Ford Motor Company's Competitive Product Tear-Down Process

1. Purchase the product. The high cost of product teardown, particularly for a carmaker, gives some indication of the value successful competitors place on the knowledge they gain.

2. Tear the product down-literally. First, every removable component is unscrewed or unbolted; the rivets are undone; finally, individual spot welds are broken.

3. Reverse-engineer the product. While the competitor's car is being dismantled, detailed drawings of parts are made and parts lists are assembled, together with analyses of the production processes that were evidently involved.

4. Build up costs. Parts are costed out in terms of make-or-buy, the variety of parts used in a single product, and the extent of common assemblies across model ranges. Among the important facts to be established in a product teardown, obviously, are the number and variety of components and the number of assembly operations. The costs of the processes are then built up from both direct labor requirements and overheads (often vital to an understanding of competitor cost structures).

5. Establish economies of scale. Once individual cost elements are known, they can be put together with the volume of cars produced by the competitor and the total number of people employed to develop some fairly reliable guides to the competitor's economies of scale. Having done this, Ford can calculate model-run lengths and volumes needed to achieve, first, break even and then profit.

Source: Robin Leaf, "How to Pick Up Tips from Your Competitors," Director (February 1978): 60.

Finding little useful information available on dishwasher design, the director of research and development decided to begin by investigating the basic mechanics of the dishwashing process. Accordingly, she set up a series of pilot projects to evaluate the cleaning performance of different jet configurations, the merits of alternative washing-arm designs, and the varying results obtained with different types and quantities of detergent on different washing loads. At the end of a year she had amassed a great deal of useful knowledge. She also had a pilot machine running that cleaned dishes well and a design concept for a production version. But considerable development work was still needed before the prototype could be declared a satisfactory basis for manufacture.

To complicate matters, management had neglected to establish effective linkages among the company's three main functions—marketing, technology, and production. So it was not until the technologists had produced the prototype and design concepts that marketing and production began asking for revisions and suggesting new ideas, further delaying the development of a marketable product.

So much for the first company, with its fairly typical traditional response to market opportunities. The second company, which happened to be Japanese, started with the same marketing intelligence but responded in a very different fashion.

First, it bought three units of every available competitive dishwasher. Next, management formed four special teams: (a) a product test group of marketing and technical staff, (b) a design team of technologists and production people, (c)

a distribution team of marketing and production staff, and (d) a field team of production staff.

The product test group was given one of each competitive model and asked to evaluate performance: dishwashing effectiveness, ease of use, and reliability (frequency and cause of breakdown). The remaining two units of each competitive model were given to the design team, who stripped down one of each pair to determine the number and variety of parts, the cost of each part, and the ease of assembly. The remaining units were stripped down to "life-test'' each component, to identify design improvements and potential sources of supply, and to develop a comprehensive picture of each competitor's technology. Meanwhile, the distribution team was evaluating each competitor's sales and distribution system (numbers of outlets, product availability, and service offered), and the field team was investigating competitors' factories and evaluating their production facilities in terms of cost of labor, cost of supplies, and plant productivity.

All this investigating took a little less than a year. At the end of that time, the Japanese still knew a lot less about the physics and chemistry of dishwashing than their British rivals, but the knowledge developed by their business teams had put them far ahead. In two more months they had designed a product that outperformed the best of the competition, yet would cost 30 percent less to build, based on a preproduction prototype and production process design. They also had a marketing plan for introducing the new dishwasher to the Japanese domestic market before taking it overseas. This plan positioned the product relative to the competition and defined distribution system requirements in terms of stocking and service levels needed to meet the expected production rate. Finally, the Japanese had prepared detailed plans for building a new factory, establishing supply contracts, and training the labor force.

The denouement of this story is what one might expect: The competitive Japanese manufacturer brought its new product to market two years ahead of the more traditionally minded British manufacturer and achieved its planned market share 10 weeks later. The traditional company steadily lost money and eventually dropped out of the market.

As the above anecdote shows, competitive analysis has three major objectives:

1. It allows you to understand your position of comparative advantage and your competitors' positions of comparative advantage.

2. It allows you to understand your competitors' strategies—past, present, and as they are likely to be in the future.

3. It is a key criterion of strategy selection, the element that makes your strategies come alive in the real world.

Gathering Competitive Intelligence

Knowledge about the competition may be gained by raising the following questions. To answer each question requires systematic probing and data gathering on different aspects of competition.

• Who is the competition? now? five years from now?

• What are the strategies, objectives, and goals of each major competitor?

• How important is a specific market to each competitor and what is the level of its commitment?

• What are the relative strengths and limitations of each competitor?

• What weaknesses make competitors vulnerable?

• What changes are competitors likely to make in their future strategies?

• So what? What will be the effects of all competitors' strategies, on the industry, the market, and our strategy?

Essentially, knowledge about competitors comprise their size, growth, and profitability, the image and positioning of their brands, objectives and commitments, strengths and weaknesses, current and past strategies, cost structure, exit barriers limiting their ability to withdraw, and organization style and culture. The following procedure may be adopted to gather competitive intelligence:

1. Recognize key competitors in market segments in which the company is active.

Presumably a product will be positioned to serve one or more market segments. In each segment there may be different competitors to reckon with; an attempt should be made to recognize all important competitors in each segment. If the number of competitors is excessive, it is sufficient to limit consideration to the first three competitors. Each competitor should be briefly profiled to indicate total corporate proportion.

2. Analyze the performance record of each competitor. The performance of a competitor can be measured with reference to a number of criteria. As far as marketing is concerned, sales growth, market share, and profitability are the important measures of success. Thus, a review of each competitor's sales growth, market share, and profitability for the past several years is desirable. In addition, any ad hoc reasons that bear upon a competitor's performance should be noted. For example, a competitor may have lined up some business, in the nature of a windfall from Kuwait, without making any strategic moves to secure the business. Similar missteps that may limit performance should be duly pointed out. Occasionally a competitor may intentionally pad results to reflect good performance at year end. Such tactics should be noted, too. Rothschild advises the following:

To make it really useful, you must probe how each participant keeps its books and records its profits. Some companies stress earnings; others report their condition in such a way as to delay the payment of taxes; still other bookkeep to increase cash availability.

These measurements are important because they may affect the company's ability to procure financing and attract people as well as influence stockholders' and investors' satisfaction with current management.6

3. Study how satisfied each competitor appears to be with its performance. Refer to each competitor's objective(s) for the product. If results are in concert with the expectations of the firm's management and stakeholders, the competitor will be satisfied. A satisfied competitor is most likely to follow its current successful strategy. On the other hand, if results are at odds with management expectations, the competitor is most likely to come out with a new strategy.

4. Probe each competitor's marketing strategy. The strategy of each competitor can be inferred from game plans (i.e., different moves in the area of product, price, promotion, and distribution) that are pursued to achieve objectives.

Information on game plans is available partly from published stories on the competitor and partly from the salespeople in contact with the competitor's customers and salespeople.

To clarify the point, consider a competitor in the small appliances business who spends heavily for consumer advertising and sells products mainly through discount stores. From this brief description, it is safe to conclude that, as a matter of strategy, the competitor wants to establish the brand in the mass market through discounters. In other words, the competitor is trying to reach customers who want to buy a reputable brand at discount prices and hopes to make money by creating a large sales base.

5. Analyze current and future resources and competencies of each competitor. In order to study a competitor's resources and competencies, first designate broad areas of concern: facilities and equipment, personnel skills, organizational capabilities, and management capabilities, for example. Refer to the checklist in Exhibit 4-4. Each area may then be examined with reference to different functional areas (general management, finance, research and development, operations, and especially marketing). In the area of finance, the availability of a large credit line would be listed as a strength under management capabilities. Owning a warehouse and refrigerated trucks is a marketing strength listed under facilities and equipment. A checklist should be developed to specifically pinpoint those strengths that a competitor can use to pursue goals against your firm as well as other firms in the market. Simultaneously, areas in which competitors look particularly vulnerable should also be noted. The purpose here is not to get involved in a ritualistic, detailed account of each competitor but to demarcate those aspects of a competitor's resources and competencies that may account for a substantial difference in performance.

6. Predict the future marketing strategy of each competitor. The above competitive analysis provides enough information to make predictions about future strategic directions that each competitor may pursue. Predictions, however, must be made qualitatively, using management consensus. The use of management consensus as the basic means for developing forecasts is based on the presumption that, by virtue of their experience in gauging market trends, executives should be able to make some credible predictions about each competitor's behavior in the future. A senior member of the marketing research staff may be assigned the task of soliciting executive opinions and consolidating the information into specific predictions on the moves competitors are likely to make.

7. Assess the impact of competitive strategy on the company's product/market. The delphi technique, examined in Chapter 12, can be used to specify the impact of competitive strategy. The impact should be analyzed by a senior marketing personnel, using competitive information and personal experiences on the job as a basis. Thereafter, the consensus of a larger group of executives can be obtained on the impact analysis performed previously.

Sources of Competitive Information

Essentially, three sources of competitive intelligence can be distinguished: (a) what competitors say about themselves, (b) what others say about them, and (c) what employees of the firm engaged in competitive analysis have observed and learned about competitors. Information from the first two sources, as shown in Exhibit 4-5, is available through public documents, trade associations, government, and

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