CHAPTER 3
BUSINESS
COMPETITION
BACKGROUND
The traditional concept of business competition whereby
players within the industry and direct competitors are very
much concerned with how to outdo or outwit each other and
be market leaders in their territory remains to be a concern of
business managers. With the advent of the concepts of
strategic management, the popularization of Porter’s five
forces model and a variety of factors that make business
somehow difficult, the traditional view on business
competition has been waning out. Michael Porter’s competition
model has played a key role and influence in the practice of
strategic management.
RIVALRY AMONG COMPETING SELLERS
Rivalry among competing sellers or producers constitutes the
traditional view of business competition and this is positioned in the
middle block in Porter’s competition model. The middle block in
Porter’s business competition model refers to the key players or
direct competitors within the industry or sector offering the same or
similar products or services.
Thompson and Strickland identified the matters of utmost
concern; in this group are the following issues:
is price competition vigorous;
active efforts to improve quality;
are rivals racing to offer better performance features;
are rivals racing to offer better customer service;
a lot of advertising/sales promotions;
active product innovation; and
active use of other weapons of rivalry.
WHAT CAUSES RIVALRY TO BE STRONGER?
Rivalry among competing sellers may be strong or weak depending on
certain conditions. Among the factors that result to strong or active
rivalry and competition among businesses engaged in similar products
or services are as follows:
active jockeying for positions among rivals and frequent launches
of new offensives to gain sales and market share;
a number of firms that relatively equal in size and capability;
WHAT CAUSES RIVALRY TO BE STRONGER?
slow market growth;
industry conditions tempt some firms to go on the offensive to
boost volume and market share;
customers have low costs in switching to rival brands;
a successful strategic move carries a big payoff;
costs more to get out of business than to stay in; and
firms have diverse strategies, corporate priorities, resources, and
countries of origin.
DETERMINANCE OF RIVALRY
Pitts and Lei (2000) have identified determination to rivalries
within the sector such as the following:
the level of industry’s growth;
fixed (or storage) cost/value added;
intermittent overcapacity;
product differences;
brand identity;
switching costs; and
concentration and balance.
Suppliers of key inputs
businesses that provide essential raw materials,
components, or services that companies need to
produce their products. While they aren't direct
competitors, they can influence the market by
controlling prices, availability, and quality. Some
suppliers may even expand into the industry,
turning into competitors themselves.
Competitive Force of Suppliers
Their materials are a big part of production costs.
It’s expensive or difficult for businesses to switch to
another supplier.
They have strong reputations and increasing demand.
They can produce certain components cheaper than
the companies they supply.
There are few or no substitutes for their materials.
Their buyers (companies) don’t make up a large
portion of their revenue.
Determinants of Supplier Power
The uniqueness of the materials they provide.
How costly and difficult it is for businesses to change
suppliers.
Whether there are alternative suppliers in the market.
If a few suppliers control most of the supply (supplier
concentration).
How dependent suppliers are on bulk purchases from
companies
The importance of their materials to overall product
costs and differentiation.
Factors Affecting Supplier Bargaining
Power
(a) Rival sellers are forming long-term strategic
partnerships with select suppliers to:
Get faster access to better materials.
Improve product quality.
Reduce costs by making supply chains more
efficient.
(b) A strong competitive advantage can come from
effectively managing supply-chain relationships
Substitutes
Generally refer to products or services which
prospective buyers can buy or source
elsewhere whose utility, function and/or use is
similar (or can act as substitute) to a desired PRODUCT SWITCHING
product for a lesser price or other reasons. can lessen the the
demand for the
Substitute products or services are capable of product; hence,
providing similar benefits, value or utility to
detrimental to the
the buying party; hence, it is but natural for
competing players as
consumers to exercise their choice given the
limitations at their end. a whole.
Factors affecting competition from substitutes
Product substitutes could be either weak or strong and thev may or may
not be a matter that should bother strategists. However. when substitutes
come in strong or threaten the company or the industry as a whole, this is
something that should be seriously looked into.
The following scenarios will indicate whether or not substitute products
are a strong force and hence should be given due consideration:
a) sales of substitutes are growing rapidly;
b) producers of substitute products add new capacities;
c) profits of substitute products are up; and
d) popularity of substitute products is growing.
Determinants of substitution threats
The extent of threats of product substitution is indicated by the
following developments:
a) relative price of the subsubstitutes
b) performnance of the substitutes in the industry;
c) switching costs involved in the act of substitution;
d) buyer's propensity or penchant for substitutes; and
e) regulatory or other factors that tend to promote product
substitution.
Switching cost
Switching cost is a factor that leads prospective customers to
entertaining or considering the idea of buying or patronizing other
products for a variety of reasons.
The switching cost involved (i.e., the price difference between the old
and the new product being offered) and the benefits it promises
results to a decision to consider the idea of buying (or not) the
substitute offered. When the switching cost (i.e., additional cost to the
customer is low and considered tolerable) is perceived to be low or
affordable on the part of the buyer, the opportunity for substitute
product or service to displace a traditional product is deemed high.
ROLE OF
BUYERS
Buyers are objects of desire of businesses competing in the same segment or industry.
They refer to prospective clients, buyers, users and consumers of the product or service
whose varying purchasing power and desire to bargain for a price or terms of payment
can affect competitiveness of certain players in the market.
Traditionally, prospective clients or buyers are simply considered as target market for
business organizations. For strategists, buyers are not simply target markets but they
also constitute a sector acting as driving force that can disturb competition or market
conditions for after all, market is all about demand and supply condition.
COMPETITIVE FORCE OF
BUYERS
Buyers are considered a strong competitive force in a variety
of ways. This is particularly true when the market is
characterized by the so-called buyers' market condition (i.e.,
buyers influence price levels in a particular market).
Generally, however, buyers are a strong competitive force
when they comprise a large portion of the demand and
purchase a sizable percentage of industry's product.
COMPETITIVE FORCE OF
BUYERS
Specifically, the driving forces brought about by buyers'
concerns are as follows
a) they buy in large quantities;
b) they can integrate backward;
c) industry's product is standardized;
d) their costs in switching to substitutes or other brands are low;
e) they can purchase from several sellers;
f) they have high purchasing power;
COMPETITIVE FORCE OF
BUYERS
Specifically, the driving forces brought about by buyers'
concerns are as follows
g) bargaining leverage;
h) buyer concentration versus firm concentration;
i) buyer switching cost relative to firms switching costs;
j) buyer information;
k) availability of substitute products;
price sensitivity;
m) product difference;
n) brand identity;
WHEN IS A.
BARGAINING
Buyer switching costs to
competing brands are high
POWER OF BUYERS
WEAK? B.
There is a surge in buyer
Bargaining power of buyers relates to the ability of the
demand and
prospective buyers to seek discounts or better deals and
prices given certain conditions favorable to them. This is
particularly true in the Asian market where bargaining and C.
quest for discount is prevalent even with a tag price Seller-buyer collaboration or partnerin
indicated on the product. Buyers are considered weak under provides attractive win-win
the following scenarios or situations oppotunities
DEALING WITH THE
COMPETITIVE
FORCE OF BUYERS
As buyers appear to be smart in seeking for an advantageous price
that somehow affects margin and profit levels of suppliers or
producers, entrepreneurs have to learn and live with this dilemma.
While there are many reasons why investors put up a business,
businesses organizations are established precisely to serve the
market or the buyers in particular with profits in mind. There are a
variety of options to take in dealing the buyers; the bottom line is to
REMINDER
contain with the competitive force or influence of the buyers are
leveraged or anchored upon any of the following:
DEALING WITH THE
COMPETITIVE
FORCE OF BUYERS
a) the price buyers have to pay for the product - make it affordable;
b) the quality of the product sold to buyers - make it acceptable to
their standards and expectations;
c) services buyers can expect from the business - be sure after
sales services are available whenever needed; and
d) other conditions of the sale - make sure that there are other
REMINDER
attractive conditions that come with the selling effort.
POTENTIAL AND NEW ENTRANTS
Potential and new entrants may not be considered active players
but in Porter’s business competition model, they are considered threat
to existing business concerns. Strategists or strategic managers in
general are supposed to be research-oriented, and therefore, they
must be aware of new developments in the academe and research
laboratories conscious of the fact that it is only a matter of time that
inventions and innovations will be introduced to the market. They are
considered factors to reckone with the moment of new business
organization comes to existence to launch its products or services.
POTENTIAL AND NEW ENTRANTS
Potential and new entrants refers to business oraganizations
attempting to or have now joined the market trying hard to make a
name of their product and business organization as a whole. As new
players, the new entrants are likely to introduce a marketing
strategy that will somehow affect the market share of vulnerable
players in the market
BARRIERS TO
NEW ENTRANTS
New entrants in the industry bring in extra capacity to
the industry and any increase in demand can be an
opportunity for new entrants. William, Jenkins, et al. (2004)
cited that if the new entrants have similar product features
and benefits to that of existing providers, then the new
entrant threat is by imitaion .
BARRIERS TO
NEW ENTRANTS
When this type of imitation produces a similar competitive position and
similarity of resources, the new entrants face the following entry barriers
(Williamson, Jenkins, et al.):
a. economies of scales
b. access to secret technology (patented and not patented)
c. brand recognition
d. capital cost entry
e. access to distribution channels
f. lack of experience in carrying operational actvities leading to learning gaps, producing cost disadvantages
g. high customer switching costs
h. access to low cost inputs (e.g., labor); and
i. legislative barriers entrry
The Stakeholders
The term stakeholders emerged in the late 1990s and became widely
popular by the early 2000.
The stakeholder group is a sector of the economy or society which may
be considered an indirect player in the business arena unlike the other
five major components of the Porter businesS competition model but
may have bearing upon the business as a whole.
Parties in the stakeholder group are not buyers, sellers or suppliers, but
the noise, efforts and advocacies they pursue can have substantial or
devastating impacts among the players in the business.