Sunday, August 7, 2011

Competitor Clusters: A Framework for Competitor Analysis

Michael Porter in his work on Competitive Strategy (1980) follows up the building blocks of structural analysis and generic competitive strategies with a framework for analyzing competitors. He holds that analyzing competitors in depth as per a detailed format prescribed in his theory provides a better perspective for formulating the competitive strategy of a firm. He considers that most firms conduct competitor analysis in a perfunctory manner as a result of which firms end up developing deficient strategies. He observes that many companies do not collect information about competitors in a systematic fashion, but act on the basis of informal tidbits of information making the competitor analysis desultory.

The framework for competitor analysis proposed by Porter comprises four diagnostic components in terms of future goals, current strategy, assumptions and capabilities. However, he advocates an extensive canvas of study covering data from the parent corporation's vision and group strategy to the goals and execution plans of individual business units. Porter lays out a comprehensive database, comprising over 100 markers and metrics, to identify competitor profiles. Though Porter's hypothesis and framework for competitor analysis are interesting, and he even commends it as an equally applicable model for self-analysis, there are weaknesses in the Porter model from conceptual as well as practical points of view.
Challenges of Porter's framework
The theory of competition is challenging in that there can be no singular definition of competition or competitor. At one level it is linked to industry definition, which is itself a moving target in the contemporary business environment (see my recent post: "Structural Analysis and Industry Definition", Strategy Musings, July 21, 2011, Secondly, competitors could be having individual businesses that compete differentially in diverse product-market combinations. The more a corporation is unitized and globalized the greater could be the chance of multiple styles of competition from the same company. And, it goes without saying that the competitive profile of a single business firm, and the competitive profile of a single business within a conglomerate could be completely different.
Porter throws in an important dimension when he hypothesizes that the study of competition should cover both current and emerging competitors. However, Porter does not indicate whether the study of competition needs to include all the competitors, a cross-section of them or only the top two or three. There could be two views on this, both with their own valid points. On one hand, it could be just sufficient if the best of the competition is benchmarked for superior performance. On the other hand, even a trivial competitor could destroy an industry structure by taking irrational actions that generate intense competitive forces. The above indicates that a comprehensive and insightful competitor analysis could be not only complex but also resource-intensive. 
Outside-in versus inside-out
From a process point of view, Porter's methodology requires that the firm, especially its strategy department, train its telescope on what happens in the external marketplace. From a range of data, not limited to published industry statistics to competitive signals, and from supplier deliveries to equipment orders, the firm is expected to systematically receive inputs, which define the strategies of competitors. Obviously, while this could be an achievable task in the case of duopolistic and reasonably oligopolistic industry structures, it could be an impossibly people-intensive task in the case of fragmented industries, and a proprietary process in the case of knowledge industries. Porter himself admits the challenges of reliable data collection on competitors.
As opposed to the classic Porter's outside-in approach, the inside-out approach takes the view that, in large organizations and innovative firms especially, there would be enough knowledge of industry shaping trends or enough inputs from who joined the firm from other competitors on the appropriate competitive trends. The inside-out approach thus does not differentiate internal firm developments from competitive external developments. As a result, no specific resources are allocated for dedicated external competitive intelligence in the inside-out approach. In this approach, self-analysis and competitor analysis converge in terms of process mechanics.
Strategic groups
Clearly, neither outside-in nor inside-out approach helps in establishing a robust and sustainable framework of competitor analysis that has a fair balance of resource deployment and information collection. When scores of competitors are analyzed over several dimensions, each with multiple metrics, the emerging picture would be too diffused to lead to any meaningful conclusions. It would be more relevant to study convergent patterns of collective competitive behavior than divergent profiles of individual competitive behavior at the firm level. Porter’s theory of strategic groups offers interesting insights in this context. Porter hypothesizes that firms in an industry can be classified into strategic groups, each comprising a group of firms following the same or a similar strategy along the strategic dimensions. The dimensions could be ones such as specialization and vertical integration.
The relevance and appropriateness of strategic groups in industry analysis had been tested by the author in his research studies conducted at the Indian Institute of Technology Madras, Chennai in the 1980s and 1990s, with the Indian automobile industry as the background. Dimensions such as import dependence, export competitiveness, product diversity and R&D intensity emerged as useful criteria to develop strategic groups, and predict their performance. However, strategic groups do not qualify to be used as the basis for analyzing competitive behavior. Adoption of a particular strategy, and even its execution, merely indicates the competitive intent but does not necessarily reflect the competitive behavior or competitive outcome. Competitive forces vary in their intensity and volatility depending upon how firms and strategic groups deploy their competitive capabilities. Strategic groups with an overlay of competitive behavior could provide a simpler yet a more effective approach to analyze competition.
Competitor clusters
Competitor clusters can be defined as strategic groups which deploy their competencies with a differential competitive intensity. A group that is R&D intensive could be low on the competitive use of such innovative intensity. Indian power plant producers as a strategic group are as innovative and cost efficient as the Chinese power plant producers. However, Chinese power plant producers are much more aggressive in leveraging their systemic cost-competitiveness to gain a lead over the Indian power plant producers. Clearly, an Indian power plant producer would need to look at a different competitor cluster than it is used to while formulating its competitive strategy. The paradox of competitor clusters would be evident from the low cost mobile phone market. The Korean (Samsung and LG)  and Swedish (Sony Ericsson, Nokia) mobile device leaders have ultra low cost devices just as the Indian (Videocon) and Chinese (Huawei) device makers have. However, the approach taken by the latter to translate their low cost position into ultra low price position, with additional smart phone features, positions them in a different competitor cluster.
A review of the Indian automobile industry provides an additional example of competitor clustering. The industry comprises a fascinating array of companies with different strategic attributes; for example, a wholly indigenous company (Tata Motors), a largely indigenized company (Maruti-Suzuki), and different strategic groups of companies with American (General Motors, Ford), European (Mercedes Benz, BMW, Audi, Volkswagen and Renault), Korean (Hyundai) or Japanese (Toyota, Nissan) technologies, and within each strategic group, strategic sub-groups of companies with high levels of import dependence and/or luxury orientation. While these companies could be grouped based on technological and business strategies as above, different competitor clusters would actually emerge when the competitive behavior profiles are superimposed. When a new entrant plans to enter the Indian automobile industry space, the entrant needs to be conscious of not only the strategic group it could form a part of but also the competitor cluster which it would need to contend with.
Dimensions for clustering
While there would exist several strategic dimensions that firms could pursue, not all are relevant for strategic grouping and much less appropriate for competitor clustering. Strategic strengths essentially are reflected in terms of new product innovation, manufacturing competitiveness, supply chain agility, market penetration and financial strength. Competitive behavior is reflected in terms of pace of new product introduction, pricing competitiveness, distribution flexibility, market spread and share, and profitability. A combination of strategic strengths and competitive behavior would help develop relevant competitor clusters. While there could be thirty six combinations of strategic strengths and competitive behaviors, only a few are significant for competitor clustering. The relevant combinations are those that are more inversely correlated than the others.
The essence of competitive excellence is the ability to pursue strategies that are apparently contrarian but are equally result oriented. One facet of competitive intensity is an ability to consume significantly high levels of resources (for example, an unceasing introduction of successive generations of products) and yet achieve outcomes that provide significantly high levels of financial strength (for example, high levels of product profitability). Another facet of competitive strength is an ability to pack maximal innovation into minimal product count (for example, just one or two products per year, each packed with breakthrough features) and yet achieve maximal market spread and market share (for example, global market footprint and over fifty percent market share). Yet another facet could be an ability to be the widest possible distribution capability with lowest product pricing (for example, mass retailing of budget products) and yet achieve high levels of financial strength (for example, corporate profitability). Toyota, Apple and Walmart are institutional examples of the three facets of competitive profiling respectively.
Competitive clustering can be carried out in terms of simple integrated hypotheses as above (for example, most profitable innovation) or could be developed in terms of high-low 2X2 grids. In this approach, firms would be classified on appropriate scales in terms of innovation intensity and product profitability to develop four grids. The grids represent clusters which are high on both the dimensions of innovation and profitability, high on either innovation or profitability on one hand, and correspondingly low on either profitability or innovation on the other, and low on both innovation and profitability. Greater clarity would be achieved by adopting the grid approach to developing competitive clusters of firms. Because of the adoption of scaling technique, there could be multiple competitive clusters that could be positioned in quite a representative manner in each of the four grids.
Guidance for entry
Any strategic framework should help firms achieve successful entry into or growth in an existing industry. The strategic formulations for entry and growth are, however, different. A new entrant to the industry needs to decide fundamentally on the strategic group to choose the right positioning within the industry, consistent with the available or accessible resources. For example, for a new entrant to the white goods industry, depending on the nature of product and manufacturing technologies as well as market plans and financial resources it would be necessary to decide whether the company should join a full line, vertically integrated strategic group or a narrow line, outsourcing strategic group. As another example, a new entrant to the Indian automobile industry, depending on the ownership strength and resource allocation to region, needs to decide whether it would be a part of the import dependent luxury car strategic group or a part of the indigenous component based low and midrange sedan strategic group.
Choice of a strategic group provides an appropriate strategic focus and scoping to a new entrant. That alone does not, however, assure success to the new entrant. It becomes necessary to understand how the appropriate competitor cluster would respond to the new entry. When Nissan has decided to enter the Indian automobile industry it has chosen the mass market oriented small car strategic group but has decided to benchmark itself against luxury oriented competitor cluster. Nissan sought differentiation through upgraded features, modern manufacturing and niche marketing. In contrast, Volkswagen chose the strategic group of import dependent, luxury car strategic group but has positioned itself on a competitor cluster that offers a wider range of automobile models with higher levels of technology. For new entrants, choice of an appropriate strategic group is, however, of greater importance than the choice of competitor cluster.
Guidance for growth
Each firm in an industry by the course of evolution falls into one or the other strategic groups. The successful growth of an existing firm in an established industry depends on the analysis of competitors and development of appropriate strategic responses. Such strategic reconfiguration could potentially move the firm into a different strategic group.  Strategic reconfiguration by several firms could also lead to formation of new strategic groups with different strategic characteristics. An existing firm therefore needs to focus on an appropriate competitor cluster and overcoming the competitive forces. Focus on competitive clusters would guide the firm onto the essential competencies that enable superior competitive advantage. Reverting to the case of the Indian automobile industry, the growth and the continued dominant play of Maruti-Suzuki is attributable to the company recognizing appropriate competitor clusters and responding to them. On the other hand, the modest growth of the other car manufacturers with American and European technologies is attributable to their being focused on strategic group membership rather than benchmarking themselves with competitor clusters.
An existing firm has the advantages of incumbency in that not all strategies need to be developed and executed from a zero base. It also has, as a corollary, the disadvantage of bearing the legacy of certain ineffective strategies that could have been pursued in the past. Overriding such advantages and disadvantages, the existing firms can realize, through the competitive cluster framework, a unique potential to identify the winning strategies to achieve industry leadership. Rather than get lost in a laundry listing of all the competitive parameters of all the players, the firm should simply focus on the essentials of the competitive strategies of competitive clusters. A range of six dimensions (sufficient in most cases) to thirty six strategic dimensions (that may be required in highly fragmented industries) as  described in this blog post would be all that is required with a resort to the competitive clustering framework.
There is no doubt that Porter’s theory of competitive strategy, first proposed in 1980, has continuing relevance despite the breakthrough developments that have been taking place in technology and competition over the last few decades. The competitive forces that exist in an industry are a cause as well as a result of the actions of the various actions taken by the incumbent firms. Rather than follow a unit level, multi-factor competitor analysis as proposed by Porter, this blog post has proposed a more efficient and more effective competitor cluster framework, which works extremely well with a selective additional deployment of the framework of strategic groups. Competitive clustering is more dynamic than strategic grouping and provides more frugal but more impactful dimensioning for firms to understand and respond to competitors’ strategic behavior in an industry.     
Posted by Dr CB Rao on August 7, 2011  


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