Fundamentals of Business

Competition

Open market rivalry in which every seller tries to get what other sellers are seeking at the same time-sales, profit, and market share-by offering the best practicable combination of price, quality, and service. Where the market information flows freely, competition plays a regulatory function in balancing demand and supply.

Seen as the pillar of capitalism in that it may stimulate innovation, encourage efficiency, or drive down prices, competition is touted as the foundation upon which capitalism is justified. According to microeconomic theory, no system of resource allocation is more efficient than pure competition.

Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

Three levels of economic competition have been classified:

√ The most narrow form is direct competition (also called category competition or brand competition), where products that perform the same function compete against each other.
For example, a brand of pick-up trucks competes with several different brands of pick up trucks. Sometimes two companies are rivals and one adds new products to their line so that each company distributes the same thing and they compete.
√ The next form is substitute or indirect competition competition, where products that are close substitutes for one another compete.
For example, butter competes with margarine, mayonnaise, and other various sauces and spreads.
√ The broadest form of competition is typically called budget competition competition. Included in this category is anything that the consumer might want to spend their available money on. For example, a family that has £20,000 available may choose to spend it on many different items, which can all be seen as competing with each other for the family's available money.

Competitive advantage is a position that a firm occupies in its competitive landscape. A competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs, including cost of capital. That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents invites competitors to duplicate the competitive advantage held by any one firm.

Core competency is something that a firm can do well and that meets the following three conditions:
1. It provides consumer benefits
2. It is not easy for competitors to imitate
3. It can be leveraged widely to many products and markets.

A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture, such as employee dedication.