Competition in Markets Lecture 2 Master of Science Agro-Technology and Business Faculty of Agriculture and Forestry University of Guyana

Competition in Markets In economics, "competition" is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, promotion and place..

Identifying competitors in a competitive market Same target markets - Competitors that participate in one or more of the current or envisioned target markets for the business Product & service strategy similarity - Businesses that have a similar product and/or service strategy or offer a similar portfolio of products and services Common core competencies - Companies whose management team, founders, key players or advisors have core competencies in common with your business. This can include technology, management, processes. Comparable business processes - Firms that appear to have comparable underlying business processes

Identifying competitors in a competitive market Similar business vision - Ventures that have a similar vision for the future at a business unit level Relevant intellectual property - Competitors who have intellectual property that could be used to limit your market opportunities Capitalization strength - Corporations with strength in financial capitalization that could enter your target market Brand similarity - Companies who appear on the surface to have a similar brand identity Organization maturity- Organization's level of maturity to serve customers in planned target markets. This includes maturity in distribution, sales, channels, quality, customer relationships, ... Participates in relevant industry groups - Firms who are actively participating in relevant industry groups that serve your target market

Elements of Competition Michael Porter developed the five forces model to help business executives understand and deal with competition. Porter argues that factors affecting competition are largely similar regardless of the industry. His five forces or identified elements indicate what shape competition include competition among existing competitors, bargaining power of customers, bargaining power of suppliers, threat of substitute products and threat of new entrants.

Competition among Existing Competitors Established companies have competitive advantages such as loyal customers, premier locations, good supply chains and a better understanding of the market. New companies may find it difficult dealing with already-established competitors, since they need to convince their customers to switch providers. To overcome this hurdle, some firms get information about rivals from customers, suppliers and employees, and study the specific products and services they sell. They then use this to develop strategies to overcome the competition.

Bargaining Power of Customers Customers’ bargaining power greatly influences a company’s competitive strategy. Buyers have the power to demand lower prices in a system where their number is relatively small compared to that of sellers. In such cases, when a customer becomes dissatisfied with the quality of service or pricing in a certain store, he can easily switch to rivals. On the other hand, if your business is the lone provider of a product or service, the customer has little bargaining power and you can be more aggressive in your pricing strategy.

Bargaining Power of Suppliers Suppliers provide the inputs or raw materials for business. Their bargaining power has a direct impact on the company’s profit margins, as the price at which they sell inputs to business will determine the selling prices of the finished products. Suppliers have a high bargaining power in cases where they are few, there are no substitutes for supplies or when there is no unity between buying companies. If there are two suppliers for a specific good your business needs, for example, and one goes out of business, the other supplier has the power to raise prices, which will impact your ability to keep your cost structure intact.

Threat of Substitute Products Substitute products give consumers the opportunity to choose alternatives based on price or quality. This increases competition, since a consumer can easily forgo buying a particular product in place of another. For instance, a consumer may buy almond butter in place of peanut butter because of the former’s apparent health benefits. For a business to maintain superiority over rivals, it needs to invest more in developing brand loyalty based on consumers’ preferences to stand out from other products in its category.

Threat of New Entrants If an industry has low barriers to entry, a business faces the risk of competition from new entrants. New entrants can introduce tactics like lower pricing and aggressive marketing strategies in an effort to attract customers. New companies also can offer suppliers better prices and terms so that they increase competition with existing players. High entry barriers, such as customer loyalty, limited distribution channels and shortage of key resources, may limit this competitive danger.

Porter's Five Forces Industry Analysis

Rivalry According to Quick MBA, the rivalry portion of Porter’s Five Forces measures the degree of competition for the product or service you’re selling. Under the model, competition works to drive the profits for the company to zero. The model says that if a business can find a way to differentiate the business from its competition, it can gain the competitive advantage, increase its market share and increase the business profits.

Threat of Substitution According to Porter’s theory, the sales for your business cannot only be affected by the product or service your competitors offer, but also threatened by products or services from outside industries that can easily replace your own product or service. If a buyer of a product or service believes he can find a substitute for a less expensive price, this can adversely affect your own business sales.

Purchasing Power How much money potential customers have in the market where you intend to sell also affects your business. When customer purchasing power is high, then your business has many potential customers. On the other hand, if the purchasing power of customers is low or weak, then your sales may suffer.

Supplier Power The suppliers you rely on to make your product or to provide your service can influence the success or failure of your business. For example, if a supplier of the raw materials you need to produce your product increases her prices, not only does it cost you more money to obtain those materials, but you may also have to raise the price of your own product in order to turn a profit. In some industries, suppliers may be limited, so simply switching suppliers to obtain better pricing may not be an option.

Barriers to Entry Barriers to entry are the factors that prohibit your business from increasing profits. For example, with too many companies offering the same product or service to the same market, there are too many companies fighting over the same group of customers, and therefore, no one business ever pulls out ahead of the rest.