Wal-Mart:Staying on top of the fortune 500
...ronment, firms concentrated on companies with which they competed directly. However, today competition is viewed as a grouping of alternative ways for customers to obtain the value they desire, rather than as a battle among direct competitors. This is particularly important, because in recent years industry boundaries have become blurred. Threat of new entrants Evidence suggests that KFC have always found it difficult to identify new competitors. This is unfortunate, in that new entrants often have the potential to be quite threatening to incumbents. One reason new entrants pose such a threat is that they bring additional production capacity. Unless the demand for a good or service is increasing, additional capacity holds consumers' costs down, resulting in less revenue and lower returns for an industry's firms. Often, new entrants have substantial resources and a keen interest in gaining a large market share. As a result, new competitors may force existing firms to be more effective and efficient and to learn how to compete on new dimensions Bargaining power of suppliers Increasing prices and reducing the quality of products sold are potential means through which suppliers can exert power over firms competing within an industry. If a firm is unable to recover cost increases through its pricing structure, its profitability is reduced by its suppliers' actions. A supplier group is powerful when: • It is dominated by a few large companies and is more concentrated than the industry to which it sells; • Satisfactory substitute products are not available to industry firms; • Industry firms are not a significant customer for the supplier group; • Suppliers' goods are critical to buyers' marketplace success; • The effectiveness of suppliers' products has created high switching costs for industry firms • Suppliers are a credible threat to integrate forward into the buyers' industry. Credibility is enhanced when suppliers have substantial resources and provide the industry's firms with a highly differentiated product. As a result of its success, initially in its USdomestic market and now globally as well, Wal-Mart is an example of a company over which few suppliers have power. The sheer size of its purchases and the relatively low switching costs it faces when choosing among suppliers often combine to yield significant power for the firm. Bargaining power of buyers Firms seek to maximise the return on their invested capital. Buyers (KFC customers of an industry or firm) want to buy products at the lowest possible price, at which the industry earns the lowest acceptable rate of return on its invested capital. to reduce their costs, buyers/customer's bargain for higher quality, greater levels of service and lower prices. These outcomes are achieved by encouraging competitive battles among the industry's firms. Customers (buyer groups) are powerful when: • They purchase a large portion of an industry's total output; • The product being purchased from an industry accounts for a significant portion of the buyers' costs; • They could switch to another product at little, if any, cost; and • The industry's products are undifferentiated or standardised, and the buyers pose a credible threat if they were to integrate backward into the sellers' industry. Substitutes One of the main problems that face many companies today is the threat of substitute products. There main substitute products competitors are McDonalds, Burger King, Wendy's, Domino's, chi-fi -A and Boston market, popeyes, etc. Industry rivalry Beyond seeking to deter entry, firms also use strategies to reduce the level of industry rivalry because unrestricted competition over prices or output can reduce profits. Several strategies are available. 1. Price signalling is the process by which firms convey their intentions to rivals concerning pricing strategy, or how they will react to the competitive moves of their rivals. Firms can announce that they will respond vigorously to other firms' hostile moves if attacked. Also it indirectly allows firms to coordinate their prices. 2. Price leadership, in which one firm takes the responsibility of setting industry prices, is another way of using price signalling to enhance industry profitability. The price-setter creates a model that other firms can follow. 3. Non-price competition usually occurs through product differentiation whereby firms compete for market share by offering products with different or superior features, or by applying different marketing techniques. There are four non-price competitive strategies. a. Market penetration involves expansion of market share in a firm's existing product markets by advertising and other promotional means. Example: Toys R Us based its CA on being a low-price, low-service store but now competes on having more toys in stores than competitors. b. Product development is the creation of new or improved products to replace existing ones. It can help to maintain product differentiation and build market share. Example: KFC very recently they rolled out buffet that included some 30 dinner, salad, and dessert items. c. Market development involves finding new market segments for a firm's existing products. It uses the firm's brand name to get market share as it enters these segments. d. Product proliferation (a range of products for a range of niches) is also a strategy for managing rivalry. Firms compete over perceived quality and uniqueness. 4. Capacity control is aimed at controlling the level of industry output. Although firms prefer non-price competition, periodically price competition does break out. This occurs because industry over-capacity leads to reduction in prices for firms attempting to dispose of the product. If one firm reduces prices, the others follow to avoid being left with unwanted goods. Excess capacity can occur because of new low-cost technology or new entrants. Two strategies are available: a. A preemptive strategy is used when one firm, recognizing an opportunity, moves quickly to establish a first-mover advantage. It hopes that other firms will recognize that they are too far behind to catch up and thus not increase their capacity. b. A coordination strategy involves firms signalling their intentions concerning their future capacity to one another. By indirectly informing one another of their plans, they seek to ensure that capacity does not become so large that it promotes a price war. As a result, the risks associated with increasing capacity (investments therein) are reduced. Sources: www2.bus.okstate.edu/mgmt/labig/(15/0...