An organisation may be one of a few similar service providers or product manufacturers — there are not many passenger jet manufacturers in the world, let alone in one country.
Another may be one of thousands of comparable organisations — small shops or schools, for instance — which may or may not have strong local competition from other shops or schools.
You should think of the competitive environment as comprising the other organisations whose actions influence yours, and which your organisation influences by its actions. Thus it includes organisations that supply you with services and materials, professional groups that are strongly represented in your organisation, organisations that you collaborate with to provide services or products, and other organisations that provide similar services.
Porter’s five forces
Porter’s work on the economic structures of various industries has affected the way many organisations seek to understand and influence their competitive environments. Although developed as a rational model for calculating the profitability of firms in different industries, it offers most organisations some useful ideas and frameworks for considering their position in those environments.
The intensity of competition (industry structure)
Porter suggests that there are varying degrees of intensity in competition in different industries, depending on the following main factors:
The threat of new entrants to the market
Porter argues that the more intense the competition is, the easier it is for new players to enter a market. By new entrants, we mean organisations that may not have been previously thought of as competitors, but which come into and start competing in a market. A market can become attractive to new entrants because of the perceived profitability of the industry or an organisation's need to find new markets.
Examples are the entry of supermarkets into the financial services industry, and the large number of different organisations which now issue credit cards. New entrants to a market are often faced with barriers to entry, such as:
Economies of scale. Lower unit costs should result from producing at a higher level of output — it is cheaper to produce a unit of something when it is one of many such units you are producing. This can act as a high 'entry tax' on potential entrants into a market. Allied to this is the 'learning curve' effect — the more you do something, the better you get at finding the short cuts. Thus a new entrant will have to go through the time and expense of learning from its own mistakes.
Absolute cost barriers. These are costs which a new entrant has to bear, such as those for patents and secret processes, and gaining the same access to raw materials, subsidies or contracts that other companies may have.
Government policy. Licensing requirements, safety and environmental regulations, planning permissions and so on all add to the costs of entry and operation. When European governments auctioned new mobile phone network licences in 1999/2000 only the wealthiest could afford to bid the huge sums required to win them — a high entry barrier.
Differentiation. Because of the real or imagined differences between products, new entrants may have to spend substantial amounts to try to overcome the loyalties of existing buyers to particular brands.
Switching costs. These are incurred by a buyer when switching from one supplier to another. Examples of switching costs for organisations changing suppliers are the retraining of employees, new ancillary equipment and the redesign of products. The introduction of a new computer system from a new supplier could involve both capital expenditure and retraining, despite the high level of compatibility that is usually claimed for most systems.
Access to distribution channels. It may be particularly difficult for new entrants to gain access to a market when its wholesale and retail channels are very limited. Supermarkets may not wish to stock a new brand of washing powder if they already stock many others. When the Korean car manufacturer Daewoo wished to enter the European market, it had to set up a new network of dealers to gain access to customers. This is very expensive, and only very well-financed organisations can afford to take this route.
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