large market share.
The economies of scale theory did not always seem to work. On the other hand, he noted that these economies of scale seemed to be present in very large companies. The result of his findings was recorded in the yield curve.
The reason for the evolution of the curve appeared to be that smaller suppliers, at least in the consumers’ perception, offered better quality products: they often turned out to be niche market oriented who either focused on specific target groups or managed to bring added value (differentiation) to their total product concept. As a result, they were able to charge a higher price which was the reason for the high return they earned (differentiation premium).
At the other end of the spectrum, the very large businesses often turned out to be focused on the mass market (mass market-oriented).
Thanks to their large volume, they were able to benefit from economies of scale, and were therefore able to sell at lower prices than their slightly smaller competitors. This cost-leadership advantage was the reason for the high return they earned.
Competitive-strategy matrix
based on horizontal: value or cost
Vertical: broad or narrow target
Porter’s matrix in retail concepts
To apply Porter’s matrix to the retail sector, a few translations are required:
- Breadth of offer: if consumer does not yet have a clear idea about what items he needs to satisfy his needs, he will choose a store with a wide range of choices. If the consumer does know exactly what he needs, he will choose a store with a specialist range
- Spending capacity: if the consumer has little money (or little money for the item: low involvement), he will choose cheap stores. If he has a large budget (or a lot of money to spend on the item: high involvement), he will generally choose a quality provider
broad assortment
- cost
cost leadership
value players
decatlon, hornbach, media markt
broad assortment - value
differentiation
service players
bijenkorf
narrow assortment - cost
cost focused
discounters
aldi
narrow assortment - value
differentiation focused
luxury players
gucci, lv
setting up a porter matrix
- define the market
- determining the perspective
- identify the players
- filling the matrix
- check the matrix
No-compromise theory
Smeets (2011) has another perspective which can be found in its no-compromise theory. The system of axes in his theory is similar to Porter’s but in his view but is entirely driven by how the customer experiences something and wants it. Customer perception is central: the customer is looking for the ultimate combination of the lowest costs and the highest added value.
Translating the Smeets vision into a matrix, we have:
horizontal low to high added value
vertical low price below, high price
want to be corner below right and not in corner left up
Comparing Porter’s approach with that of Smeets:
According to Porter, the ideal situation (green quadrant) of Smeets is not possible. According to Porter, retailers could only be positioned in the ‘compromise alley’
However, Smeets says that in the no-compromise matrix a new position has been added: the no-compromise players. These are the players that know how to combine the best of both worlds. For example, Primark is setting a new benchmark in terms of price, and are thus placed below the competition. The environment in which they are selling their products is certainly not at a lower level than that in which existing players operate. As these players grow, the entire playing field shifts up.
The positions within the axis system are the following:
- Hard discounters (HD) left low
- Soft discounters (SD) middle to up red
- Full-service (FS) upper right quadrant
- no-compromise (NC) players in right below