WORKSHEET 20B: Evaluating Competition and Their Knowledge, Capacity and Will
Identify competitors who are particularly strong in the Heart of the Market. You complete this step by reviewing the random sample of 100 customers (see Basic Strategy Guide Step 2, Analysis 2 and Analysis 66), along with the interviews done on the random sample of twenty-five Very Large and Large customers. From the sample and interviews, determine the competitors who have a higher percentage of their market shares in the Heart of the Market than the average competitor in the market.
If the Company is not strong in the Heart of the Market, usually the cause is a relative weakness with Very Large customers. The Company is then likely to have, as its Peer group, those companies who compete for the Large and Medium size customer segments. Determine the companies who are strong with the Large and Medium customers using the same approach as in the step above for the Heart of the Market.
If necessary, determine the Company's market share in the Large and Medium size customer segments compared to its average share in the total market.
From the steps above, identify the Company's Peers. Usually, these include all companies who have their focus on serving the same size segments as the Company. These size segment focuses will be either the Heart of the Market or the Large and Medium customer Primary and Secondary role segments.
Where is Price an important role reason in the Size/Role matrix? You completed this analysis in Basic Strategy Guide Step 3. Please see that step for procedures. The two major role reasons to purchase on Price are Price Information and Price Leverage.
What procedures do industry competitors use to telegraph or announce their price increases or price decreases? Use past price changes to conduct this analysis.
Determine from your interviews of customers how customers know that the price they pay is competitive with the prices paid by their own competition (see Analysis 66).
If there is significant use of Last Look in the marketplace, determine from your customer interviews of the twenty-five customers and from your sales force, how any competitor is able to succeed in using a low price to gain new customer volume.
Identify companies in the industry in a Leader's Trap and determine:
How much market share have the companies in a Leader's Trap lost in each of the previous three years.
Whether, during the period up to three years ago while companies were in a Leader's Trap, industry prices have continued to fall.
Whether the returns on investment for the companies who are in a Leader's Trap have fallen.
Identify the pricing policy of each competitor. Use the random sample of your 100 customers and the sample of the twenty-five larger customers in the market whom you interview. From this customer interview base, you want to evaluate whether a competitor is more or less likely to lose sales volume on price compared to the average competitor in the marketplace. The best way to do that is to create an index as follows (see Analysis 51):
For each competitor, total the Negative Volatility the competitor has on Price and divide that by the total Negative Volatility the competitor has. Convert this to an annual rate of Negative Volatility on price for the competitor (see Analysis 51).
Divide the competitor's rate of Negative Volatility on Price by the industry's rate of Negative Volatility on Price and convert that fraction to an index, where the industry's total Negative Volatility on Price is 100.
Identify, from interviews of the sales and marketing staffs and your samples of customers, the companies who tend to be Price Shavers in the market.
Evaluate the returns on investment for the Price Shavers compared to the average returns in the industry. If the returns for the Price Shavers are higher than industry average, they are financially strong. If they are lower than the industry average, they are financially weak.
From your analysis of the random sample of 100 customers and your interviews of twenty-five larger customers in the market, determine:
Whether the Price Shavers are serving roles in the industry's Heart of the Market.
Whether the Price Shavers are gaining market share. They gain share if their sales growth exceeds that of the average competitor.
Estimate the Company's total cash costs, in dollars per unit, for the Standard Leader product.
Compare the total cash costs for the Standard Leader product to the price received in Price Leverage roles. Ensure that the revenue received on Price Leverage roles exceeds the cash costs of each unit of product.
Find the Company's average price received, in dollars per unit, on its Standard Leader product, where it is not in a Price Leverage role.
Calculate the average price received, in dollars per unit, in Price Leverage roles.
Subtract the average price received in the Price Leverage roles from the average price received when the Company is not in a Price Leverage role.
Divide the difference found in the previous step by the average price received on all Company sales of the Standard Leader product. Convert this fraction to a percentage. Compare this percentage discount to the current percentage operating margin on the Standard Leader product and determine whether there is enough operating margin in Price Leverage roles to make them attractive.
To determine whether Price Shavers or other competitors serve a higher proportion of customers who are more price sensitive than the average customer in the marketplace, interview the marketing and sales staffs to determine:
Which segments of the market seem to be particularly price sensitive.
At what relative prices, compared to the average prices in the market, do these price sensitive customers appear to enter and leave the market.
Which competitors serve a higher proportion of these customers than does the average competitor in the market.