The Fundamentals of Competitive Marketing - Term Paper Example

Porter's five-force framework The Porter's Five Force Analysis, initially propounded by Michael Porter, is a strategic framework applied to analyze an industry. Porter's Five Forces Model indicates that the five forces interact to determine the intensity or strength of competition, which ultimately determines the profitability of the industry. Any analysis of an industry must expand beyond the traditional practice of concentrating on direct competitors to include potential competitors. It should consider the possibilities of a supplier becoming competition by integrating forward, buyers becoming threats by integrating backwards or companies who are not competitors today producing potential products that could act as substitutes and capturing significant market share. In a competitive industry, the powerful will exploit the powerless to their advantage in the relentless pursuit of self interest. Buyers exert power through their ability to switch suppliers and/or demand more favorable terms and conditions of their transactions. Suppliers exert power by virtue of their control of important resources, and the resulting ability to raise prices or reduce quality. Rivalry between suppliers Technology, although critical to the success of a business, is common in all segments and has lost its core function. Services, software and hardware are easily replicated by suppliers, hampering innovation and decreasing the strategic importance of technology. However, the role of technology in competitive advantage cannot be denied. It is important to note that it is not the technology itself, but how the technology is used and integrated into the business process that creates the competitive advantage among firms. Both iRobot and Dyson belong to an industry which is triggered by consistent innovation of new products. Strategic alliances play an important role in developing competitive advantage in these firms. Strategic alliances play an important part in product development and distribution strategies. They rely on strategic alliances to provide technology, complementary product offerings and speedier access to markets. In a highly competitive market, technology acts as the differentiating factor that sets innovative firms apart from the others. Porter (2001) argues that, companies will gain the competitive advantage only if the use technology to complement their existing business strategies, products and best practices. Companies should use technology as a valuable corporate asset and should differentiate itself from competitors by achieving a sustainable competitive advantage by having low operational costs, value added products, low production costs and excellent customer service. Dyson bulids vaccum cleaners that guarantee no loss of suction by using Root Cyclone technology that separate the dirt from air. Bargaining power of buyers There are a large number of companies competing against each other, in a constant struggle to innovate products that suit customer needs in the varying environment. Customers, therefore, have a variety of products to choose from. Companies differentiate from one another through product innovation and customer service. iRobot strives to continuously improve their robots and exceed customer expectations by delivering highly reliable, high performance robots and providing world class support and service. Dyson makes vaccum cleaners that are guaranteed a life over 5 years by developing them to resist rough circumstances with no extra costs involved. Since buyers are large, they exhibit very little control over the market with lower bargaining power. Firms compete with innovating products that provide unique solutions to customer needs. Firms also provide complimentary products to gain better customer base for their existing products. Bargaining power of suppliers Suppliers for specialized innovative products may not be very large in number and therefore may exhibit much bargaining power. Bargaining power is high for major suppliers of specialized materials and equipment who are also sources of process innovation. Most technology companies establish strategic alliances with potential suppliers so as to overcome the bargaining power that the suppliers may otherwise exercise. Through these strategic alliances, firms will be able to get consistent supply of materials that are also highly consistent in quality. Threat of new entrants New entrants to an industry are important because, with new competitors, the intensity of competitive rivalry in an industry generally increases. When entry barriers are low, as in the case of many technology based industries, more and more companies will enter the market and act as potential threats to the existing firms. Also, in many technology based industries, replication of innovative technology is easy and widely done. This can pose as another reason for new firms entering the market. As there are large number of small firms, competition will be very high. Economies of scale and scope will help in determining the survival of such small firms. Firms will also need capital to invest in innovation and access the established distribution channels within the market. Threat of substitute products Quality of the product is the most important factor that determines whether it will face threat from substitutes. Firms in the technology business take great care in manufacturing quality products that are unique in its ability to meet customer needs. iRobot is one of the leaders in robot technology and maintains its leadership position by continuing to make highly reliable, easy to use, affordable robots that meet their customers' needs. Another complimenting factor is the cost of the product. If there are other products that are equal in quality and available at lower prices, customers will be tempted to switch. However, switching between products is not an easy process when it comes to technology driven products. These products involve high switching costs as they are highly specialized products with complimenting complex technological procedures. Strategic innovation in small firms The table below gives the advantages and disadvantages of small firms over large firms in matters relating to strategic innovations. The table has been adopted from the book "Intellectual Property and Innovation Management in Small Firms" by Robert A. Blackburn, 2003. Small Firms Large Firms Marketing Adv: The ability to react quickly to keep abreast of the fast-changing market requirements. Disadv: Initiating a market start-up abroad can be a very costly affair. Adv: Widespread distribution & servicing facilities and a high degree of market power with the existing products. Management Adv: There is little or no bureaucracy and dynamic and entrepreneurial managers who can easily adapt to take advantage of new opportunities and are open to taking risks. Adv: Professional managers with experience of handling complex organizations and establishing corporate strategies. Disadv: Excess of bureaucracy, risk-averse managers and lack of dynamism with respect to new long term opportunities. Internal Communication Adv: Informal yet efficient internal communication networks that provides for fast response to internal problem solving and the ability to adapt quickly to the dynamic external environment. Disadv: Slow reactions to external threats and opportunities due to unmanageable internal communication networks. Qualified technical manpower Disadv: Lack of qualified technical specialists and inability to support R&D efforts on a large scale. Adv: Ability to support large R&D facilities and provide highly skilled technical specialists. External communications Disadv: Lack of time and resources to identify and use important external sources of scientific and technological expertise. Adv: Can afford crucial technical information and technology, capacity to subcontract R&D to specialist centers of expertise and ability to 'plug-in' to external sources of scientific and technological expertise. Finance Disadv: Difficulty in attracting capital and the inability to spread risk over a portfolio of projects. Adv: Able to borrow on the capital market, can spread risk over many projects and fund diversification into new markets. Economies of scale and the systems approach Disadv: In some markets, economies of scale act as a barrier to entry for small firms. There is also inability to offer integrated product systems. Adv: Ability to gain economies of scale in R&D, production and marketing and to diversify to offer complimentary products. Growth Disadv: Acquiring enough capital for expansion and lack of entrepreneurial skills to manage complex organizations. Adv: Can afford to finance expansion and growth through diversification and acquisition. Patents Disadv: Inability to afford costs involved in patent litigations. Adv: Ability to afford patent specialists and litigate to defend patent rights. Government regulations Disadv: Unable to cope with complex regulations and the unit costs of compliance for small firms are often high. Adv: Able to fund legal services to cope with complex regulations and fund R&D necessary for compliance. Systematic and comprehensive empirical studies have provided compelling evidence that small firms generate significant amount of innovative activity, especially in new and emerging industries. In high-technology industries, small firm survival rates are still lower in contrast to larger firms. At the same time, start-up rates are higher and this makes it difficult to identify and track firms over time. In addition, small firms have a track record of forsaking formal research and development (R&D) for informal research (Audretsch & Feldman, 2003). At the same time, the importance of research linkages and partners to small firms is undeniable. While it may not make sense for firms that are new and most likely transitory to formalize strategic research partnerships with other firms and institutions, such linkages are clearly at the heart of some small-firm strategies (Audretsch & Feldman, 2003). An example to prove this would be the biotech research sector. This sector has seen truly dramatic growth in strategic research alliances with 20,000 alliances formed since 1988 and an annual average growth rate of 25 percent. In a context where size contributes to competitive advantage because of economies of scale or scope, large enterprises will obviously tend to have a better edge. To compensate for this size-inherent cost disadvantage faced by small firms, they engage in a strategic alliance to increase their scale and scope. Having mentioned that, it is important to note that not all small firms are necessarily at a competitive disadvantage even with the competition from larger firms in the same industry. As long as no size-coherent cost disadvantage exist, no compelling reason for strategic alliances exist either (Audretsch & Feldman, 2003). In addition, occupying a strategic niche provides small firms with an opportunity for feasibility when either no scale economies exist, or there are even modest diseconomies of scale. By contrast, when a small firm is at a competitive disadvantage due to difficulty to meet cost commitments, developing a strategic alliance helps to compensate. An example to demonstrate the advantage of a strategic alliance is the success of a small computer firm, MIPS Computer Systems. The firm competed in the same market as IBM and HP where economies of scale in production and market penetration determined commercial success. In this production oriented industry, economies of scale and the designs with the most market penetration determined the survival of the firms. Thus, it was crucial for MIPS to obtain a large market share and influence the industry standard. MIPS created an alliance including semiconductor partners and a number of systems vendors who contributed production capacity, market presence, technological competencies and finance. Along with Sun Microsystems, one of its partners, the smaller company was able to attain the scale, scope and market impact that otherwise would have been unimaginable (Audretsch & Feldman, 2003). Another factor that motivates strategic alliances for small firms is the need for capital. Small firms with novel technologies normally lack the financial backing to support product innovation. In many cases, small firms lack complementary assets such as sales force, technical and manufacturing know-how which takes years to develop. One of the reasons why small firms face severe liquidity constraints is the lack of information about the firm in the market. Most potential lenders have little information on the managerial capabilities or investment opportunities of such firms and are unlikely to be able to screen out poor credit risks or to have control over a borrower's investments. The competitive advantages a smaller firm possesses can be categorized into three: (1) developing and implementing strategies of restricted scope, (2) building capacities for innovation and change and (3) resisting the temptation to make growth a strategic priority. Michael Porter introduced the notion of "generic competitive strategies" (1980), according to which, a smaller organization adapts a focus strategy concentrating on a particular niche market. The success of this strategy rests on serving a relatively small segment of the market particularly well. A firm that has done this exceptionally well is Nautel Limited of Hackett's Cove, Nova Scotia. Specializing in high power radio frequency equipment, Nautel has earned a reputation in the design and manufacture of exclusively solid state radio transmitters. The firm used mature technologies in relatively narrow market segments and established dominance in them. Nautel strategy has consistently been to use an established technology in a limited number of market segments to establish its reputation and help build a leadership position (Wicks, 2005). A second type of advantage that smaller firms have to offset the benefits of size is to build capacities that can accommodate innovation and change. The less complex organizational structures and informal procedures allow them to adapt to the changing external environment and develop strategic flexibility (Wicks, 2005). The third success factor revolves around the capability of a small firm to resist the temptation of making growth a strategic priority. Growth should be a natural flow of an organization's success and not a goal or objective that determines major strategic decisions. Michael Porter recommends "strategic positioning" (1996) in achieving superior performance, i.e., a firm should either perform different activities from that of its rivals or perform the same activities differently from that of its rivals. Successful strategies therefore rest on doing something unique and being prepared to make the trade-offs necessary to capture the advantages of being unique (Wicks, 2005). The strategy adopted by Canjet Airlines of Nova Scotia, reflects the above mentioned strategy. In order to improve its cost structure and optimally serve its market niche (price-sensitive customers) it foregoes the potentially lucrative trans-Atlantic routes and upper-class seating. These sacrifices show the company's refusal to adopt strategies initiated by its rivals and its willingness to forgo top-line sales growth for bottom-line profitability (Wicks, 2005). A firm's ability to innovate successfully is critical to its ability to achieve strategic competitiveness. The need for innovation is critical for all firms because of the rapid pace and unpredictability of technological change as well as the increasing speed with which competitors often are able to bring new products, services and processes to market. Innovation also is important because it can result in competitive advantage if the innovation is difficult for competitors to imitate, provides value to customers and can be successfully exploited commercially (Menger, 2001). Entrepreneurship is important to innovation and a firm's strategic competitiveness because it represents the commitments, attitudes, actions and relationships within a firm that enable it to develop, encourage and manage innovation (Menger, 2001). In today's economy, with all its environmental uncertainty, presents new opportunities for small innovative firms to compete successfully in the market. With the aid of the three strategic advantages discussed above, small firms can gain competitive strength that offsets the many benefits that size-coherent firms benefit from. References Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Menger, Richard. A. 2001. Small Firm Innovation and Strategic Competitiveness: The Role of Firm Infrastructure. The Journal of Behavioral and Applied Management. 3 (1), pp. 26-28. Porter, M. E. 1996. What is Strategy Harvard Business Review. November-December 1996: p. 61-78. Wicks, David. 2005. When Bigger isn't better: The Strategic Competitive Advantage of Small Firms. The Workplace Review. Blackburn, Robert. A. 2003. Intellectual Property and Innovation Management in Small Firms. London: Routledge. Audretsch, David. B & Feldman, Maryann. P. 2003. Small Firm Strategic Research partnerships: The Case of Biotechnology. Technology Analysis & Strategic Management. 15 (2), pp. 273-278. Read More