Competition (Leaving Cert Business): Revision Notes
Competition
Competition is a fundamental aspect of business that shapes how companies operate and succeed in the marketplace. Understanding competition helps businesses make strategic decisions about pricing, product development, and market positioning.
What is competition?
Competition refers to the rivalry that exists between businesses operating in the same industry. Companies compete against each other on various factors including price, customer service, product quality, and innovation. The ultimate goal is to increase sales and gain a larger share of the market.
When businesses compete effectively, it benefits consumers through better products, lower prices, and improved services. However, intense competition can also create challenges for businesses, requiring them to continuously adapt and improve their offerings.
Types of competition
Direct competition
Direct competition occurs when businesses sell identical or very similar products and services to the same target market. These companies are essentially fighting for the exact same customers.
Examples of direct competition include:
- Domino's Pizza and Four Star Pizza (both offering pizza delivery services)
- Coca-Cola and Pepsi (both selling cola soft drinks)
- iPhone and Samsung Galaxy (both premium smartphones)
Indirect competition
Indirect competition happens when companies offer different products or services but satisfy the same customer need or want. While the products may be different, they compete for the same consumer spending and time.
Examples of indirect competition include:
- Domino's Pizza competing with Chinese takeaways (both satisfying the need for convenient dinner)
- Netflix competing with cinema chains (both providing entertainment)
- Uber competing with public transport (both offering transportation solutions)
Understanding both types of competition is crucial because businesses often underestimate the threat from indirect competitors.
Competitor analysis
Competitor analysis is the systematic process of identifying competitors in the market, examining their strengths and weaknesses, and comparing them against your own business capabilities.
Why competitor analysis matters
Conducting thorough competitor analysis provides several key benefits:
Key Benefits of Competitor Analysis:
- Identify strengths: By studying competitors, a business can identify its own strengths and understand how it differs from rivals, helping to develop its unique value proposition
- Risk management: Understanding the competitive landscape helps businesses anticipate and prevent potential risks or threats
- Market understanding: Analysis creates a deeper understanding of the entire market, including customer needs and service gaps
- Spot industry trends: Monitoring competition reveals changes in the market, enabling businesses to identify and predict trends and adapt to meet evolving customer needs
- Benchmark for future growth: Studying larger competitors provides reference points for growth strategies and helps identify areas for improvement
The competitive analysis process
Effective competitor analysis involves examining several key areas:
- Market position: Where competitors sit in the market hierarchy
- Product offerings: What products or services they provide
- Pricing strategies: How they price their offerings
- Marketing approaches: How they promote their business
- Customer base: Who their target customers are
- Strengths and weaknesses: What they do well and where they struggle
Porter's Five Forces model
Professor Michael Porter of Harvard Business School developed the Porter's Five Forces model in 1979 as a strategic management framework. This tool helps businesses understand the competitive pressures within their industry and explains why some industries generate high profits while others struggle with low profitability.
Porter's Five Forces model is a strategic management framework that businesses can use to understand the competitive forces at work in their industry. The model identifies five key forces that shape industry competition, enabling businesses to develop more effective strategies.
Force 1: Competitive rivalry
Competitive rivalry examines the intensity of competition among existing competitors in the market. High rivalry typically leads to price wars and aggressive marketing campaigns, reducing profit margins for all companies involved.
Factors that increase competitive rivalry:
- Number of competitors: More competitors generally means more intense competition and reduced market share for each company
- Market saturation: When markets are declining or growing slowly, firms compete more intensely for a larger slice of a shrinking market
- Product similarity: When products and services are very similar, companies must compete primarily on price, increasing competitive intensity
- Exit barriers: If it's difficult to leave a market, firms will stay and compete even when profitability is low
- Fixed costs: Industries with high fixed costs are more likely to reduce prices to maintain volume when demand slows
Force 2: Supplier power
Supplier power refers to the influence suppliers have over businesses in an industry. When suppliers have significant power, they can increase prices, reduce quality, or limit availability, all of which impact business profitability.
Factors that increase supplier power:
- Number of suppliers: Fewer suppliers mean each has more bargaining power and can raise prices more easily
- Uniqueness: Suppliers providing essential resources with no alternatives have considerable power
- Switching costs: When it's expensive or difficult to switch suppliers, the current supplier holds more power
- Forward integration: If suppliers can easily move into the same industry as their buyers, they have additional leverage
Measuring supplier power involves considering:
- The total number of available suppliers
- How unique their products are compared to alternatives
- The threat of suppliers moving into your industry
- Your ability to switch to different suppliers
Force 3: Buyer power
Buyer power (also called customer power) measures the influence customers have over businesses. When buyers have strong power, they can demand lower prices, better quality, or superior service, which reduces industry profitability.
Factors that increase buyer power:
- Number of buyers: Fewer customers mean each individual buyer has more power to negotiate better terms
- Purchase size: Customers who buy in large quantities can negotiate better prices and terms
- Switching costs: When it's easy and inexpensive for customers to switch to competitors, they have more power
- Price sensitivity: Customers who are highly sensitive to price changes will quickly move to cheaper alternatives
- Informed buyers: Well-informed customers have greater power to negotiate better prices and terms
Real-World Example: Supermarket Competition
The introduction of low-cost supermarkets like Lidl and Aldi has given customers more power, as they can easily switch to cheaper alternatives if traditional supermarkets don't offer competitive prices. This has forced established supermarkets to lower prices and improve value offerings.
Force 4: Threat of substitution
Threat of substitution considers products or services from different industries that can satisfy the same customer need. Substitute products pose a significant threat because they can attract customers away from the entire industry.
Key factors affecting substitution threat:
- Relative price performance: When substitutes offer better value for money, customers are more likely to switch
- Customers' willingness to change: If customers find it easy to switch to substitutes, the threat is higher
- Availability of close substitutes: The more similar alternatives available, the greater the threat
Examples of substitution:
- Nespresso coffee pods being substituted by supermarket own-brand coffee pods or instant coffee
- Uber and ride-sharing services substituting traditional taxis
- Streaming services like Netflix substituting traditional TV and cinema
Force 5: Threat of new entrants
Threat of new entrants evaluates how easily new companies can enter the market and compete with existing businesses. High threats can impact profitability and market share for established companies.
Key barriers to entry that reduce this threat:
- High capital costs: Industries requiring significant upfront investment deter new entrants
- Economies of scale: Larger firms can produce at lower costs per unit, making it harder for smaller new entrants to compete
- Product differentiation: Strong brands with loyal customers make it harder for new firms to gain market share
- Regulations: Legal restrictions, licences, and safety standards can prevent new companies from entering
- Access to distribution channels: When existing firms control retail stores or distribution networks, new entrants struggle to reach customers
- Retaliation threat: If existing companies are likely to respond aggressively to new entrants, this discourages market entry
Applying Porter's Five Forces
The pharmaceutical industry provides an excellent example of how Porter's Five Forces work in practice:
Worked Example: Pharmaceutical Industry Analysis
- Competitive Rivalry: Intense competition mainly on price, with over $1 trillion in global sales
- Supplier Power: Low power as raw materials generally come from chemical industry suppliers
- Buyer Power: High power as doctors and consultants decide prescriptions, and patients are increasingly price-conscious
- Threat of Substitution: Moderate threat from generic drugs and alternative treatments
- Threat of New Entrants: Medium barriers due to high capital requirements but potential for new companies with innovative products
Case study: Sculpted By Aimee
Aimee Connolly founded Sculpted By Aimee in 2016, starting as a make-up artist and growing the business into a successful Irish beauty brand. The company demonstrates several competitive principles in action.
Case Study Analysis: Competitive Advantages Developed
- Product differentiation: Created unique products that customers love and know how to use
- Direct-to-consumer model: Built strong customer relationships through social media and online sales
- Irish brand identity: Positioned as an accessible, authentic Irish beauty brand
- Strategic partnerships: Collaborated with major retailers like Boots to expand distribution
Key Lessons from Sculpted By Aimee:
- Start with a clear understanding of your target market
- Develop products that genuinely solve customer problems
- Use social media effectively to build brand awareness
- Form strategic partnerships to expand reach
- Maintain focus on customer needs and feedback
Key Points to Remember:
- Competition is rivalry between businesses fighting for market share through price, service, and quality
- Direct competition involves identical products, while indirect competition satisfies the same customer needs with different products
- Competitor analysis helps identify strengths, manage risks, understand markets, spot trends, and benchmark growth
- Porter's Five Forces provides a comprehensive framework: competitive rivalry, supplier power, buyer power, threat of substitution, and threat of new entrants
- Understanding competitive forces enables businesses to develop better strategies and achieve sustainable competitive advantages