Chapter 3

BUSINESS
COMPETITION
 After reading and studying the chapter, learner should be able

1. Discuss the nature and context of business competition

2. Explain and appreciate Porters Forces model related to business
competition
3. Analyze and contextualize the role of various forces or factors forming
part of Porters business competition model.
4. Illustrate why product substitutes are vital threat to competition
5. Explain the role played by stakeholder groups associated with
business competition
BACKGROUND
A number of considerations as well as theoretical principles were
discussed in Chapter 2 as regards to realities in the business that
necessitate changes in the conduct of business every now and then.
These theories and principles were attributed to as drivers and
motivators constantly reminding business managers to be concerned
with addressing the challenges of competition in the business and
consideration for strategic management as well.
a midst a variety of theories and principles that drive business
managers and strategists to be creative, innovative and skillful in terms
of out competing of edging out its rivals in the business, some of them
stand out that the rest
Michael Porters
Business competition model introduced in the 1980s. Its context and
component are somehow numerous and need some elaboration that
a separate chapter
The traditional concept of business competition whereby players
within the industry and direct competitors are very much concerned
with how to outdo or outwit each other and be market managers.
With the advent of the concepts of strategic management, the
popularization of Porters five forces model and a variety of factors
that make business somehow difficult, the traditional view on
business competition has been waning out. Michael Porters
competition model has played a key role and influence in the practice
of strategic management.
Porters Competition Model
There is no doubt that in many ways, Michael Porter has made
substantial contribution in the field of strategic management via his
business competition model which originally comes in five major
forces; hence, the so called Porters Five Forces Competition Model.
The theory advocates that other that the competition of rivalry
among business organizations producing or selling the same or
similar products in the same market sector or segment , there are
other factors or forces that drive business competition.
The kind of competition expounded by Michael Porter goes beyond
the domain of price, kind and quality aspects as dominant factors in
competition. When it was introduced, the model included five major
forces but has been expanded to include another important force
lumped into what is called the stakeholders group.
The specific roles played by the forces of the business competition
model are individually addressed or discussed below.

Substitute Products
(of firms in other industries)

Rivalry
Suppliers of Among
Buyers
Key Inputs Competing
Sellers

Potential New
Entrants
 Potential entrants

Other
stakeholders Industry
Competitors Buyers

Suppliers
Rivalry among
existing firms

Substittutes
Potential entrants Threat of new entrants
Other Stakeholders - Relative power of Unions, Government.
Suppliers Bargaining power of Suppliers
Substitutes Threats of substitute products or services
Buyers Bargaining power of Buyers
Rivalry among Competing Sellers
Rivalry among competing sellers or producers. Constitutes the traditional
view of business competition and this is positioned in the middle block in
Porters business competition model refers to the key players or direct
competitors within the industry or sector offering the same or similar
products or services.
For strategic management purposes, rivalry among competing sellers is the
most powerful and important aspect of Porters competition model.

a) is price competition vigorous;

b) active efforts to improve quality;
c) are rivalry racing to offer better performance features;
d) are rivals racing to offer better customer service;
e) a lot of advertising/sales promotions;
f) active efforts to build a stronger dealer network;
g) active product innovation;
h) active use of other weapons of rivalry;
What causes rivalry to be stronger?
Rivalry among competing sellers may be strong or weak depending on
certain conditions. Among the factors that result to strong or active rivalry
and competition among businesses engaged in similar products or services
are as follows:
a) active jockeying for position among rivals and frequent launches of new
offensives to gain sales and market share;
b) a number of firms that are relatively equal in size and capability;
c) slow market growth;
d) industry conditions tempt some firms to go on the offensive to boost
volume and market share;
e) customers have low costs in switching to rival brands;
f) a successful strategic move carries a big payoff:
g) costs more to get out of business than to stay in;
h) firms have diverse strategies, corporate priorities, resources, and
countries of origin
Determinants of rivalry
Other than the other factors that cause or result to rivalry within the
industry to be considered stiff and threatening, Pitts and Lei (2000) have
identified determinants of rivalries within the sectors such as the following:

a) the level of industrys growth;

b) fixed (or storage) cost value added;
c) intermittent overcapacity;
d) product differences;
e) brand identity;
f) switching costs;
g) concentration and balance;
Suppliers of Key Inputs
This includes another group of business organizations outside the middle
box of Porters competition model in the sense that they do not pose as
direct threat to competition. In a sense, the role of suppliers is to provide
inputs or doing supportive role to the key players belonging to the middle
box who are competing with one another. This group includes suppliers of
raw materials and other inputs to products and services offered by the key
players in the market or the rivals identified in the middle block of the
Porter model. They are considered part of the competition because of their
potential to join the foray by producing a product or service and joining the
direct competition with existing business they used to deal with suppliers
can manipulate prices to achieve profit goals or favor some of their clients
thus making one of the key players more competitive in pricing their
product.
Competitive force of suppliers
Outside of being directly involved in competing with the business
organizations they are dealing with , the competitive force or pressure
that suppliers exert may come in many forms. Suppliers are considered
strong competitive force when the following situation prevails:

a) item makes up large portion of product costs, is crucial to production

process, and/or significantly affects product quality;
b) it is costly for buyers to switch suppliers;
c) they have good reputations and growing demand;
d) they can supply a component cheaper than industry members can
make it themselves;
e) they do not have to contend with substitutes;
f) buying firms are not importantvustomers
Determinants of supplier power
in addition to the competitive force of suppliers enumerated
above, Pitts and Lei (2000) identified its role as a that threat
to competition given the presence or existence of the
following situations;

a) differences in inputs;
b) switching costs of suppliers and firms in the industry;
c) presence of substitute inputs;
d) supplier concentration;
e) importance of volume to supplier;
f)cost relative to total purchase in the industry;
g)impact of inputs on costs or differentiation;
Factors affecting supplier bargaining power
Strategically, to avoid turning suppliers into a competitive
force, there is no other way but to forget a collaboration with
suppliers. Collaboration with suppliers can be done in the form
of strategic alliance or joint venture thus creating competitive
pressures in the form of the following situations.

a) Rival sellers are forming long term strategic partnerships

with select suppliers to promote just in time deliveries and
reduced inventory and logistics costs
b) speed availability of next-generation components
c) enhance quality of parts being supplied
d) reduce suppliers costs which pave way for lower prices on
items supplied
e) competitive advantage potential may accurate to industry
rivals doing the best job of managing supply chain relationships
Substitutes
Substitutes generally refer to products or services which
prospective buyers can buy or source else where whose utility,
function and/or use is similar (or can act as substitute) to a
desired product for a lesser price or other reasons.

Substitute products or services are capable of providing similar

benefits, value or utility to the buying party; hence, it is but
natural for consumers to exercise their choice given the
limitations at their end. In some cases, the substitutes may even
have more benefits or utility to buyers and acquisition cost or
price more advantageous to the buyers
Factors affecting competition from substitutes
Product substitutes could be either weak for strong and they may
or may not be a matter that should bother strategies . However
when substitutes come in strong or threaten the company or the
industry as a whole, this is something that should be seriously
looked into
The following scenarios will indicate whether or not substitute
products are a strong force and hence should be given due
consideration :
a) sales of substitutes are growing rapidly ;
b) producers of substitute products add new capacities ;
c) profits of substitute products are up; and
d) popularity of substitute products is growing .
Determinants of substitution threats
Business organizations should regularly monitor technology
developments in the industry or sector they are operating as
this situation can lead to developing new products or service
that can threaten the very existence of the business. This is
true not only because of the threat of competition from
rivals ; the product itself may be considered obsolete if new
products considered substitutes have made substantial gain
and this scenario can be threatening not only to one
business organization but to the industry as a whole .
a) relative price of substitutes;
b) performance of the substitutes in the industry ;
c) switching coats involved in the act of substitution ;
d) buyers propensity or penchant for substitutes ; and
e) regulatory or other factors that tend to promote product
substitution .
Switching cost
Switching cost is a factor that leads prospective
customers to entertaining or considering the idea of
buying or patronizing other products for a variety of
reasons. Basically , switching cost refers to the amount
the buyers can save of forego in exchange for buying
other products or services they used to patronized .
In some cases , the product or service being offered is a
direct substitute and the price is comparatively high but
the promise of immediate or short and long-term
benefits is much more. In this case , there is switching
cost or additional expense in acquiring a product (may it
be direct or indirect substitute) that would somehow
scare the prospective buyer but the amount (or the
differential price) involved and the benefits it promises
are matter that are inviting the prospective buyer to
further think about it .
Role of buyers
Buyers are objects of desire of business competing in
the same segment or industry. They refer to
prospective clients , buyer , users and consumer of
the product or service whose varying purchasing
power and desire to bargain for a price or terms of
payment can effect competitiveness of certain
players in the market .
Traditionally ,prospective clients or buyers are simply
considered as target market for business
organizations. For strategists ,buyers are not simply
target markets but they also constitute a sector
acting as driving force that can disturb competition
or market conditions for after all , market is all
about demand and supply condition .
Competitive force of the buyers
Buyers are considered a strong competitive force in a variety of ways . This is particularly true
when the market is characterized by the so-called buyers market condition ( buyers
influence price levels in a particular market ) generally however ,buyers are a strong
competitive force when they comprise a large portion of the demand and purchase a sizable
percentage of industrys product .
Specifically , the driving forces brought about by buyers concern are as follow :
a) They buy in large quantities ;
b) They can integrate backward ;
c) Industrys product is standardized;
d) Their costs in switching to substitutes or other brands are low ;
e) They can purchase from several sellers;
f) They have high purchasing power ;
g) Bargaining leverage ;
h) Buyer concentration versus firm concentration;
i) Buyer switching cost relative to firms switching costs;
j) Buyer information ;
k) Availability of substitute products ;
l) Price sensitivity ;
m) Product difference;
n) Brand identity;
o) Impact on quality and performance ;
p) Buyer profits ; and
q) Decision maker incentives
When is bargaining power of buyers weak ?
Bargaining power of buyers relates to the ability of
the prospective buyers to seek discounts or better
deals and price given certain conditions favorable to
them . This is particularly true in the Asian market
where bargaining and quest for discount in
prevalent even with a tag price indicated on the
product . Buyers are considered weak under the
following scenarios or situations:
a) Buyer switching costs to competing brands are
high ;
b) There is a surge in buyer demand ;and
c) Seller-buyer collaboration or partnering provides
attractive win-win opportunities
Dealing with the competitive force of buyers
As buyers appear to be smart in seeking for an advantageous price
that somehow affects margin and profit levels of suppliers or
producers , entrepreneurs have to learn and live with this
dilemma . While there are many reasons why investors put up a
business , business organizations are established precisely to
serve the market or the buyers in particular with profits in mind .
There are the variety of option to take in dealing the buyers the
bottom line is to contain with the competitive force or influence
of the buyers are leveraged or anchored upon any of the
following :
a) The price buyers have to pay for the product make it
affordable ;
b) The quality of the product sold to buyers make it acceptable
to their standards and expectations;
c) Service buyers can expect from the business- be sure after sales
services are available whenever needed; and
d) Other conditions of the sale make sure that there are other
attractive conditions that come with the selling effort .
Potential and New Entrants
Potential and new entrants may not be considered active
players but in Porters business competition model ,
they are considered threat to existing business
concerns . Strategists or strategic managers in general
are supposed to be research - oriented and therefore
they must be aware of new developments in the
academe and research laboratories conscious of the
fact that it is only a matter of time that inventions and
innovations will be introduced to the market . While
potential and new entrants may be unnoticeable ,they
are considered factors to reckone with the moment a
new business organization comes into existence to
launch its products or services . Potential and new
entrants refer to business organizations attempting to
or have now joined the market trying hard to make a
name for their product and the business organizations
as a whole .
Barriers to New Entrants
New entrants in the industry bring in extra capacity to the industry and
any increase in demand can be an opportunity for new entrants.
William ,Jenkins et (2004) cited that if the new entrants have
similar product features and benefits to that of existing providers
,then the new entrant threat is by imitation . When this type of
imitation produces a similar competitive position and a similarity of
resources , the new entrants face the following entry barriers (
William .Jenkins ,et al)
a) Economies of scale;
b) Access to secret technology (patented and not patented );
c) Brand recognition;
d) Capital cost entry ;
e) Access to distribution channels ;
f) Lack of experience in carrying operational activities leading to
learning gaps, producing cost disadvantage ;
g) High customer switching costs ;
h) Access low cost inputs (labor) and ;
i) Legislative barriers entry.
The stakeholders
The term stakeholders emerged in the late 1990s and
became widely by the early 2000. An outgrowth of
consumerism and intrusion of progressive minds in the
business sector , the stakeholder group is a sector of the
economy or society which may be considered an
indirect player in the business arena unlike the other
five major components of the porter business
competition model but may have bearing upon the
business as a whole.
Keywords and phrases to remember :
Business competition model Buyers
Porters five forces competition model New Entrants
Stakeholder Switching cost
Suppliers Substitutes
Exercises question
1. Describe the context of business competition
model?
2. Enumerate and briefly describe each of the factors
identify in Porters business competition model ?
3. Different a competing product from a substitute
product ?
4. In what way can stakeholders group affect business
competition ?
5. Briefly discuss the term switching cost and describe
how affects business competition ?