Competition

One of the key issues in the narrow external environment is competition. As a process, competition is trying to be better among the companies producing the same or similar products in the same industry. In global markets, competition comes from an increasingly wide range of sources. To protect its position as a successful organization, every company must identify new opportunities, understand and recognize the types and sources of competition and, where possible, predict their activities.

Underlying any analysis of competition is the economic concept of supply and demand.

In simple terms, a market begins life as a monopoly, with one supplier. A company identifies a need, develops a product and launches it at the price that will generate a net profit. With obvious rewards to be gained and without too many barriers to entry, competitors will probably be quick to enter the market, often with improved products. The story of the Sony Walkman portable music player in its cassette-tape, compact disk, mini–disk and solid state MP3 and video formats is an example.

As supply increases to meet demand, prices tend to fall. While rewards are still considered to be worthwhile, competition tends to increase, often until saturation is reached. When supply exceeds demand, there is a shakeout of weaker suppliers and only the stronger and most differentiated competitors remain in the market. Tight cost controls, economies of scale and the cost savings resulting from experience play a significant part in determining which suppliers continue to compete.

When a market reaches relative equilibrium of supply and demand, it does not remain static. The remaining players then develop competitive strategies based on:

• price

• high volume

• low cost

• product and service differentiation

• market niche domination.

Markets may become polarized; in which case those suppliers caught in the middle may find it increasingly difficult to remain profitable.

Supermarkets must be taken into consideration while speaking about competition.

In UK food retailing, large supermarkets became concentrated in the hands of Tesco, Sainsbury’s and Asda/Wal–Mart, all of which entered the battle for Safeway in 2003. In 2004, the Competition Commission allowed Morrisons to take over Safeway because the acquisition did not give a monopolistic advantage to any player. Sainsbury’s struggled to deliver both top quality and low prices while, at the other end of the scale, family-run corner shops with long opening hours survived. Companies in the middle, such as Gateway, suffered badly and were taken over.

Concentration in the hands of buyers and suppliers is a growing trend, and one that represents a threat to many smaller companies. Concentration often results from mergers and take–over. Large companies may reduce the number of their suppliers to improve efficiency. This creates an interdependency that can benefit both supplying and buying companies. It also leaves smaller companies to find niches in which to survive.

Competitor analysis can be applied to an industry or a market, and preferably both. In its narrowest definition, a firm's competitors are other firms in the same industry supplying similar products. Competitor analysis helps to identify the behavior patterns competitors might adopt in response to marketing tactics such as price–cutting or promotion. Kotler describes the four most common competitor reaction profiles:

• the laid–back competitor, which does not react quickly or strongly to a competitive move. This may be because it is confident of customer loyalty, because its strategy is to “milk” the business or because it is ill–informed.

• the selective competitor, which will react only to certain types of attack. For example, it may react to price cuts but not to advertising.

• the tiger competitor, which reacts quickly and strongly to anything it sees as an attack, and will fight to the last. Kotler adds that it is always better to attack a sheep than a tiger.

• the stochastic competitor, which does not have any predictable reaction pattern.

A particular competitive pattern may permeate a whole industry. Markets with many similar competitors tend to be unstable and in state of a perpetual conflict. Undifferentiated commodity markets, for example, tend to have price wars as a result of the overcapacity. Analyzing an industry’s competitive pattern can help directors and marketing managers make strategic and tactical market decisions.

Exercise 9. Read the text once again and express the contents of every passage in one sentence.

Exercise 10. Fill in the gaps in this passage with the words under the line; learn the degrees of comparison to expand your grammar and vocabulary on the topic.