Chapter 7: Competitor Analysis

Question 1

The purpose of a competitor’s analysis is

Answer 1

is to gain insights into the relevant elements of the overall competition, namely those suppliers who are in direct competition with the company’s own formula.

Question 2

There are three levels of competition analysis:

Answer 2

1. Macro level: focuses on the strategic analysis of the field of competition and possible movements within it.
2. Meso level: aims to identify and analyze the current relevant competition.
3. Micro level: aims to identify the main direct competitor and to analyze their strengths and weaknesses (e.g. Aldi: main direct competitor is Lidl) (e.g. Action plays in many categories and for each of them it has to find its competitors. For example, Action has as its main category DIY (12%). The more categories you have, the more complex the competitor’s analysis).

Question 3

Michael Porter’s theory:

Answer 3

• five-forces model
• yield curve
• competitive-strategy matrix

Question 4

Five-forces model

Answer 4

Companies that have already established a position in their market tend to look at competition on the basis of existing competition - so they only look at the current players in their industry. Porter says that this is a dangerous and limited vision, because there are 4 other forces that may be important over the long term.

Question 5

four external forces of five forces model:

Answer 5

• Bargaining power of suppliers: Power shift in the relationship between existing vendors and their suppliers.
• Bargaining power of buyer: Power shifts in the relationship between existing vendors and their customers. The transition from a seller’s to a buyer’s market is one example.
• Threat of new entrants: A situation in which existing providers are not aware, or too late in discovering, that a new provider is coming into the scene. (e.g. the rise of Zalando and the impact it has had on the established shoe retail sector). (e.g. Action started silently opening stores in the NL. It opened stores in places where the competition did not yet see them. Then Action grew extremely fast).
• Threat of substitute products or services: An example is the phenomenon whereby consumers started using fast-food concepts such as McDonald’s more and more, reducing visits to the traditional supermarket, which lost market share. Supermarkets are now regaining market share as a result of changing eating and shopping behaviour, in part due to its offer of convenience products and ready-made meals.

Question 6

Yield Curve

Answer 6

Porter found that: companies with a relatively small market share were often more profitable in terms of return on investment (ROI) than companies with a fairly large market share.
The economies of scale theory did not always seem to work. On the other hand, he noted that these economies of scale seemed to be present in very large companies. The result of his findings was recorded in the yield curve.

The reason for the evolution of the curve appeared to be that smaller suppliers, at least in the consumers’ perception, offered better quality products: they often turned out to be niche market oriented who either focused on specific target groups or managed to bring added value (differentiation) to their total product concept. As a result, they were able to charge a higher price which was the reason for the high return they earned (differentiation premium).

At the other end of the spectrum, the very large businesses often turned out to be focused on the mass market (mass market-oriented).
Thanks to their large volume, they were able to benefit from economies of scale, and were therefore able to sell at lower prices than their slightly smaller competitors. This cost-leadership advantage was the reason for the high return they earned.

Question 7

Competitive-strategy matrix

Answer 7

based on horizontal: value or cost
Vertical: broad or narrow target

Question 8

Porter’s matrix in retail concepts
To apply Porter’s matrix to the retail sector, a few translations are required:

Answer 8

1. Breadth of offer: if consumer does not yet have a clear idea about what items he needs to satisfy his needs, he will choose a store with a wide range of choices. If the consumer does know exactly what he needs, he will choose a store with a specialist range
2. Spending capacity: if the consumer has little money (or little money for the item: low involvement), he will choose cheap stores. If he has a large budget (or a lot of money to spend on the item: high involvement), he will generally choose a quality provider

Question 9

broad assortment
- cost

Answer 9

cost leadership

value players

decatlon, hornbach, media markt

Question 10

broad assortment - value

Answer 10

differentiation

service players

bijenkorf

Question 11

narrow assortment - cost

Answer 11

cost focused

discounters

aldi

Question 12

narrow assortment - value

Answer 12

differentiation focused

luxury players

gucci, lv

Question 13

setting up a porter matrix

Answer 13

1. define the market
2. determining the perspective
3. identify the players
4. filling the matrix
5. check the matrix

Question 14

No-compromise theory

Answer 14

Smeets (2011) has another perspective which can be found in its no-compromise theory. The system of axes in his theory is similar to Porter’s but in his view but is entirely driven by how the customer experiences something and wants it. Customer perception is central: the customer is looking for the ultimate combination of the lowest costs and the highest added value.

Question 15

Translating the Smeets vision into a matrix, we have:

Answer 15

horizontal low to high added value
vertical low price below, high price

want to be corner below right and not in corner left up

Question 16

Comparing Porter’s approach with that of Smeets:

Answer 16

According to Porter, the ideal situation (green quadrant) of Smeets is not possible. According to Porter, retailers could only be positioned in the ‘compromise alley’

However, Smeets says that in the no-compromise matrix a new position has been added: the no-compromise players. These are the players that know how to combine the best of both worlds. For example, Primark is setting a new benchmark in terms of price, and are thus placed below the competition. The environment in which they are selling their products is certainly not at a lower level than that in which existing players operate. As these players grow, the entire playing field shifts up.

Question 17

The positions within the axis system are the following:

Answer 17

• Hard discounters (HD) left low
• Soft discounters (SD) middle to up red
• Full-service (FS) upper right quadrant
• • no-compromise (NC) players in right below

Question 18

Example of Smeets’ theory applied on fashion sector:

Answer 18

Entering the market, companies like H&M, Mango and ZARA initially chose only fashion and no longer brands, everything under their own label. The verticalized retailers passed on part of the margin advantage they gained to the customer, enabling them to offer not only better prices but also more added value. They no longer offered everything, but more in fashion. The playing field for fashion shifted: the department stores moved a little more up and to the left. At the same time, they were in the upper right quadrant. With the arrival of new players on the market such as Primark, the playing field is being turned upside down again. They are now the no-compromise players. As a result, the H&Ms and ZARAs of this world are moving towards the upper right quadrant, the high profile department stores such as La Rinascente are moving further to the right corner in the upper right quadrant, etc.

New competitors can therefore set the playing field in motion again, so every retailer must continually adapt, not only to the new wishes of the customer, but also to the changing competitive field

Question 19

Customer relevancy model

Answer 19

Porter’s five-forces model is less suitable for creating a benchmark for positioning. One benchmark model that can be used is the Customer Relevancy Model. It identifies 5 underlying dimensions for describe the positioning of retailers

Question 20

Customer Relevancy Model identifies 5 underlying dimensions for describe the positioning of retailers

Answer 20

price level
assortment
service
accessibility
experience

Question 21

Store compass approach

Answer 21

A model similar to the Customer Relevancy, is the pentagon-and-triangle model (by Tigert and Ring, 2001). This model makes a distinction between back-office (triangle) and front-office (pentagon) factors.
According to the model, there are 8 ways to build competitive advantages.

Question 22

store compass approach back-office (triangle)

Answer 22

elements that the consumer cannot see through direct observation, but that do create the conditions for the concept to be executed well:

suppliers: good agreements
systems: proper functioning
logistics: proper execution

Question 23

store compass approach front-office (pentagon)

Answer 23

place
product
value
people
communication

Question 24

Hemmer and Quix made an adaptation of the pentagon: the Store Compass, which also serves as a method to benchmark the own formula against the competition.
The Store compass is built on 5 crucial points.

Answer 24

As in the marketing mix we talk about the 5Ps, this model talks about the retail 5W’s, factors that are clearly perceptible to the consumer and that the consumer can easily assess with grades or scores on a point scale.
The store compass shows that a retail formula can distinguish itself from its competitors in five areas: where, what, worth, who, why. It is like a mirror in which a retailer compares its own performance with that of its competitors.

By collecting consumer ratings on the five components of their own formula and those of competitors, retailers can determine where they stand and assess where they want to create a difference. In this way, the Store Compass offers retailers the opportunity to choose which W’s they want to excel in. It is impossible to dominate on all five W’s: one or two points are more than sufficient.

Question 25

store compass: where

Answer 25

good location
good layout
good size

Question 26

store compass: why

Answer 26

why buy it, promotion and communication

Question 27

store compass: who

Answer 27

service, staff and atmosphere

Question 27

store compass: worth

Answer 27

value for money

Question 28

store compass: what

Answer 28

assortment, style, innovation and intensity

Question 29

The difference between the pentagon-and-triangle model and the Store Compass

Answer 29

is that the Store Compass directly links up with the behaviour of consumers in shops, while the pentagon-and-triangle model includes both consumer perception (which is not necessarily the same as behaviour) and operational aspects of the business operations.

Measuring the consumer’s assessment of the five different aspects for different formulas on a 5 or 10 point scale, it emerges a clear picture of a retailer’s position. In this way they can make spider web-diagrams of the different players in the market →

Question 30

Retailers are increasingly using the Net Promoter Score (NPS) to measure their own performance and compare themselves with their competitors. However, the NPS measures only one dimension. That is why the Net Loyalty Score (NLS) is developed. If we combine both scores,

Answer 30

it leads to the Loyalty Matrix.

Question 31

net promotor score

Answer 31

This simple method for measurement provides the answer to the question of what contributes to profitability and what can predict it. The NPS method is based on asking customers one key question:
“How likely is it, on a scale of 0 to 10, that you would recommend company X to a friend / colleague?”

There are three different groups of respondents:
- Promotors (9 – 10)
- Fence-sitters (7 – 8)
- Detractors (0 – 6)

The percentage of Promoters is subtracted from the percentage of Detractors. The result is the Net Promoter Score (NPS). It indicates how much customer loyalty a company commands, but it actually measures the degree of recommendation (the degree to which a company can be recommended). This correlates strongly with the organic growth of a company.

Question 32

Net Loyalty Score

Answer 32

The NPS is an interesting score for measuring loyalty, but it measures only one dimension, the dimension of recommendations to others. The NPS is and will continue to be an important score but gives only one dimension to evaluate the degree of loyalty on the part of the current customer base. However, customers should not only make recommendations but also come back themselves (retention). Retention is an even more important score. For this reason, the Net Loyalty Score was developed.

The NLS uses the same method by asking: “On a scale of 0 to 10, how likely is it that you will visit this company again?” This also leads to the same three groups (Loyals, Potentials and Disloyals).
The idea behind this is that it is most certain that the first group (Loyals) will return and will not be tempted to go shopping elsewhere. The Disloyals can easily be tempted to shop elsewhere. The score gives us insights into the degree of retention the company can manage.

Question 33

The Loyalty Matrix

Answer 33

When it comes to measuring customer loyalty to a brand or company there are two factors: the degree to which a company can be recommended (NPS) HORIZONTAL and the extent to which it can keep customers (NLS) VERTICAL. Plotting both scores on two axes, we get the Loyalty Matrix

Question 34

high NLS high NPS

Answer 34

pure loyalty

Question 35

high NLS low NPS

Answer 35

trapped loyalty - lack of something better (closeby)

are loyal but do not promote

Question 36

low NLS high NPS

Answer 36

fake loyalty

telecom companies

Question 37

low NLS low NPS

Answer 37

disloyalty

Question 38

A more complicated technique, which often requires separate market research, is Importance/performance mapping: by questioning consumers, you can get an importance scaling of the factors that consumers consider important when shopping.

Answer 38

• The vertical axis mapping shows which factors consumers consider important for a shop.
• The horizontal axis shows, for the same factors, how the consumer assesses the performance on each of these factors for a specific shop.
• The white diagonal line represents the consumer’s expectations: the shop is evaluated in the same way as the expectations of the consumer. Any deviation from the line means either a shortcoming (if the observation is above the line), or an unexpected gain (if the observation is below the line)

Question 39

Importance/performance mapping: high importance, high performance

Answer 39

maintain proformance

policy: maintain by business as usual

Question 40

Importance/performance mapping: low importance, high performance

Answer 40

strategic overkill

Policy: spend money rather on the upper left quadrant

Question 41

Importance/performance mapping: high importance, low performance

Answer 41

improvement very necessary!

Question 42

Importance/performance mapping: low importance, low performance

Answer 42

not very important