Competition
Competition
The main conpetitors in a particular industry are its key players. Smaller competitors may be referred to as minor players. Competition in an industry can be cut-throat, intense, keen, stiff, ferocious, fierce, or tough. The usual pattern for a new industry is to have a large number of competitors: there may be start-ups (completely new companies), and there may be companies already established in other sectors that also want to get into the industry, perhaps, by setting up a new subsidiary or business unit.
Competitive forces
An important strategic thinker Michael Porter in his books, Competitive Strategy (1980), and Competitive Advantage (1985), argues that growth and diversification alone do not guarantee a company’s long-term success and that size alone guarantees nothing: industry leadership is an effect of competitive advantage, which derives from the value a company creates. Porter outlines the five competitive forces at work in any industry: (1) rivalry among existing firms, as inter-firm competition affects prices, advertising and sales budgets, and so on; (2) the threat of new entrants and new competitors in an industry as it limits the prices a company can charge, and often results in expensive investment designed as a deterrent; (3) the threat of substitutes as the possibility of consumers switching to cheaper substitute products limits prices; (4) the bargaining power of buyers because the power of large buyers such as retail chains also limits prices, and (5) the bargaining power of suppliers as powerful suppliers determine the cost of raw materials.
Competitive forces
M. Porter says that competitive advantage can be based on: cost leadership – offering products or services at the lowest cost; this is one strategy to adopt in volume industries where competitors produce large numbers of similar products; differentiation – offering products or services that give added value in terms of quality or service compared to competitors; focus on a narrow market segment. The danger, says Porter, is when a company does not follow any of these particular strategies and is stuck in the middle.
Industries and their players
In some industries there are few companies: these industries are concentrated. Other industries are fragmented: for example, there are millions of restaurants worldwide, and even the largest chain, McDonalds, only has a market share of less than one percent in terms of all restaurant meals served worldwide. Some industries have low entry barries, for example, – anyone with a small amount of capital can open a restaurant. If an industry has low entry barries and is attractive because of its high potential profitability, there will be new entrants. This was the case for Internet service providers with a lot of companies offering this service. Other industries, like steel, require massive investments in equipment, know-how, etc. – these are high entry barriers and new entrants to the industry are rare.
Concept check
Define key and minor players in an industry, and competitive forces.
What is the central idea of Michal Porter’s theory?
What competitive forces does M. Porter outline? In what way do they influence a company’s long-term success in the market?
What strategies does M. Porter consider to be important to retain a competitive advantage and to achieve success?
In what way do low and high entry barriers influence the market structure?
Read the statements and decide if they are true or false. Comment on your viewpoint. Use I'm absolutely convinced that, as I see it, as far as I’m concerned, I completely agree with the statement, I totally disagree with it.
The major competitors in the field are its key players.
A new industry usually has a small number of competitors.
The main distinguishing factor between concentrated and fragmented industries is the number of participants in the market.
Industries which require a lot of investment have low entry barriers.
Investment is an ability of a business to earn profits.
High entry barriers encourage new entrants in an industry.
READING II