What’s it: Competitors are rivals who try to meet the same customer needs and wants. As external stakeholders, they benefit from the failures of other companies. They like it when other companies compete fairly or fail. They have an interest in diverting customers from the company. They set targets and strategies based on the actions of other companies in the industry.
Why are competitors matters
In most markets, except for monopolies, firms have competitors. The number of competitors depends on the market structure in which they operate. In a monopolistic competitive market, they face many competitors. Meanwhile, in the oligopoly market, the number of competitors is relatively small.
The market structure shapes a competitive environment and influences a company’s strategy and success. Companies must develop strategies to build a sustainable competitive advantage. And, they have a competitive advantage if they serve customers better than competitors. If successful, they can eventually sell more products and make more money.
Suppose companies fail to analyze the strengths, weaknesses, strategies, and areas of competitors’ vulnerability. In that case, their performance will be less than optimal. They will spend most of their time tracking the competitors’ strategic moves and market share for such reasons. Then, they use the results of the analysis to formulate and find strategies to fight back.
Types of competitors
Three types of competitors in an industry. They are:
- Direct competitors
- Indirect competitors
- Future competitors
Direct competitors offer similar products and services for the same target market and customer base. To grow their profits and sales, they seek to seize customers and market share from the company.
For example, smartphone manufacturers compete fiercely to provide the best value by offering their customers the most suitable products. They compete in many ways and most easily through price. They also compete on features. Some smartphones offer a higher camera resolution, longer battery life, or more memory capacity.
Businesses also face indirect competition. Competitors may offer products to different market segments but provide solutions to meet customers’ similar needs or desires. In other words, the two are substitutes, though not perfect.
For example, in the transportation industry, airlines compete indirectly with railroad companies. Airline companies may target higher-income consumers than rail companies. However, both services fulfill the same basic need, namely services for the mobility of people.
Future competitors represent existing and potential companies to enter the market, even though they haven’t done so at this time. We also refer to it as a potential competitor. One source of future competition is from indirect competitors. They are much more prepared and more likely to enter the market when they see the right opportunity.
How to deal with competitors
One of the best ways to overcome market rivals is to attack. Suppose the company’s offering is not competitive enough. In that case, management should look for other ways to find customers, for example, by adding new features to the product, more aggressive advertising, more attractive packaging, or offering additional services.
Some companies may prefer to adapt to the strategy of competitors, namely as market followers. They usually have a relatively weak market position with a relatively low market share. They become market followers rather than market challengers. They try to find opportunities without having to fight openly with market leaders.
Porter proposed three basic competitive strategy alternatives. We call this Porter’s generic strategies.
- Cost leadership
Cost leadership strategy
This strategy requires companies to operate most efficiently for a certain level of quality. In other words, firms must produce at the lowest possible cost than the average of their competitors in the industry.
To get a higher profit than competitors, the company can sell its products at the industry’s average price. Or, they sell it slightly below the industry average to attract more customers.
Long story short, a cost leadership strategy offers lower margins compared to a differentiation strategy. The critical success factors of this strategy are cost efficiency and selling as many products as possible. When price wars emerge in the market, firms can maintain profitability due to lower costs, while competitors suffer losses.
The differentiation strategy requires companies to develop products that are unique and highly desirable to consumers. This uniqueness allows customers to be willing to pay higher prices.
The differentiation strategy offers high-profit margins because of the premium price. Companies may not have to sell high volumes to achieve their revenue and profitability targets. To market them, they will usually focus on a few quality conscious customers instead of price-conscious.
This strategy requires companies to continue to innovate and adapt to changing consumer tastes. Failure to do so ultimately renders competitive advantage unsustainable.
Under a focus strategy, the company basically adopts a differentiation strategy or price leadership. It’s just that the company concentrates on a narrow segment (market niche) instead of the main market.
By focusing its strategy on a narrower market, the company enjoys a high level of customer loyalty. Competitive pressure is also relatively low because large competitors are usually reluctant to enter the market.
However, the company can only sell at a lower volume. This implies lower bargaining power over their suppliers. Long story short, making sure the market is profitable is the first task before getting into this market.