Week 3.3 Competitive Forces
Competition refers to the firms in the same market providing similar or substitute products. They also target the same consumer segments and try to satisfy a specific market's needs.
There are four basic forms of competition in the markets.
Monopoly occurs when only one firm sells the product or service. There is only one seller in these markets for a product with no close substitutes. If consumers are interested in this product, there is no other seller providing this good or a substitute good.
Examples are water, electricity, and most utility services.
In terms of the role of marketing in monopolistic markets, it is fairly small. Most monopolistic markets are regulated by the province or the federal government. Consumers cannot switch to another provider since there is no other firm providing the same or a substitute good. Promotion and advertising are almost non-existent for these reasons.
Oligopoly occurs when there are a few companies in the market who control the majority of the sales. In oligopolies, firms usually do not compete on price. Firms maximize their joint profits by cooperating rather than competing on price. Non-price competition is common in oligopolistic markets. Firms compete on other dimensions of the marketing mix rather than price, such as product quality, distribution, and/or promotion. Canada has quite a few oligopolistic markets including the airline industry and the banking industry.
3. Monopolistic competition
In monopolistic competition, there are many sellers in the market. Sellers sell products that are similar but not identical. Products could be close substitutes.
Examples are apartments, books, bottled water, clothing, fast food, night clubs, etc.
In monopolistic competition, consumers substitute between the similar products. For example, consumers shopping for a compact car might switch from one brand to another based on the attributes and prices of the brands.
Advertising plays a very important role in monopolistic competition. As the products are differentiated (in other words the products are not identical), sellers feel the need to advertise so that they can point out their superior characteristics to the consumers. Coupons or promotional sales are frequently used marketing tactics in monopolistically competitive markets.
4. Pure competition
In pure (or perfect) competition, there are a very large number of sellers, every one of which sells an identical product.
Examples are companies that deal in commodities in agribusiness such as wheat, rice, and grain.
In perfect competition, advertising activities do not play an important role due to the products being identical. Marketing is more than just advertising. Distribution (Place “P” as one of the 4Ps) can play a role in improving access in perfectly competitive markets.
Porter's Five Forces
Porter’s five forces are commonly used to examine the industry structure.
Threat of New Entrants
Additional producers in the market puts more pressure on existing firms by increasing the industry capacity and bringing more innovation. In environmental scanning, companies pay attention to how easy it is for other firms to enter the same market. In some markets, there could be potential barriers to entry. Such barriers make it difficult for new firms to enter a market.
Entry into the market would be seen as a threat if additional producers in the market puts more pressure on the existing firms. This could be due to the increase in the supply in the industry or the pressure of new and highly innovative products. Existing firms must compete with new entrants in order to defend their market share.
Air traffic control in Canada is provided by NAV Canada and no other firm can get a license from the government to enter this market. It is the best practice to have a uniform air traffic control platform due to safety concerns.
Another example of entry barriers would be that one firm controls/owns the majority of the resources required to produce a particular product. De Beers Group owned almost 95% of diamond mines in the world and operated as a monopoly until early 2000. No other firm was able to enter the market due to not having access to the mines.
Power of Buyers and Power of Suppliers
Buyers become powerful under two conditions. First is when they are few in number. In this case, the loss of one customer means the loss of a big market share for the sellers. Second, buyers become powerful if there are low switching costs. It makes it easier for buyers to switch to another seller when there no switching costs or very low switching costs.
A supplier gains power under two conditions. First, when the product is critical to the buyer, which makes the buyer remain loyal to the seller. Second, when the seller has built up the switching costs. High switching costs are a factor deterring buyers from moving between different sellers. This is the reason behind the contracts you sign when you acquire a wireless or phone service provider.
Threat of Substitutes and Level of Existing Competition
The competition in the market affects the behavior of the firms in many ways such as setting their prices, their spending on marketing, as well as on research and development. We examined four different market structures: pure or perfect competition, monopolistic competition, oligopoly, and monopoly, in this lesson. Firms adjust their behavior based on the structure of the market.
High fixed costs also create competitive pressures. For example, airlines offer discounts for making early reservations and charge penalties for cancellations. Their fixed costs do not change whether they fill all the seats or end up with some vacant seats on the plane.
Other than large corporations, there are small, medium size, and micro enterprises. Small businesses make up the majority of the competitive landscape for most businesses. A small business is a firm that has fewer than 100 employees while a medium-sized business has more than 100 but less than 500 employees. A micro enterprise is a firm with fewer than 5 employees.
Small to medium size enterprises (SMEs) are the driving force behind most innovative products. They aggressively invest in research and development of new products/services, and new technologies.
Green Marketing: Incentives/Regulations
Green marketing refers to the efforts to produce, promote, and reclaim environmentally sensitive products.
ISO 14001 consists of worldwide standards for environmental quality and green marketing practices. ISO 14001 is developed by the International Standards Organization (ISO) in Geneva, Switzerland. More than 150 countries, including Canada and members of the European Union, apply ISO 14001 standards.
Companies who are involved in green marketing benefit from favourable word-of-mouth among consumers. Most of them outperform less environmentally responsible companies on financial performance. However, research shows that not all environmentally friendly practices are noticed by consumers. There is little-to-no impact on the consumers' choice of companies even though consumers indicate they are concerned about environment. For example, over 75% of leading Canadian companies are actively engaged in corporate social responsibility (CSR) initiatives, but only one-third of Canadian consumers are aware of any companies that do so. In many instances, consumers make a purchase decision based on lower prices, convenience, and excellent customer service rather than whether a company engages in CSR.
Stop and Think Question: How can we increase the recognition of companies who continue to engage in socially responsible activities and promote recognition for their efforts? Think about a couple ways before clicking reveal.
Click to reveal answer.
One way would be to announce an official list of green marketing companies. For example, Corporate Knights, a Canadian magazine for responsible business, prepares an annual list of Canada's best corporate citizens. Some of the companies recognized include Desjardins Group, Vancouver City Savings, Hydro One, and Sun Life.
Another way would be by educating consumers when it comes to environmentally conscious behaviour.
Eco-labelling is one way to accomplish this. For example, Corporate Knights has prepared reports for consumers to educate them on how to choose and use environmentally friendly products.