Competition risk — Case study

Overview :

Inherent in business is the ‘risk of competition’, which can be local, regional, national and transnational. Surf faced it from Nirma and both are facing it from Ghadi and other regional brands. Despite the ‘risk of competition’, competition is the ‘breath and blood’ of business. Competition motivates managements to innovate. It creates entrepreneurs. Competition and competitiveness are necessary to meet the challenges of tomorrow. It improves both the cost and quality of the product. It would not be wrong to say that competition even changes the taste of the customer.

However, it is also necessary at this stage to see the impact of absence of competition. Its absence results in monopoly, deterioration in quality, increase in prices and consumer being short-charged. The automobile industry is an outstanding example of what absence and existence of competition has done in India. Padmini and Ambassador were both bad in quality and delivery. It used to be said that :

•  the only thing that works is the horn, and

•  one needs to book a car when a child is born.

Look at the market today. Competition has led not only to increased availability, but also improved quality and variety of models and makes. Cars at every price point are now available. ‘Nano’ the innovative product from Tata’s is changing the market. Many international car manufacturers are making India as the hub for producing small car. Again care for environment is internationally increasing competition for introducing hybrids. GM is working on a hybrid electric car which will give 230 miles per gallon. Daimler’s smart car will give 300 miles per gallon and Nissan’s product is expected to give 367 miles per gallon — Time 31 Aug. 2009.

Another outstanding example of what competition can do is our ‘telecom’ sector. It is the only product where cost to customer has reduced since the advent of mobile phone about a decade and half back. Today the customer pays not per minute of use but per second of use.

Nations fight for markets. That is what Doha is all about. Opening of services is expected to improve the quality of services. Even during the recent and current financial crises the impacted markets were inherently against taking protective measures as that would lead to lack of competition and result in a closed market which is against the interest of the consumer.

There are a number of factors that attract competition in a given business and industry. The primary factor of course is the prospect of earnings, and growth potential in term of revenues, profits, value addition, market share and customer base and loyalty. Hence, the challenges are :

A. The first real challenge is knowing your competitors, in being able to judge (i) the market segments that are exposed to the risk, (ii) the level and resources of the threat which they pose, (iii) the source of competition risk in respect of the particular competitors in terms of the 4ps of marketing, (iv) their relative strengths and weakness.

B. The second real challenge is in knowing what makes your products and services click in the market in the teeth of competition and why and how you are able to score over the competitors. These two aspects generally enable us to judge the extent of competition and its impact on our business.

C. The third aspect of competition risk pertains to potential and future competition. This is given by the attractiveness of the market, controlled by the extent and difficulty of entry barriers and the competition regulations and trade practices.

Competition encompasses not just the marketing and sales dimension of the organisation covering advertising, brand building and publicity, but affects the entire life cycle of the product and the organisation right from infrastructure planning, supply chain and sourcing, production, human resource to distribution, selling, after-sales service and even research and development.

The demand-supply equation, the entry barriers, the customer preferences, industry size, local, regional and global position all these determine the type and extent of competition an organisation is likely to face.

However ‘competition risk’ is not merely about the risk that your competitors will overtake you and make your product obsolete and your service look much poorer in comparison to theirs, or that they will beat you in the price or in reaching and occupying the market place and the hearts and minds of the consumers. ‘Competition risk’ could be both local and global. Apart from the 4ps of product, price, promotion and place which is the traditional sparring battle ground for competition, competition may also arise and manifest itself in location, policies, product mix, branding, recruitment and even reward and incentive schemes to staff as well as to customers.

‘Competition risk’ often goes much beyond into the realm of opportunities, possibilities, chance, market segments and niches that an organisation fails to spot and cash in on and the competitors are able to capitalise on. In fact creativity, innovative thinking and out-of-the-box approach often are the only offence and defense for dealing with competition.

Effectively dealing with the external risk of competition requires :

•  A thorough understanding of the market

•  An analysis of the environment, political, social, economic and cultural.

•  An understanding of selective strengths and weaknesses of the organisation and its products and services vis-à-vis the competition.

•  An understanding of potential competitors and the entry and exit barriers.

•  A strategic and operational knowledge of competitor activity and customer expectations.

Thus, as can be seen from the above, it is indeed a very complex and daunting task, but it is nevertheless essential as without this, one cannot survive the competition.

The example for this month’s case study on competition risk is that of a company operating holiday tours and travel packages.

‘Sweet Memories’ is a tour company that was started about 15 years back in Mumbai. This company initially catered to the middle and lower middle-class segment and according to the budgets and the general trends in these times, arranged tours – and holiday packages to places of interest and cultural themes. It initially arranged tours to the West and South. This was followed by covering Rajasthan and the North.

Around four to five years back it started operating tours overseas to destinations in South-East Asia, Far East, Australia, New Zealand and is now arranging tours even to Europe and U.S.A. The customers are still essentially budget travellers belonging to the ” middle-class segment.

Of late the owners who have been casual in their approach and relying on word-of-mouth publicity ‘ and offering value for money to customers as their mainstay to survive in the market have found business difficult with the new entrants and bigger travel companies coming in with innovative concepts like theme tours, budget tours, action packed tours, exotic destinations and even sports-based tourism like the IPL South Africa tours.

Revenues of Sweet Memories have fallen and the management is at a loss as to how to deal with this” threat of sudden onslaught of competition with high-end tours, large publicity budgets, beautiful travel brochures, exotic destinations and innovative ideas.

They therefore approach you as a professional risk manager and consultant to identify and analyse competition risks and advise the tour company on the next course of action and develop an immediate plan to stop customers from migrating to competition. ‘

Suggested    solution for competition risk:

Competition risk analysis needs to be done of the, potential tour market based on :

Identifying existing and future risk for Sweet Memories:

An analysis of the situation reveals the following major issues:

Challenges and risks encountered from  competition:

1. Judging the high-end tourist market segments’ needs and expectations.

2. Identifying strategies of new entrants – e.g., price.

3. Developing a positioning strategy and organised approach from the existing casual unorganised approach.

4. Expanding own share in the pie and expanding the pie itself.

5. Review existing marketing plan: Product, pricing, promotion and locational access.

Strategies for overcoming existing competition risk:

1. SWOT analysis:

a. First step is to evaluate internal capabilities and identify areas which require improvement.

b. Determine  the scope of improvement.

c. Making small modifications to eliminate un-productive activities. This process requires ‘persistence’.

d. Conducting ABC analysis of revenue generating tourists and repeat tourists.

e. Identifying opportunities – that is – creating new untapped space in the market. e.g., International business exhibition tours, grooming and training with leisure tours for corporate executives, etc.

2. Study regional and international top 5 tour operators:

a. Complete  package  of offerings

b. Value added features like pickup and escorting services.

c. Customised onboard meal: Veg, Non-Veg. [ain, etc.

d. Event based tours: Brazil Carnival, New Year in Australia

e. Theme based tours: African safari, Buddhist circle, gaming, Dassera in Mysore and Christmas in Jeurusalem.

f. Promotion  and Branding  strategies

g. Hospitality training to their guides, cooks, other professionals

3. Strong Brand Building and positioning activities will lead towards reaching the customer’s Evoked Set (Unconscious Mind) and help in discriminating customer preferences and choice.

a. Providing a travel kit with most common and essential items with a logo mark.

b. Attractive and innovative brochures with graphics and a colorful appeal.

c. Positioning themselves as High-end quality of service with cost benefit.

d. Creating jingles, slogans, a cartoon character, modified colorfullogo, uniform dressing style for their professionals, etc.

4. Keeping a track of environmental happenings and events directly or indirectly influencing the industry: Social, Legal, Economical, Political, Technological and Cultural environments.

a) Assigning a representative in major interna-tionallocations will help in identifying key events and happening, which are not captured by major media agents.

b) Preparing a calendar with notes of future happening events and subsequently designing tour packages around those happenings – for example, Olympics in China and forthcoming Commonwealth games in Delhi.

6. Optimising  Entry and Exit Barriers

a. Creating a niche in the market which becomes a trademark and difficult to imitate by other competitors

b. Besides risk of existing competition, organisation should also open up their vision for other threats like:

1. Bargaining  power  of customers

2. Bargaining  power  of suppliers

3. Threat  from new  entrants

4. Threat from substitute  products

Porter’s    5 forces  for an organisation’s    risk:

– Risk of customer consistently demanding better quality product at reduced price.

– Suppliers demand higher volumes with sufficient margins and shorter payment cycle.

– New entrants possess more features with enhanced strengths like distribution power, innovative promotion, etc.

– Substitute product like jewellery or watches; amusement parks and resorts for tour operators; Nano car for two-wheelers’ market, etc. threatens the ability to cover large market share.

7. Adopting combination of marketing competition warfare strategies:

Sweet Memories depending on the market conditions and result of market study and analysis can adopt a combination of one or more of the following strategies to ward off competition risk.

a. Offensive marketing warfare strategies –  are used to secure competitive advantages; market leaders, runner-ups or struggling competitors are usually attacked.

b. Defensive marketing warfare strategies – are used to defend competitive advantages; lessen risk of being attacked, decrease effects of attacks, strengthen position.

c. Flanking marketing warfare strategies – Operate in areas of little importance to the competitor.

d. Guerrilla marketing warfare strategies – Attack, retreat, hide, then do it again, and again, until the competitor moves on to other markets.

e. Deterrence strategies – Deterrence is a battle won in the mind of the enemy. You convince the competitor that it would be prudent to keep out of your markets.

f. Pre-emptive strike – Attack before you are attacked.

g. Frontal attack –  A direct head-on  confrontation.

h. Flanking attack –  Attack the competitor’s  flank.

i. Sequential strategies – A strategy that consists of a series of sub-strategies that must all be sue” – cessfully carried out in the right order.

j. Alliance strategies – The use of alliances and partnerships to build strength and stabilise situations.

k. Position defence –  The erection of fortifications.

l. Mobile defence –  Constantly  changing positions.

m. Encirclement strategy – Envelop the opponent’s position.

n. Cumulative strategies – A collection of seemingly random operations that, when complete, obtain your objective.

o. Counter-offensive – When you are under attack, launch a counter-offensive at the attacker’s weak point.

p. Strategic withdrawal – Retreat and regroup so you can live to fight another day.

q. Flank positioning  –  Strengthen  your flank.

r.  Leapfrog strategy    – Avoid confrontation by bypassing enemy  or competitive forces.

To summarise, once competition risk has been identified, it has to be dealt with using a combination of strategies and tackled at all levels to keep competition out of the way. The selection of the strategy, techniques, tools will depend on your own financial and marketing strength, the competitor’s strength and the existing and expected market conditions.

Initially, the ‘risk advisor’ advised Sweet Memories to:

– renegotiate terms  with  suppliers

– add features to its tours, e.g., air conditioned buses

– develop advertising material in the form of brochures

– employ strategy of distributing brochures through newspaper vendors

– hold low-cost customer meetings prior to the departure of a tour

– distribute travel  kits at such meetings

– give specific information on places covered by the tour – e.g.,famous temples, churches, historic buildings, museums, gardens, etc. This information is normally available in local brochures.

The above low-cost strategy  has worked  in increasing the inflow  of customers  and  the efforts of the ‘risk adviser’  were appreciated.  It however  needs to ‘- be noted that ‘competition  risk’ is an always  existing risk and the management  has to be vigilant and pro-active  at all times.