Competitive Demographics

We hear a great deal about Customer Demographics, but very little about Competitive Demographics and yet understanding the nature and motivations of competitors is just as important as understanding them for customers.

I recommend to my clients and students that they categorize the competition in three ways. First is the degree of specialization, second by geographic focus and the third by ownership. Each of these help determine the focus of competitors and can help assess who they will behave and the impact it will have on the markets and the ability to make money.

This is a short summary of the process from the updated edition of Putting It All Together, which can be purchased from my site: http://www.strategyleader.com/. A more extensive description of the process can be found in How to Gain and Maintain a Competitive Advantage in business, also available on the site.

Competitive Demographics.
In this chapter I would like to classify and categorize competitors. I call this “competitive demographics”. I will show how different types of competitors may have different objectives, expectations and decision making, which influence how the industry or market may behave. Then, I want to discuss changes and their implications. Finally, I will discuss the need to understand what is happening in different parts of the value added chain. The result will provide a better understanding of the earnings potential of a market and industry.

I have found, based on my research and experience, that there are two characteristics of competition that provide insight into how a competitor is likely to view a market and how they may behave in a market.
The first deals with their degree of diversity and, the second, is their globality.

· Diversity is first. I group competitors into three groups: single industry, multi-industry and conglomerates.
· Globality is second. I classify companies into national, international and global/ multi-national.
The combination of these two characteristics provide insights into how the competitors may behave and their long term view and commitment to the market segments. Let examine the characteristics of these different types of companies and then we will interrelate them.
As you can see, I like to use matrices to capiture a lot of information and then use it to identify the positive and negative strategic implications

Lets examine some of the strategic characteristics of each of these categories and then take a look at the integration of both.
Diversity
Single- Industry / Specialized Competitors.The single/industry specialist are highly focused and tend to be headed by a strong, knowledgeable entrepreneur, possibly the founder. Such a company is willing to grow the market and stick to their niche. While the entrepreneurial leader is in command, he or she strongly resists moving outside their area of expertise. Later, if demand begins to shade off or he steps aside, the firm will look for more fertile though related opportunities. They are usually knowledgeable about the market and sees its future as resting in the market that they are familiar with. This type of competitor may be difficult to beat. If the industry is dominated by a few specialists, it is likely to be stable and the rules will be known by the participants.
Normally, only the entry of a new aggressive competitor, some discontinuity like a new technology, or a serious change in the customers and their expectations will rock the boat. A few examples may demonstrate this type of situation.
Some examples: These are two United States based single industry specialists.
· Kodak has been a strong specialist in the low-end consumer camera and film markets. Though it has diversified into related photographic markets, like copiers, it has remained primarily a film and camera company. It has made money on selling film and developing pictures. Its primary competitors have been other specialists like Fuji of Japan and Polaroid. The industry has been relatively stable and its competitors have followed Kodak’s practices focusing on selling camera, film and development supplies. Even though instant photography was a minor blip, Kodak has continued to prosper. Today, the Kodak strategy is being threatened by digital technology, though it, too makes money on providing photographic paper and supplies.
· Dell Computers is a more recent example of a company that started by focusing and becoming the leader of the personal computer market and has gradually moved into related equipment both for the consumer and business segments. They have been able to set the standard for the personal computer arena and have forced the competition to adopt many of their practices. The more diversified companies, like IBM, have been relegated to a small position. The same is true of personal computer operating systems, where Microsoft dominates.
· Both companies are led by their founders and they have continued to call the shots both in their company and in the total industry
The Non-United States versions of the specialist firm are quite similar to their U.S cousins except that they are often more tied to their national governments. When these companies rank high on its government’s priority list, it is given protection in their home markets and strong financial incentives to export or grow in other countries. Korea and China are the most recent examples and they have modeled their practices after the Japanese. These are export dependent countries and it is important for their indigenous companies to be able to export so that they can provide jobs and foreign exchange. These factors have contributed to the decline and fall of many U.S. industries and companies. Examples are consumer electronics, where there are no major U.S. manufacturers, and textiles and clothing where the U.S. producers are in a continuing state of threat and even destruction.

Multi-Industry Competitors The multi-industry company creates and manages a diversified portfolio of businesses for the moderate to long term. If these companies have businesses in a variety of industries and markets they are able to minimize the impact of cycles. Further, they are able to take cash from the more mature businesses and invest it in those with higher growth potential. In addition, they are more able to manage earnings to meet investor and Wall Street expectations. The strategic significance of this type of competitor is that they may be willing to aggressively price to gain share at the expense of short term earnings, as well as to harvest or divest businesses to generate capital and cash for businesses they think have a longer term attractiveness. This can erode earnings and hurt the specialist who has no other option but to meet the price deceases to maintain their position or who are negatively impacted when a company is being divested or harvested. However, it can also provide opportunities for these specialists if they can take advantage of the confusion caused by harvesting and divestitures.
Multi-industry companies are difficult to analyze, since they often group their businesses in ways that it is impossible to decipher how and where they make or lose money. Foreign multi-industry are even more difficult to appraise since they may literally have several sets of books, one for the tax system, another for their governments and a third for investors. This is the key issue of disclosure, which has been going on for decades, but has come to a head with the
Conglomerates
The conglomerate is the true portfolio company. These companies enter and exit markets and segments purely to maximize short term earnings and not to be long term players. They use a continuing stream of acquisitions, mergers, partnerships and divestitures to make the numbers, even it may injure a business and disturb an entire industry. The classic conglomerate leader was ITT’s Harold Geneen. He bought and sold companies like a mutual fund manager. There was little interest in growing or enhancing the businesses.

Global
Local/ National companies are like the single industry specialist. They select are content with being a “big fish in a little pond” and not try and move oversea. Often they create a competitive advantage my establishing strong relationships with the government, communities and even the labor unions to build barriers to entry. They are not likely to move outside their own country markets unless they are supported by their governments.
Multinational are again like the multi-indstry in the sense that they are willing to move into new areas if and when they see an opportunity, but they are very selective and only participate if they can create a sustainable competitive advantage.
Global companies are again like the conglomerate since they have a willingness to participate anywhere they can make money and are also willing to exit if they are not winning and making the desired returnes.

Multi-national and global companies prospered prior to World War II, but almost disappeared in the 1950’s and 1960’s. This was a result of the pent-up demand created by the war and the ability of most companies to grow dramatically by just satisfying national demand. However, these types of companies are now gaining strength because of the opening of national markets and the ability to produce globally. In addition, many consumers and businesses are becoming similar in their needs and expectations and will purchase from anyone who provides what they want, when they want it, and at a competitive price. Multi-nationals purchase, produce and market where it makes financial sense. Their strategic decisions are based on economics and business savvy and not on political or nationalistic reasons. The number of single industry multinational specialists is increasing. Often these companies make alliances with national companies to gain a foothold. There are an increasing number of acquisitions as well.