Components of Competition

In developing a marketing program, companies must consider the factors that drive competition: entry, the bargaining power of buyers and suppliers, existing rivalries, and substitution possibilities.35 Scanning the environment requires a look at all of them. These factors relate to a firm’s marketing mix decisions and may be used to create a barrier to entry, increase brand awareness, or intensify a fight for market share.

Entry    In considering the competition, a firm must assess the likelihood of new entrants. Additional producers increase industry capacity and tend to lower prices. A company scanning its environment must consider the possible  barriers to entry  for other firms, which are business practices or conditions that make it difficult for new firms to enter the market. Barriers to entry can be in the form of capital requirements, advertising expenditures, product identity, distribution access, or the cost to customers of switching suppliers. The higher the expense of the barrier, the more likely it will deter new entrants. For example, Western Union and MoneyGram dominate the $529 billion money transfer market because of their huge distribution networks of branch offices and global pickup locations. Potential competitors find it difficult to enter the market because lack of distribution limits consumer access.36

Power of Buyers and Suppliers    A competitive analysis must consider the power of buyers and suppliers. Powerful buyers exist when they are few in number, there are low switching costs, or the product represents a significant share of the buyer’s total costs. This last factor leads the buyer to exert significant pressure for price competition. A supplier gains power when the product is critical to the buyer and when it has built up the switching costs.

Existing Competitors and Substitutes    Competitive pressures among existing firms depend on the rate of industry growth. In slow-growth settings, competition is more heated for any possible gains in market share. High fixed costs also create competitive pressures for firms to fill production capacity. For example, airlines offer discounts for making early reservations and charge penalties for changes or cancellations in an effort to fill seats, which represent a high fixed cost.

Small Businesses as Competitors

While large companies provide familiar examples of the forms and components of competition, small businesses make up the majority of the competitive landscape for most businesses. Consider that there are approximately 28 million small businesses in the United States, which employ half of all private sector employees. In addition, small businesses generate 64 percent of all new jobs and 44 percent of the gross domestic product (GDP). Research has shown a strong correlation between national economic growth and the level of new small business activity in previous years.37