Internal Factors

Company Capabilities

Capability management uses the organization’s customer value proposition to set goals for capabilities based on value contribution.

Learning Objectives

Key Takeaways

Key Points

  • An organization capability refers to the way its people and systems work together. A company’s culture is defined by how management fosters talent, mindsets, and collaboration.
  • Social and technical competencies and capabilities intersect in different ways. Organization capabilities such a talent management, collaboration, and accountability interact with and bring together all parts of the company.
  • shows four types of capabilities: essential capabilities, business necessity capabilities, strategic support capabilities, and advantage capabilities. These are all necessary, in different degrees, to the running of a business.

Key Terms

  • business capability: a collection or container of people, process and technology that is addressable for a specific purpose.
  • process: in reference to capabilities, a process is how the capability is executed.
  • competency: while organizations have capabilities, individuals have competencies.

Defining Business Capability

A business capability is what a company needs to be able to do to execute its business strategy. Another way to think about capabilities is as a collection of people, process, and technology gathered for a specific purpose. Capability management uses the organization’s customer value proposition to establish performance goals for capabilities based on value. It reduced inefficiencies in capabilities that contribute low customer impact, and focus efficiencies in areas with high financial leverage, while preserving or investing in capabilities for growth.

Capability vs. process

A process is how the capability is executed. Much of the reengineering revolution, or business process reengineering, focused on how to redesign business processes.

Business vs. organizational capability

An organization capability refers to the way systems and people in the organization work together to get things done. The way leaders foster shared mindsets, orchestrate talent, encourage speed of change, collaborate across boundaries, and learn and hold each other accountable define the company’s culture and leadership edge.

Capability vs. competency

Although often used interchangeably, “capability” and “competency” are quite different. Individuals have competencies while organizations have capabilities. Both competencies and capabilities have technical and social elements (see ).

A table that shows how individuals have functional and leadership competencies, while organizations have business and organizational capabilities.

Competencies and Capabilities: Individuals have competencies while organizations have capabilities.

At the intersection of the individual and the technical, employees bring functional skills and competencies such as programming, cost accounting, electrical engineering, etc. At the intersection of the individual and the social, leaders also have a set of competencies or skills such as setting a strategic agenda, championing change, and building relationships. At the intersection of the organizational and the technical are business capabilities. For example, a financial service firm must know how to manage risk and design innovative products.

Organization capabilities include talent management, collaboration, and accountability. They are the underlying DNA, culture, and personality of a firm, integrating all the other parts of the firm and bringing it together. When a group of leaders have mastered certain competencies, organization capabilities become visible. For example, when a group of leaders master “turning vision in to action” and “aligning the organization,” the organization a whole shows more “accountability. ”

Capability value contribution

Firms should assess the capabilities necessary to operate the business by examining the financial impact as well as the customer impact (see ).

A diagram that shows how strategic support capabilities, business necessity capabilities, advantage capabilities, and essential capabilities have a greater financial impact and a greater strategic and value prop impact.

Capability Value Contribution to Strategy: Different capabilities have different financial and strategic impacts.

Some capabilities directly contribute to the customer value proposition and have a high impact on company financials. These “advantage capabilities” are shown in the upper right. Value contribution is assured when performance is among the best in peer organizations at acceptable cost. In the top left quadrant, strategic support capabilities have high contribution in direct support of advantage capabilities. Value contribution is assured when performed above industry parity at competitive cost. Other capabilities shown in the bottom right are essential. They may not be visible to the customer, but contribute to company’s business focus and have a big impact on the bottom line. Value contribution is assured when performed at industry parity performance below competitors ‘ cost.

Competition

Companies must conduct competitive analysis to identify their competition accurately, and must avoid defining the competition too narrowly.

Learning Objectives

Classify the use of competitive data from an internal and external viewpoint

Key Takeaways

Key Points

  • Defining competitors too narrowly leads to the chance that an unidentified competitor will capture market share without the company’s knowledge.
  • Competition focuses on the wants and needs of individuals’ being satisfied, not the product being produced. Companies and marketers must keep this in mind when evaluating the competition.
  • Barriers to entry represent business practices or conditions that make it difficult for new or existing firms to enter the market. A company in a dominant market position can create barriers to entry for potential entrants.

Key Terms

  • competitive analysis: An assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats.
  • marketing mix: A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.

Competitive Analysis

Competitive analysis focuses on opportunities and threats that may occur because of actual or potential competitive changes in strategy. Competitive analysis starts with identifying current and potential competitors. For example, who are General Motors’ competitors? If you named companies like Toyota, Ford, Chrysler, and Honda, you are right, but you have just begun. outlines some of General Motors’ competitors, and outlines some of Nintendo’s competitors.

A chart analyzing Nintendo's competitors including Game Suppliers, Providers, and In-home. As well as Out-of-home, and Hobbies.

Nintendo: An analysis of Nintendo’s competitors.

A chart analyzing General Motor's competitors including Autos, Repairs, Parts, and others.

General Motors: An analysis of General Motors’ competition.

It is essential that the marketer begin the analysis by answering the following question: “What criteria can be used to identify a relevant set of competitors?” It is clear from the two examples above that an accurate accounting of competitors is much broader than the obvious. If competitors are defined too narrowly, there is a risk that an unidentified competitor will take market share away without the company’s knowledge. A company’s strategy must address all competitors, not just the leaders in a field. Competition is a never ending challenge that must be addressed on an ongoing basis because consumers are exposed to many types of products, to many different marketing concepts which, if compelling enough will prompt them to switch and make different choices on the products or services they buy.

For example, General Motors competes against Ford, Chrysler, Toyota, and other auto manufacturers. They also compete against Sears in the repair market, the subway in large cities, airlines, and Schwinn, among people for whom bicycle riding is popular. Nintendo competes against Sega in the video game market. It also competes against Blockbuster Video, local gyms, board games, the theater, and concerts. Competition focuses on individuals’ wants and needs being satisfied, not the product being produced. General Motors, then, is competing to satisfy the public ‘s need for transportation. Nintendo is competing to satisfy the need for entertainment.

Once competitors are correctly identified, it is helpful to assess them relative to factors that drive competition: entry, bargaining power of buyers and suppliers, existing rivalries, and substitution possibilities. These factors relate to a firm’s marketing mix decisions and may be used to create a barrier to entry, increase brand awareness, or intensify a fight for market share. Barriers to entry represent business practices or conditions that make it difficult for new or existing firms to enter the market. Typically, barriers to entry can be in the form of capital requirements, advertising expenditures, product identity, distribution access, or switching costs.

In industries such as steel, automobiles, and computers, the power of buyers and suppliers can be very influential. Powerful buyers exist when they are few in number, there are low switching costs, or the product represents a significant share of the buyer’s total costs. This is common for large retailers such as Walmart and Home Depot. Existing competitors and possible substitutes also influence the dynamics of the competition. For example, in slow-growth markets, competition is more severe for any possible gains in market share. High fixed costs also create competitive pressure for firms to fill production capacity. For example, hospitals are increasing advertising budgets in a battle to fill beds, which represents a high fixed cost.

The International Competitive Environment

Entering an international market is similar to doing so in a domestic market, in that a firm seeks to gain a differential advantage by investing resources in that market. Often local firms will adopt imitation strategies, sometimes successfully.

Calculating Market Share

Market share is an important indicator of the strength of a business in it’s industry, even though there is no standard way to measure it.

Learning Objectives

Indicate the method, purpose and importance of market share calculation

Key Takeaways

Key Points

  • Market share is a key measure of competitiveness. However, firms should be wary of making decisions based on how they will affect their own market share, or that of competitors.
  • Unit market share measures the percentage of units sold by a company compared to total units sold in the market, while revenue market share measures the revenue of a company compared to total revenue in the market. Both methods have useful implications for managers.
  • Market share is not a perfect proxy of market dominance, as the influences of customers, suppliers, competitors in related industries, and government regulations must be taken into account when assessing market dominance (none of which are considered in the measurement of market share).

Key Terms

  • Herfindahl Index: A measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.
  • Market Share: The percentage of some market held by a company.
  • market dominance: A measure of the strength of a brand, product, service, or firm, relative to competitive offerings.

Market Share

Market share is the percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity. Increasing market share is one of the most important objectives of business. The main advantage of using market share as a measure of business performance is that it is less dependent upon macro-environmental variables, such as the state of the economy or changes in tax policy. In a survey of nearly 200 senior marketing managers, 67% responded that they found the “dollar market share” metric very useful, while 61% found “unit market share” very useful (both methods are discussed below).

Purpose

Market share is a key indicator of market competitiveness—that is, how well a firm is doing against its competitors. It enables managers to judge not only total market growth or decline but also trends in customers’ selections among competitors. Research has also shown that market share is a desired asset among competing firms. Experts, however, discourage making market share an objective and criterion upon which to base economic policies. The aforementioned usage of market share as a basis for gauging the performance of competing firms has fostered a system in which firms make decisions with regard to their operation with careful consideration of the impact of each decision on the market share of their competitors.

Construction

— Unit market share: The units sold by a particular company as a percentage of total market sales, measured in the same units.

Unit market share (%) = 100 * Unit sales(#) / Total Market Unit Sales(#)

Unit sales (#) = Unit market share (%) * Total Market Unit Sales (#) / 100

Total Market Unit Sales (#) = 100 * Unit sales (#) / Unit market share (%)

— Revenue market share: Revenue market share differs from unit market share in that it reflects the prices at which goods are sold. In fact, a relatively simple way to calculate relative price is to divide revenue market share by unit market share.

Revenue market share (%) = 100 * Sales Revenue ($) / Total Market Sales Revenue ($)

Methodologies

There is no generally acknowledged best method for calculating market share. This is unfortunate, as different methods may yield not only different computations of market share at a given moment, but also widely divergent trends over time. The reasons for these disparities include variations in the lenses through which share is viewed (units versus dollars), where in the channel, measurements are taken (shipments from manufacturers versus consumer purchases), market definition (scope of the competitive universe), and measurement error. Nonetheless, both methods have useful implications for managers.

Market Dominance

Market dominance is a measure of the strength of a brand, product, service, or firm, relative to competitive offerings. In defining market dominance, you must see to what extent a product, brand, or firm controls a product category in a given geographic area.

Methodology

There are several ways of calculating market dominance. The most direct is market share, discussed above. However, market share is not a perfect proxy of market dominance. The influences of customers, suppliers, competitors in related industries, and government regulations must be taken into account. Although there is no set relationship between dominance and market share, the following are general criteria: A company, brand, product, or service that has a combined market share exceeding 60% most probably has market power and market dominance. A market share of over 35% but less than 60% is an indicator of market strength but not necessarily dominance. A market share of less than 35% is not an indicator of strength or dominance and will not raise anti-competitive concerns by government regulators.

The concentration ratio of an industry is used as an indicator of the relative size of leading firms in relation to the industry as a whole. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the combined market share of the four largest firms, as a percentage, in the total industry. The higher the concentration ratio, the greater the market power of the leading firms.

The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. It ranges from 0 to 10,000, moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the Herfindahl index indicate a loss of pricing power and an increase in competition, and vice versa.

Some examples of market dominant products are: Photoshop, iPod, Facebook, Microsoft Office, Intel and Google. Market share data can usually be shown in pie charts, bar graphs, or line graph such as this one.

A line graph with many lines of various colors. Years on the x-axis and percentages on the Y-axis. The red line is significantly steeper than the rest.

Browser Market Share: A line graph is one way to monitor market share over time.

Monitoring Competition

Companies must monitor competition in order to make intelligent marketing decisions based on how competitors operate.

Learning Objectives

Classify the purpose of and methodology of monitoring competition from a marketing perspective

Key Takeaways

Key Points

  • Marketing myopia is common, and refers to situations where companies fail to properly identify the extent of their competition.
  • Some companies that are giants in their industry, such as Coke and Pepsi, have been competing for so long that the result is a stalemate, despite billions spent by each on marketing.
  • Competitive intelligence is a legal business practice, focused on the external environment, that involves gathering intelligence and turning it into useful information for business decisions.

Key Terms

  • marketing myopia: Marketing myopia occurs when companies incorrectly identify the extent of their competition.
  • competitive intelligence: The action of defining, gathering, analyzing, and distributing intelligence about products, customers, and competitors to support executives and managers.

Monitoring Competition

As a fundamental practice, marketing companies must thoroughly understand their competitors ‘ strengths and weaknesses. This means more than making sweeping generalizations about the competitors. It means basing intelligent marketing decisions on facts about how competitors operate, as well as determining how best to respond. Often the identification of competitors is fairly straightforward. It is the supermarket on the next block, or the three other companies that manufacture replacement windshields. There are instances, however, when the identification of a competitor is not clear.

Marketing expert Theodore Levitt coined the term “marketing myopia” several years ago to describe companies that incorrectly identify their competition. Levitt argued, for example, that the passenger train industry made the mistake of restricting their competition to other railroads, instead of all mass transit transportation alternatives, including automobiles, airlines, and buses. Today we see the same mistake being made by companies in the entertainment industry (movie theaters, restaurants, and resorts), who assume that their only competition is like-titled organizations. Since practically no marketer operates as a monopoly, most of the strategy issues considered by a marketer relate to competition.

A train pulling into the station.

Transportation Industry: Levitt argued that the passenger train industry erred in restricting competition to other railroads instead of all mass transit transportation alternatives.

Visualize marketing strategy as a huge chess game where one player is constantly making his or her moves contingent on what the other player does. Some U.S. rivals, like Coke and Pepsi, McDonald’s and Burger King, and Ford and General Motors, have been playing the game so long that a stalemate is often the result. In fact, the relative market share owned by Coke and Pepsi has not changed by more than a percentage or two despite the billions of dollars spent by each on marketing. The desire of companies to accurately gauge competitors has led to the growing popularity of a separate discipline—competitive intelligence. This field involves gathering as much information about competitors through any means possible, usually just short of breaking the law. More is said about this process in the integrated marketing box that follows.

Competitive Intelligence

A broad definition of competitive intelligence is the action of defining, gathering, analyzing, and distributing intelligence about products, customers, competitors, and any aspect of the environment needed to support executives and managers in making strategic decisions for an organization.

Key points of this definition:

  • Competitive intelligence is an ethical and legal business practice, as opposed to industrial espionage which is illegal.
  • The focus is on the business environment.
  • There is a process involved in gathering information, converting it into intelligence and then utilizing this in business decision-making.

A more focused definition of competitive intelligence regards it as the organizational function responsible for the early identification of risks and opportunities in the market before they become obvious. Experts also call this process the early signal analysis. This definition focuses attention on the difference between dissemination of widely available factual information (such as market statistics, financial reports, and newspaper clippings) performed by functions such as libraries and information centers, and competitive intelligence, which is a perspective on developments and events aimed at yielding a competitive edge.