Chapter-02-Competitor-Analysis

13CompetitorAnalysisWhatisit?Competitoranalysisisaframeworkforevaluatingcurrentorpotentialcompetitorsofafirm.Whiledeceptivelysimple,acompetitiveanalysisisanindispensabletoolinthestrategist’stoolkit.Whendoweuseit?Whilecompetitoranalysisisbynatureonlyonecomponentofamorerobuststrategicanalysisthatemploysmultipleframeworksandtools,itcanbeausefulstartingpointforthinkingaboutcompetitivedynamicsandanalyzingtheindustryingreaterdetail.Whydoweuseit?Agoodstrategicanalysisrequiresananalysisofthefirm’scompetitioninordertobeabletoassessandpredictthesustainabilityofanycompetitiveadvantageandtheresponseofrivalstovariousstrategicactions.Competitoranalysiscanhelpfirmsmakestrategicdecisionsandgathercompeti-tiveintelligenceontheindustry.Adetailedcompetitoranalysiscanhelpfirmsinfluencetheirrivals’behaviortotheirownadvantage.Whenassessingafirm’sstrategyanditscapacitytocreatevalueforimportantstakeholders,itisimportanttokeepinmindthefundamentalprincipleofcompetition:Ifeveryonecandoit,it’sdifficulttocreateandcapturevaluefromit.Strategyplaysoutinthecompetitivearena.Howwillcompetitorsreacttothestrategicmovesofabusiness?Willtheybeabletoimitatethosemoves?Howwillotherstakeholders—say,customersorthecommunity—respond?InthewordsofSharonOster,“Strategymustbedevisedandimplementedwithanappreciationofthesesecond-ordereffects.”5Toillustratethefundamentalprinciple,consideravendorsellingT-shirtsoutsidetheUniversityofVirginia’sbasketballarena.Thisvendordoesquitewellforherselfsellingadesiredproductatareasonablemarkupovercosts;herenterpriseprovidesagoodreturnforthevendorandaproductcustomersfinddesirable.Buthowdoothersrespond?Absentanybarrierstoentry,otherT-shirtvendorsmaysoonappearoutsidethearena.Absentanybarrierstoimitation,theymay,infact,sellexactreplicasoftheT-shirtssheiscurrentlyselling.AsthesupplyofT-shirtsincreases,thecompetitionforcustomersbecomesstiffer,andvendorsstartloweringtheirpricestoattractcustomers.Soonenough,pricesfalltothepointthatthenextpotentialT-shirtvendorelectsnot5.SharonOster,ModernCompetitiveAnalysis(Oxford:OxfordUniversityPress,1999),11.THESTRATEGIST’STOOLKIT14toenterbecausetheopportunitycostistoohighandhisnextbestoptionforabusinessventureismoreattractivethanbecomingaT-shirtvendor.Theremainingvendorsmayprofitfromtheirventuresbutwilllikelymakenomorethantheiropportunitycost.Thisiswhateconomistsrefertoaseconomicprofitoreconomicrents.Itdiffersfromaccountingprofitinthatitreferstoprofitsinexcessoftheopportunitycostofcapital.Thefundamentalprincipleofcompetitionimpliesthatasuccessfulstrategyrequiressomebarriertocompetitionthatpreventsothersfromenteringafirm’smarketandimitatingitsstrategy.InthecaseofourT-shirtvendor,restrictionsthatrequirepermissiontoselloutsidethearena,intheformofalicenseorpermit,wouldserveasabarriertoentry.Copyrightandtrademarkscouldserveasbarrierstoimitationoftheinitialvendor’sT-shirtdesigns.Together,barrierstoentryandbarri-erstoimitationcanreducecompetitivepressuresandallowourT-shirtvendortothrive.Onlyinthepresenceofsuchbarrierstocompetitioncanafirmbeexpectedtoearnastreamofeconomicprofitsintothefuture.Ultimately,thisexpectedstreamofeconomicprofitsisreflectedinthefirm’smarketvalue.Themarketvaluationofafirmreflectsinvestors’expectationsofthefuturediscountedstreamoffreecashflowsaccruingtothefirm.Freecashflowsaredefinedasthosefundsremainingfromrevenuesafteroperatingcosts,taxes,netinvestments,andchangesinworkingcapitalarededucted.Anotherwaytothinkaboutfreecashflowsisnetoperatingprofitaftertaxes(NOPAT)lessinvestments.Wediscountthisstreambecausecashinthefutureisarguablyworthlessthancashtoday.Athoroughstrategicanalysiscanhelponeforecastfuturecashflowsforafirmandthuscalculateanexpectedmarketvalueforthefirm.Howdoweuseit?Step1.Identifycompetitors.Whileseeminglystraightforward,competitoridentificationisacritical,andoftenchallenging,firststepinacompetitoranalysis.Twocompaniesinthesameindustrymayvarysignificantlyinthedegreetowhichtheycompete.Theymaycompeteindifferentgeographicmarketsortargetradicallydifferentcustomersegments.Forexample,istheremuchusetoPorsche,aluxurysportscarmanufacturer,inanalyzingKia,abuilderoflow-costsedans?Insomecases,evenidentifyingacompany’sindustrycanbedifficult.Therearetwocommonwaystoidentifycompetition.Thefirstistolookattheindustryfromacustomer’sviewpointandgroupallfirmsprovidingasimilarproductorservice.Marketershavedevelopedvarioustechniquessuchasperceptionmappingandbrand-switchinganalysestoaidinidentifyingthemostrelevantcompetitors.Point-of-salesandscannerdataproviderichsourcestohelpwithsuchanalyses.Thegoldstandardistoidentifythecross-priceelasticitybetweenpairsofproducts(i.e.,thepercentageincreaseindemandforoneproductgivena1%decreaseinpriceforanotherproduct).Thelargertheincreaseindemand,themorethosetwoproductsaresubstitutesandtheirmakersrivals.Inpractice,however,cross-priceelasticitycanbedifficulttocalculate.COMPETITORANALYSIS15Thesecondapproachistocarryoutadetailedanalysisofindustryplayersandgroupfirmswithsimilarstrategiesascompetitors.Forexample,ifanalyzingtheU.S.steelindustry,itmaybeusefultoclas