Introduction
This assignment is a discussion on the topic of competitiveness. The discussion pays close attention to the forces which shape competition in any given market or industry. The forces include threat of new entrants, bargaining power of suppliers, rivalry among existing competitors, bargaining power of buyers and the threat of substitute products or services. The other competitive strategies to be discussed include differentiation and positioning.
Also to be discussed is competition in various market structures such as perfect competition, monopoly and oligopoly. The discussion kicks off with a definition of competitiveness then moves on to the competitive forces named above and the strategy of differentiation and positioning. What follows is a discussion of competitiveness in the various market structures named above. At the end is a conclusion which sums up the main points of the discussion.
Discussion
Definition of Competiveness
This is a concept which is used to refer to the ability of a business enterprise to supply or sale its goods or services in a given market within a given period of time and under certain rules and regulation governing the supply of such goods or services.
The nature of this definition implies that for there to be competiveness, there must be few or many suppliers of certain goods or services in a given market, and since all businesses are established with an overriding objective of making profits, each business tries as much as possible to overcome all barriers which prevent it from selling or supplying its goods and services in a given market.
Competitive Forces
Michael Porter, a scholar and economist at Harvard Business School published an article titled “How competitive Forces Shape Strategy”. This article started a revolution in the competitive strategy field. Mr. Porter introduced five forces that shape business competition, academic research and business practice. According to Mr. Porter, companies often compare with rivals within the industry or among existing competitors when measuring competitiveness (Porter 3).
They frequently overlook other crucial competitive forces including bargaining power of buyers, bargaining power of suppliers, threat of new entrants and threat of substitute products and services. Mr. Porter declares as I quote “Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack” (Porter 3).
In order to gain competitiveness, companies have to look beyond rivalry among existing competitors and consider other important forces that will lead to ultimate competitiveness. The five forces are discussed in detail below.
Threat of new entrants
In every industry, there is what is known as the ‘incumbents’, which are the competitors who have been in the industry for some time or who dominate the industry for some time. However, this domination does not guarantee them long-term stay in the industry because new entrants may express interest in the industry.
New entrants usually come with unique approaches in any given industry so as to gain a portion of the market as well as build trust with the customers. Most of them usually rely on pricing, whereby they set the prices of their products at low levels than the incumbents. They can also focus on quality by improving the quality of their products so as to attract customers (Porter 3).
When this happens, the incumbents face stiff competition and sometimes they may even be threatened to quit the industry, especially if the new entrants have strong capital base. As a reaction to this threat, the incumbents may come up with strategies to put barriers to entry in the industry.
For example, they may adopt very sophisticated technologies which are not easily available. They may also consider putting barriers to the access of the distribution channels so that new entrants may be scared away by the restricted access to supply channels (Porter 3).
The incumbents may also consider adopting what is referred to as ‘Supply-side economies of scale’ which allows them to produce large quantities of goods at relatively low costs per unit. This cushions them from the threat of lowered prices by the new entrants. It also discourages new entrants because they are not able to use price reduction as a strategy to penetrate the market and dislodge the incumbents (Porter 3).
Bargaining power of suppliers
In some industries, there are monopolies in terms of supply of goods or services. In such industries, the powerful suppliers are able to manipulate the prices of the goods or services the way they want. A supplier is regarded as powerful if for instance he does not depend on a particular industry for the revenues and therefore, he can do without the industry.
A supplier is also considered powerful if he supplies goods and services which are unique or if some companies have established a long term business relationship with him. Powerful suppliers are also those who supply goods and services which cannot be substituted. A good example is pilots and the aviation industry. This is because it is not easy to get well trained and qualified pilots within short notice and therefore, the pilots’ unions may have a big bargaining power (Porter 4).
Another example is the Microsoft computer giant. It can decide to increase the price of operating systems. When this happens, the other computer dealers have no option other than to cut on their profits. In some cases, some powerful suppliers can also threaten to enter the markets themselves if the customers are not willing to purchase the goods at their desired prices. Companies may overcome this by having large capital base, so that they can become suppliers themselves (Porter 4).
Bargaining power of buyers
In some industries, there may be few but large buyers, who purchase certain goods or services in bulk. Such buyers usually have a bargaining power to lower the price of the goods or services in question because if the suppliers do not comply, they end up with minimal sales and profits. Buyers usually have power when the cost of switching suppliers is low as well as when the products in question are undifferentiated or are standardized.
The bargaining power of buyers can affect the profitability of the industry because they may lower the purchasing prices and then lower their selling prices. When this happens, the people who suffer are the other small dealers in the industry as well as the suppliers. Buyers can increase their competitive strategy by teaming up and setting the buying price of the products at a certain level. This can cushion them from unscrupulous suppliers as well as from new entrants (Porter 5).
Threat of substitute products or services
A substitute is a product which plays similar function as the original product. Examples of substitutes include the electronic mail as a substitute for sending letters by mail, video conferencing as a substitute for commuting and the use of plastics instead of aluminum products. Substitutes usually act as a threat to some industries especially when they are priced in a friendly manner than the original products as well as when the costs of switching vendors is relatively low.
Companies can guard themselves from the threat of substitutes by differentiation of their products as well as through teaming up to influence government policy on the introduction of substitute goods in the market (Porter 6).
Rivalry among existing competitors
Existing players in a given industry may sometimes have rivalry which leads to stiff competition in form of introduction of new products, price reduction wars, service improvement or intensive advertisement campaigns. When there is high rivalry between the existing competitors in a given industry, the profits are usually low due to reduced sales.
The impacts of rivalry between existing competitors in an industry are usually intense when the competitors are many; the industry growth is significantly low and when there are exit barriers. Exit barriers are things like heavy investment of capital in a certain industry or the devotion of employees in a particular industry.
This retains old competitors in a given industry even if they are not making profits. Companies may cushion themselves from rivalry through having very reliable suppliers as well as diversification, which allows them to invest in various industries so that if one becomes very competitive, they may compensate the low profits in that industry from the other ventures in the other industries (Porter 8).
Differentiation and Positioning
In marketing, differentiation is the process of distinguishing a product or service from the rest through describing its unique differences and or characteristics. It is done for competition purposes with a view of creating a market niche for that particular product or service. Differentiation seeks to create a good image about a particular product among the targeted consumers so as to ensure that they perceive it as unique and different from other similar products (Armstrong and Kotler 26).
Product differentiation makes the targeted consumers not compare a particular product with others; which gives that particular product a competitive advantage over the others. In doing differentiation, marketers or product owners may rely on advertisement, promotions, improved product quality, lowering or increasing the prices as well as the lack of understanding on the part of the consumers regarding the price and quality of the product being differentiated (Armstrong and Kotler 26).
A company may engage itself in differentiation of several products at the same time. This makes it have a definitive number of customers, who are sort of owned by it due to the uniqueness of its products or services. This is what is called positioning. Positing entails using various strategies like promotion, distribution of products or services and production of unique products with unique pricing to build an identity of a particular company or organization in the minds of particular consumers.
Positioning seeks to stabilize and retain the positions of the particular differentiated products for a particular company so as to retain the competitive advantage of the company in regard to those products. For a company to create and maintain a particular position in a market, it needs to do a thorough research and consistent monitoring of market trends so as to modify or readjust the differentiation and positioning strategies for its respective products.
Competitiveness in Various Market Structures
The economy of any country or region is characterized by supply and demand. Supply comprises the producers and suppliers of goods and services while demand constitutes the consumers of the products or services. In general economic principles, when the supply of goods and services is high, the demand is usually low and vice versa. A third component of price comes in to shape the relationship between supply and demand.
The price of goods and services is usually low when the supply is high but it goes up when the supply is low. On the other hand, the price of goods and services is usually high when the demand is high and the supply is low. In a free market economy therefore, the economy is driven by the forces of supply and demand, which determine the price of goods and services (Norman, Thisse and Phlips 67).
However, in other situations, the economy may not be left to the forces of demand and supply but rather, the government may introduce what is referred to as price controls. This happens especially when the government of a country is a key stakeholder in the supply of the goods and services in question.
It also happens mostly during times of crises and it usually leads to what economists call hoarding of products so as to wait for the prices to go up. This is mostly a crime in many countries and regions (Mankiw 98). This all makes sense of course, but I am concerned that within a very limited word count, you have not yet directly addressed the question, or at least related the above factors to oligopoly if that is part of your argument.
There are three main forms of market structures namely perfect competition, monopoly and oligopoly. In perfect competition, businesses are usually referred to as price takers. This means that they are not able to influence the price of goods and services because the market is usually flooded with many businesses.
The prices are therefore left to the forces of demand and supply. Competition is also very stiff but the prices usually remain stable. In a perfect competition, the consumers are the beneficiaries (McEachern 132). Again, you’re still avoiding the main focus of this question. I think you could be losing marks all the way here so far.
In a monopoly, there is usually one big supplier who dominates the market with little or no competition at all. In a monopoly structure, the firms which enjoy monopoly usually dictate the price of the products through manipulating the supply. Monopolies may however not always exploit the consumers but in most cases, they usually do especially in markets which are not regulated by any government authorities (McEachern 132).
Oligopoly is a market structure which is characterized by few but big firms. The firms usually know each other very well and they are characterized by sharing the whole market in terms of percentages. For example, if there are four big firms in a certain field, each usually occupies a certain percentage of the whole market in terms of capital base and the number of customers.
One characteristic of oligopoly is a cut throat try to avoid slang competition. The firms usually compete for the customers but in very unique ways. One of the ways in which they compete is through what is referred to as differentiation. They usually differentiate their products so as to position themselves in a strategic position in order to attract and retain customers (Vives 57).
The firms also compete through increasing their efficiency, which entails the maximization of their resources and ensuring that they provide services which are very efficient, reliable and of high quality. Firms also compete through what is referred to as research and development.
In this, innovation and invention are very instrumental because they help the firms to have a competitive advantage over their rivals. Oligopoly is also characterized by entrance barriers, which are put by the dominating firms through sophisticated technology, intellectual property rights, patents as well as government regulations (Vives 57).
In some cases however, the competition becomes very stiff and forces the firms in oligopoly to cooperate. They do so in order to ensure that they remain profitable. The good thing with oligopoly is that firms do not compete in terms of pricing of their products because of the complexity of that kind of competition.
In an oligopoly therefore, the consumers are usually the beneficiaries because the firms usually strive to provide them with the most affordable products in the most friendly terms and conditions possible. However, when the firms cooperate, the consumers may suffer because the firms may agree to fix the prices (Surhone, Timpledon and Marseken 234).
Conclusion
This assignment was a discussion on the topic of competitiveness. In the discussion, various strategies on how companies compete and how they can position themselves in the markets so as to compete well with the others have been analyzed.
This discussion has highlighted the five major forces of competition which include the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services and rivalry among existing competitors. It has also highlighted other strategies for increasing competitiveness such as differentiation and positioning. The discussion has also looked at different market structures and how they shape competitiveness.
Works Cited
Armstrong,Gary., and Kotler, Philiph. Marketing. An Introduction. 9th ed. Prentice Hall: Pearson Education Company, 2009.26.Print.
Mankiw, Gregpry.Principles of Microeconomics. 6th ed. Farmington: Cengage Learning, 2011.98.Print.
McEachern, William.A. Economics: A Contemporary Introduction.9th ed. Farmington: Cengage Learning, 2011.132.Print.
Norman, George., Thisse, Jacques and Phlips, Louis. Market structure and competition policy: game-theoretic approaches. Cambridge: Cambridge University Press, 2000.67.Print.
Porter, Michael. E. The five competitive forces that shape strategy. Harvard business review.3-8.Web.5.Dec. 2011.
Surhone, Lambert., Timpledon, Miriam.T and Marseken, Susan.F.Price Fixing: Product (business), Price Control, Competition Law, Monopoly, Vendor Lock-in, Bid Rigging, Collusion, Cartel, Oligopoly, Variable Pricing. New York: Betascript Publishers, 2009.234.Print.
Vives, Xavier. Oligopoly pricing: old ideas and new tools. Cambridge, MA: MIT Press, 2001.57.Print.