In many markets, competition is the driving force of change. Without competition, companies satisfice. They provide satisfactory levels of service but fail to excel. Where there is a conflict between improving customer satisfaction and costs, the latter often takes priority since companies feel that such cost cuts do not affect customer services, and it also produces tangible results foster. Competition, then, is good for the customer as it means that companies have to try harder to satisfy customers or lose their customer base.
When developing marketing strategy, companies need to be aware of their own strengths and weaknesses, customer needs and the competition. To be successful it is no longer sufficient to be good at satisfying consumer’s needs- companies need to be better than competition in doing so.
Competitive Behavior can take Five Forms:
Conflict is characterized by aggressive competitors where the objective is to drive out competitors from the marketplace, say by price cutting.
An industry is likely to face a conflict situation if a player/s have extremely high stakes to dominate the industry. Players that have large market shares (dominant players), companies are not diversified (businesses confined to one industry), those that have invested a disproportionate amount of assets in building their business in this industry, are likely to be extremely aggressive. This situation can be aggravated by a threat of strong imminent competition, or a declining market growth.
Some industries are very sensitive to volumes. If a company in such a industry is able to build high market share by grabbing market share of competitors, the cost of production goes down significantly, thus raising the company’s profitability. But for most industries, it is not a good idea to drive out competitors. This is specially true for the lead players of the industry.
Competitors play a very important role in raising the ‘noise levels’ (for instance, through advertising) and thus, help in expansion of the category/industry. Since the lead players have more market share than the fringe players, they get more share of the expansion in the category. And good competitors are always a great help in improving the functioning of a company.
The objective is not to eliminate competitors but to perform better than them. This may take the form of trying to achieve faster sales, profit growth, larger size or higher market share. Competitive behavior recognizes limits of aggression. Competitor reaction will be an important consideration when setting strategy. Players will avoid spoiling the underlying industry structure which has an important bearing on overall profitability. For example, price wars will be avoided if competitors believe that their long term effect will be to reduce industry profitability.
Co-existence may occur due to several reasons. It may arise because firms do not recognize their competitors owing to difficulties in defining market boundaries. For instance, a manufacturer of fountain pens may ignore competition from jewellery companies since its definition may be product based than market centered (gift market).
Firms may not recognize other companies which they believe are operating in a separate market segment. Third, firms may choose to acknowledge the territories of their competitors (geography, market segment, product technology) in order to avoid harmful head-to-head competition.
This involves the pooling of skills and resources of two or more firms to overcome problems and take advantage of new opportunities. A growing trend is towards strategic alliances where firms join together through a joint venture, licensing agreements or joint R&D contracts to build a long term competitive advantage. In today’s global markets where size is the key source of advantage, cooperation is a major type of competitive behavior.
Firms come to some arrangement that inhibits competition in a market. Prices are fixed in order to discourage customers from shopping around to find the cheapest deal. Collusion is likely when there are a small number of suppliers in each market, price of product is a small proportion of buyer costs, where cross national trade is restricted by tariff barriers or prohibitive transportation cost and where buyers can pass on high prices to their customers.