Year after year, very few companies use the same competitive approach. Your company and the industry are continuously changing, with new businesses and goods entering the market regularly. To achieve your unique objectives, your strategy for keeping ahead of the competition must alter. It doesn’t mean your prior approach was incorrect; it just means you now face new challenges and must adapt fast to your new position. We’ll go through each of the variables in more depth below.
Features in Products and Services
Product features are distinguishing characteristics of the products that set them different from others. When products or services are becoming more distinct, market rivalry tends to diminish, and vice versa. The rationale for this is that distinguishing characteristics make goods less interchangeable, reducing the quantity and attractiveness of alternatives accessible.
As an example, consider three food trucks that are directly next to each other. Imagine that the only variation between both the desserts they offer is the taste. Individuals who enjoy strawberries have no option but to go to the truck that gives them. On the other hand, all three trucks offer strawberry ice cream, their goods are homogeneous, and strawberry fans may pick between three distinct providers. As a consequence, there is more competition.
The Population of Sellers and Providers
The number of vendors has a direct impact on the number of options available to customers. When the number of providers selling the same or comparable goods grows, so does the degree of competition. Conversely, when the number of suppliers decreases, the sector becomes less competitive. In the most extreme example, a market with just one vendor has no competition since customers have no choice about where to purchase their goods.
Let’s go back to our three ice cream trucks to see how this works. Assuming that they all offer the same goods, customers have three equal choices. In such a scenario, each of the three vendors receives one-third of the market. If two more trucks take up residence in the same area, customers have two more options, and the trucks must divide the trade by five. In that scenario, each vendor must outperform four other trucks rather than just two, increasing competition.
In comparison, if everyone but one vendor goes out of business, the surviving truck can service the whole market, and there is no longer any rivalry. But imagine if these sellers and providers were to combine their resources and merge. In this instance, each truck would have to go through an arduous collaboration process, many aspects of which you can conquer through excellent M&A advisory.
Permeability of the Market
Entry barriers define how simple or hard it is to enter and leave a sector. High entry barriers (e.g., large initial expenditures, complex laws) may deter new vendors from joining the market, keeping competition low. On the other hand, if new vendors quickly enter and leave the market, incumbent merchants are less protected, and competition rises.
We can go back to our three ice cream trucks and see how it works. Suppose they all would have to get permission before selling ice cream. To make matters worse, suppose this permission costs USD 5000 and requires two years to acquire. In such a scenario, new vendors would find it difficult and time-consuming to join the market. Without such rules, anybody with a freezer may sell ice cream, and competition can skyrocket in a couple of days.
The Power in Information
The access to information in this context mainly relates to how challenging it is for customers to discover and compare costs. The degree of competition rises if it is simple for people to compare offerings and prices among rivals, and vice versa. The rationale for this is that lowering the price of a competitive product (i.e., replacement) enhances its appeal, but only if customers know it.
Imagine our three ice cream trucks are required to post all of their pricing on a giant board at the street entrance. Buyers may easily compare costs and choose the most competitive deal as a result of this. In comparison, since none of them actively advertise their pricing, customers must travel to every one of them and inquire how much their ice cream charges until they can choose the best deal. Most customers are unlikely to do so since the potential cost would be too large.
When customers choose between various goods or providers, this is referred to as competition. Product characteristics, the number of vendors, entry hurdles, information availability, and location are the five variables that affect competitiveness. The appeal of alternatives is influenced by unique product characteristics and the availability of information. In contrast, their availability is influenced by the number of vendors, obstacles to the entrance, and location.