Competition
From a
managerial perspective, competition generally falls into the external environment, though it can also take shape in
the internal environment through rivalry
between strategic business
units (SBUs). For managers, understanding the external competitive landscape is
a critical factor in
assessing company strategies and benchmarking appropriately
to ensure the competitiveness of the firm. Businesses that fail to keep pace
with their rivals will eventually be overpowered and often forced to develop an
exit strategy.
Avoiding
the risks of competitive factors demands a strong understanding of operational efficiency (low cost), quality production, differentiation, and competitive advantage or who
you target and whether or not you have a cost or quality advantage (see figure
below).
Cost vs.
quality
Companies
generally achieve either a cost or a quality advantage (very rarely, both).
Low-Cost and Branding
The
simplest perspective on competition is in industries where products are homogeneous (or very alike). In such a
situation, companies compete directly. For example, bottled-water producers are
directly involved in such a framework and thus
adopt two basic competitive strategies: low-cost and branding.
Low-cost
suppliers find ways to optimize their production and distribution to offer
consumers the lowest possible price on one bottle of water. Low-cost suppliers
often benefit largely from economies of scale. Branding, on the other hand, aims
to convince the consumer that a higher price point is worth paying based upon
the company's name, reputation, or other distinguishing characteristic. For example, Dasani brand water
costs more than generic store brand water, despite being essentially the same
product. Commercials, aesthetic presentation, goodwill, and factors other than price may
then influence a consumer's purchasing decision.
Differentiation
Most
products and services are not homogeneous, however, allowing incumbents in an industry to compete with
one another by means of various competitive strategies. Differentiation is a
competitive tactic wherein companies approach certain niche needs within an
industry to capture a segment of the market share.
An
example of differentiation might be cereal. There are hundreds of different
kinds of cereals. The need being filled is sustenance: people need to eat. The
producers of these cereals use differentiation to capture a share of the cereal
market: some brands focus on their organic nature, others their sugary appeal,
and still others on being "cool." Branding plays an important role here as well, though assessing niche consumer needs
and filling them is the principal focus.
Quality
Finally,
there is the potential to compete externally based upon quality. Toyota makes
both the Corolla and the Lexus, thereby targeting both ordinary automobile
drivers and those in the luxury-car consumer bracket. Quality competitive
strategies, while related to branding, provide a particular level of quality to
capture a specific income or interest demographic. The opportunity cost of
efficiency is associated with quality, which generally sees higher price
points. Quality is therefore a strong antithesis to the low-cost strategy.
Internal
Competition
Businesses
also compete internally, an intrinsically complex issue. On the surface,
internal competition involves either direct product substitutes or funding competition (among
different business units). An example of internal competition is PepsiCo. Pepsi
makes both colas and sports drinks, all of which sit on the shelf next to one
another. When a customer sees the sports drink and chooses it over the cola,
the cola has lost a sale to an internal competitor. Pepsi, however, did not
lose a sale; it merely lost one segment of the business while gaining another.
With
these points in mind, managers must thoroughly understand the products they are
pitching and which strategy will help them avoid going toe-to-toe with other
businesses with whom they cannot compete. Starting up a car manufacturing
business to compete with Hyundai in the low-cost market is extremely difficult,
as Hyundai has economies of scale in place that will almost always beat smaller
competition on a low-cost strategy. This example illustrates an extremely
important point in business: rely on strengths. Managers must understand their
own competitive advantage (what they do better than the competition) to adopt
the appropriate competitive strategy to gain market share and remain profitable
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