Introduction to Management

Fourth edition

by Richard Pettinger

A note on competition, rivalry and the competitive environment

Competition and rivalry exist wherever there is choice. The market is an environment in which competition and rivalry take place. Rivalry is the process by which a company establishes its position in particular sectors using the marketing tools and techniques at its disposal. The main features are as follows.

  • Competition with whom: it is very easy to assume that there is genuine competition between large organisations in particular markets; for example, the McDonald's and Burger King compete in the fast food market, or that Coca Cola and Pepsi Co compete in the soft drinks market. It is true that individual branches and outlets compete when they are located close to each other. However, market size and share is determined, to a large extent, by the numbers and locations of outlets provided by each. This also applies to many other sectors - for example, supermarkets, department stores, oil and petrol sales.
  • Competing for what: competition for the business of customers and consumers means that, on specific occasions, competition is between organisations that have no direct relationship to each other. For example: there is competition between car and holiday companies when customers make the choice either to have a new car or a good holiday. Competition exists between fast food retailers and transport companies when the consumer is faced with a choice of either having something to eat and then walking home, or else taking public transport and foregoing the meal. In industrial markets, competition may exist between capital goods providers and construction companies - for example, when an organisation takes the decision either to replace its photocopier, or else to refurbish its premises.
  • Degree of market captivity: whether customers and consumers have to buy from a particular source or whether they have a choice.
  • The state of the market: whether expanding, static, stagnant or declining; this may be measured in sales, financial and volume terms; in terms of numbers of customers; in terms of reputation of product or service offered.
  • Social and ethical aspects: including the use of animals for product research; sexual images in advertising campaigns; exploitation of cheap labour; working in areas where employment legislation is lax or non-existent; and environmental pollution (see Summary Box 7.5).
  • Entry barriers: consisting of levels of capital investment; staffing volumes; expertise and technology; market location; protectionism and size; legal constraints; economies of scale; access to distribution channels; the loyalty of customers to those organisations supplying substitute or alternative products; and the costs incurred in switching from the current to the proposed activities, or of starting up and making entry as the first initiative of a new business. They may also be very low, if the products, buyers and markets are easily accessible, and the production technology freely available.
  • Offensive and defensive capability: the ability of existing players to defend their position, or to engage in their own activities devised to prevent the entry of new competitors. They may possess substantial financial resources, and also more nebulous perceptual advantages to do with image, confidence, quality and reliability, which any organisation wishing to break into the market would first have to overcome. Because of its position and reputation also (apart from any reasons to do with size and influence, or financial resources), an existing player may be able to cut its prices low enough and for long enough to force a new competitor out.
  • Legal constraints: most markets and sectors have specific legal regulations and constraints, quite apart from the wider considerations of the laws of the country concerned. Governments may also regulate the operations of organisations by the require­ment to obtain licences for particular activities; and to operate to given legal minima in employment, marketing and production practices; and in the setting of quality standards for certain products and services.

This also extends to imitation and copyright; organisations have the right not to have their pioneering or profitable ideas stolen and represented as a genuine article by an imitator.

  • Confidence and expectations: of organisations in terms of the returns on investment from their particular activities; in terms of assured product and service quality on the part of customers, consumers and clients.
  • The number of competitors in the sector, especially where there are many companies of equivalent size and capacity in the sector, and the products and services are undifferentiated - there is no particular brand loyalty or identity, or at least this is not the overriding factor.
  • Sector dominance: who or what dominates the sectors, who the market leaders are, whether by reputation, income, sales volume, customer volume, location or command of resources.
  • Sectoral growth: where growth is slow or steady, companies that wish to expand will precipitate marketing wars. Related to this is the expectation of high rewards to be gained by the 'winning' player or players. Where growth is rapid there is a threat of entry when existing players cannot cope with increased demand.
  • Sectoral stagnation and decline: where the present range of products or services are no longer valued by the customer, client and consumer groups in question.
  • Sectoral transience and faddishness: where customers, clients and consumers have gone into the sector because it has for some reason become attractive in the short-term; it is essential to recognise that this only endures until the next fashion or fad comes along.
  • Exit barriers: where exit barriers are high, companies may remain in business in the sector even if they are not making profits because the costs of total withdrawal are greater than continuing to produce. Companies facing this, use it as an opportunity to seek other markets, sectors and niches; and also to engage in wider marketing activities with the purpose of differentiating its products and services, generating new images, identity and loyalty to them. Where exit barriers are low, companies normally withdraw.

A note on the effects of major and dominant players on competitive activity

The major players in every sector have come to this position, either because they command high levels of customer loyalty, or else exert some other form of dominance (see above). The result is that, whenever a major player does withdraw from a particular sector, this becomes destabilised, and may lead to enduring loss of customer, client and consumer confidence in the products and services of the sector as a whole. For example:

  • Were McDonald's ever to cease trading, it is not easy to gauge the effect on the fast food and convenience restaurant industry. There would be an initial swamping of competitors and other equivalent outlets, leading to substantial price rises, and shortage of supplies among the remaining players. The effect of this is likely to be a withdrawal by consumers until such time as the sector re-stabilised; the effect would thus be that the removal of the largest player would result in the decline in fortunes (rather than an increase) of those companies that remained.
  • When the UK domestic car industry collapsed, it took between 10-15 years for Ford, Vauxhall, Nissan, Toyota and the large continental manufacturers to fill the gap. Over the period 1970-1990, as the indigenous companies declined, there were substantial price rises in the sector. At present, in spite of the fact that the global car industry now has substantive over-capacity, car prices in the UK have not come down into line with what is on offer in the rest of the world.
  • The decline in regional house building in the UK, brought about as the result of building recessions in the early 1980s and early 1990s, mean that there is still a shortage of good quality, affordable housing in, and around, centres of commercial, economic and public service importance. This is because the total expertise has gone out of the industry, and this is taking years to restore. This, in turn, has led to industrial, commercial and consumer pressures on prices; and the charges available to successful and effective construction, building and property companies are very high.

It is clear that the mixture and balance of these elements changes as the sector and market environment concerned changes, and as the marketing activities of all players in it have effect. Ultimately, there will be company collapses, shakeouts, mergers and take-overs, as the weaker players go to the wall, and the stronger seek to consolidate their positions.

Buyer and customer groups have the greatest influence where they are in the position of being able to force down the price to be paid to suppliers; or to demand higher quality, volume or service from the supplier group. They may also play one supplier off against others. The power and influence of the buyer group depends on the following.

  • If there are few entry barriers or critical switching costs on the part of potential suppliers, especially to do with capital or legal constraints; in such cases, buyers are able to approach anyone they choose.
  • Where products are undifferentiated, where there is no brand loyalty, buyers also have greater influence.

Otherwise, it is essential to be aware that price reductions are only effective if they are so great as to draw immediate attention on their own; or where the reduction is a critical part of the decision to buy. If neither of these conditions are present, price reductions may have an adverse effect, leading customers to the conclusion that because the price has come down, the product or service on offer can no longer be any good.