Unit 5 competition

LEAD-IN

Read the text and answer the questions that follow.

Whether we realize it or not, competition is an integral part of our everyday life. Competition in society and business is a contest between individuals, groups, companies for a niche, for resources and goods, for prestige, recognition, awards, or group or social status, for leadership. It is the opposite of cooperation. Competition is believed to occur naturally between individuals or companies who co-exist in the same environment. Similar to animals that compete over territory, water supplies, food, mates, and other biological resources (basic needs , according to Maslow’s pyramid), humans compete usually for food and mates, though when these needs are met, deep rivalries often arise over the pursuit of wealth, prestige, and fame, social status or leadership.

Competition is also a major tenet in market economy, and business is often associated with competition as most companies are in competition with at least one other firm over the same group of customers. Besides, competition inside a company is usually stimulated to reach a higher quality of services or products that the company produce or develop.

Like it or not, competition exists on all levels: among individuals, groups of people, companies and even economies and states. Although there are competition rules, they may be violated to support domestic businesses, industries or consumers in a protectionist effort.

Competition in business is defined by economists as allocating productive resources to their most highly-valued uses and encouraging efficiency. Competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly). Cartel is an agreement among two or more firmsin the same industry to collaborate infixing prices and/or carving up the market and restricting the amount of outputthey produce. It is particularly common when there is anoligopoly. The aim of such collusion is to increaseprofitby reducingcompetition. Identifying andbreaking up cartels is an important part of the competition policy overseen by antitrustregulators in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper. The desire to form cartels is strong. As AdamSmithput it, 'people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends ina conspiracy against the public or in some contrivance to raise prices.'

Businesses compete against each other to sell their products andto increaseordefend existingmarket share.When a company succeeds infinding its nicheorcreating a new market,competitors enter the industry, offering similar products butat a lower price. Thus they applyprice competition methods. Moreover, sometimes the rivals trydumping (selling below cost price) the companyout of the market. Therefore, to stop their customers fromswitching toalternative products, businesses mustmaintain a competitive advantage. This can be achieved bydifferentiating the product or service, by alower cost of production, possibly througheconomies of scale,or by controlling thesource of supply ordistribution network; the company can also provide abetter quality, reliability, flexibility, adaptability, anda longer guarantee period forits goods, as well asafter-sales servicing – all of these arenon-price competitiontechniques. Companies compete by constantlyupdating, upgrading, adapting, andrelaunching their products, as well as bymodernizing their business processesandmethods of production. Globalization has transformed even giant corporations: most have shifted their production fromhigh-volume to high-value, fromstandardized to customized. Besides, successful companies are always finding new markets and new opportunities to grow.

Businesses live or die, of course, by their sales. And it is the survival of the fittest.

Sales figuresshowunit sales,the number of goods or services sold, andsales revenue(s), orsales turnover, - the money resulting from those sales. When considering revenues over time, commentators talk aboutthe revenues streamthat a business or product generates.

Costs (also referred to as expenses or expenditures) are equally important while assessing a company performance - it is the money that a business spends to produce goods or to render services. Businesses of different kinds have differentcost structuresand define, calculate, and refer to their costs in different ways.

Fixed costsdo not vary in relation to the output level of goods or services;variable costs do. For example, in its quest to get ‘lean and mean’, US industry has exchanged variable costs for fixed costs. Then many of the blue-collar workers who used to make things have been replaced by more productive machines, usually financed by bank loans. But while the workers could be laid off when recession occurred, machines can’t be fired, and interest payments don’t go away.

Direct costsare directly related to things produced. In manufacturing, for example, direct costs include raw materials and wages, whileindirect costs may include things like social security chargeson top ofthe wages.

Overhead costs oroverheadsare used to mean different things, but usuallycoverall regular non-production costs of running a business, such as salaries and telephone bills, and can be extended, for example, to include the cost of marketing and R&D activities.

Most competitive companiesareagile, flexible, adaptive and quick to respond to the needs of market,in which case they are approvingly calledmarket-driven, market-led ormarket-oriented.Organizations that are market-oriented, i.e. those thattrack and respond to customer needs and preferences, can bettersatisfy customersand henceperform at higher levels.

A market sector orsegment is a part of a large market, for example, the market for trucks is seen as part of the overall market for vehicles.Segment is also used to refer to a particularcategory of customers. When companies try to identify or appeal to these specific groups of customers, they talk aboutsegmenting a market in a process ofsegmentation. Market share is the proportion of sales that a company or a product has in a particular market. Themarket leader is the company or product with the biggest share.Market growth is the rate at which the overall market is growing (or not, as the case may be).

Naturally, companies strive for higher margin, wheregross margin isthe difference betweentheselling priceof goods and theirproduction cost, without taking into account other costs such asmarketing and general overheads. A company’s or product’sprofit marginis the difference between its total costs and itssales revenues. This profit margin may be referred to asnet marginto distinguish it from gross margin.Marginis expressed as a percentage of theselling price. It can also be expressed as a percentage of the total cost of goods: in this case it is referred to as themark-up.

These are measures of a product’s or a business’sprofitability: ROE - return on equity, or ROC - return on capital. When sales reach the level whererevenues match costs, a company or productbreaks even. This isbreak even or thebreakeven point, a crucial figure when calculating theROI – return on investment for a given business or product. Thecontribution generated by each product in aproduct lineor by each business in a group is the amount it represents inreturns of overall profit.

Cannibalize. Eating people is wrong. Eating your own business may not be.Firmsused to be reluctantto launch new productsandservicesthatcompeted withwhat they were already doing, as the new thing wouldeat into (cannibalize) their existing business. In today's innovative,technology-intensive economy, however, a willingness to cannibalize is more oftenseen as a good thing.This is becauseinnovationoften takes the form of what economists callcreative destruction, in which a superior new product destroys the market for existing products. In this environment, the best course of action for successful firms that want toavoid losing their market to a rivalwith an innovation may be to carry out the creative destruction themselves.

Fair or perfect competitionis beneficial both for businesses and consumers who can enjoy a greater choice of better products at cheaper prices, while any sort ofimperfect competition(e.g. monopoly, cartel or fixed prices practices) is to be ruled out of the market by the authorizedmarketorcompetition regulators, who regulate and enforce competition laws and consumer protection laws. Manynationsimplement competition laws, and there isgeneral agreement on acceptable standards of behavior. The degree to which countriesenforce their competition policyvaries substantially. Regulators may form supranational or international alliances like the ECA (European Competition Authorities), the ICN (International Competition Network), and the OECD (Organization for Economic Co-operation and Development).

Competition can have both beneficialanddetrimental effects. Positively, competition may serve as a form ofrecreationor a challenge provided that it is non-hostile. On the negative side, competition cancause injury and loss tothose involved, anddrain valuable resources and energy. For people, competition can be expensive on many levels, not only in lives lost to war, physical injuries, and damaged psychological well beings, but also in the health effects from everyday civilian life caused by work stress, long work hours, abusive working relationships, and poor working conditions, that detract from the enjoyment of life, even as such competitionresults in financial gains forthe owners.