Wednesday, November 9, 2011

Can Competition be good?

Can competitors be good? What are some of the ways in which they can be beneficial? What are the characteristics of “good” competitors?

This post relates the “Competitor Analysis: Understanding your Opponents” book excerpt to another excerpt “Competitor selection” from the book Competitive advantage by Michael Porter. I intend to answer the above mentioned questions by giving a short summary of the excerpt on competitor selection. The excerpt on Competitor analysis views competition in a slightly negative sense in as much as competition is viewed as a threat (They win – you lose). On the other hand, the excerpt on competitor selection argues that the right competition can strengthen a firm’s competitive advantage and help improve the structure of the industry. However,” bad” competitors need to be attacked and dealt with at all times.

Some of the strategic benefits of good competitors are:

1) Aid in increasing competitive advantage: This is done by competitors who:

Absorb demand fluctuations: So that the firm is not the only one bearing the brunt of cyclicality, seasonality etc

Serve unattractive segments: In the absence of a good competitor the firm would have to srve unattractive segments as well.

Increase motivation: Prevent a firm from being complacent

Improve bargaining position with labor and regulators

2) Improving current industry structure

One way of doing this is by “expanding the pie” i.e. by increasing industry demand

3) Aiding market development

Good competitors will share the costs of market development and reduce buyer’s risk, thus aiding in market development

4) Deterring entry: Good competitors would aid the form in deterring the entry of new entrants.

Good competitors are the ones who:

Are Credible and viable: A good competitor should have sufficient resources to aid market development and to deter new entrants. The competitor should be viable and credible enough to keep the firm from being complacent.

Understand the rules and have a good knowledge of costs: A ‘dumb’ competitor might not understand the rules of competition, read market signals nor have knowledge of costs which could cause it to disrupt the industry.

Have reconcilable goals: A good competitor has goals that are reconcilable with the firm’s goals. Some characteristics could be having comparable return on investment targets, being risk-averse, accepting its current profitability etc

Have clear, self-perceived weaknesses: This understanding would deter the competitor from entering the segments (or trying to gain relative position) that it views as its weakness. The firm would be able to maintain its strong position relative to the competitor in these segments.

Some of the characteristics of good competitors do make them a threat to the firm, in as much as they may eat into the firm’s market share, but without the good competitors, the firm would be worse off in the industry. For example, a good competitor’s knowledge of costs will stop it from unnecessarily subsidizing products which would hurt the industry as a whole.

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