The past performance of business units serves as an important input in formulating corporate-wide strategy. It helps in the assessment of the current situation and possible developments in the future. For example, if the profitability of an SBU has been declining over the past five years, an appraisal of current performance as satisfactory cannot be justified, assuming the trend continues. In addition, any projected rise in profitability must be thoroughly justified in the light of this trend. The perspectives of different SBUs over time, vis-à-vis other factors (top management values, concerns of stakeholders, corporate resources, and the socioeconomic-political-technological environment), show which have the potential for profitable growth. SBU performance is based on such measures as financial strength (sales - dollar or volume - operating profit before taxes, cash flow, depreciation, sales per employee, profits per employee, investment per employee, return on investment/ sales/assets, and asset turnover); human resources (use of employee skills, productivity, turnover, and ethnic and racial composition); facilities (rated capacity, capacity utilization, and modernization); inventories (raw materials, finished products, and obsolete inventory); marketing (research and development expenditures, new product introductions, number of salespersons, sales per salesperson, independent distributors, exclusive distributors, and promotion expenditures); international business (growth rate and geographic coverage); and managerial performance (leadership capabilities, planning, development of personnel, and delegation). Usually the volume of data that the above information would generate is much greater than required. It is desirable, therefore, for management to specify what measures it considers important in appraising the performance of SBUs. From the viewpoint of corporate management, the following three measures are frequently the principal measures of performance:

1. Effectiveness measures the success of a business’s products and programs in relation to those of its competitors in the market. Effectiveness commonly is measured by such items as sales growth in comparison with that of competitors or by changes in market share.

2. Efficiency is the outcome of a business’s programs in relation to the resources employed in implementing them. Common measures of efficiency are profitability as a percentage of sales and return on investment.

3. Adaptability is the business’s success in responding over time to changing conditions and opportunities in the environment. Adaptability can be measured in a variety of ways, but common measures are the number of successful new product introductions in relation to those of competitors and the percentage of sales accounted for by products introduced within some recent time period.

To ensure consistency in information received from different SBUs, it is worthwhile to develop a pro forma sheet listing the categories of information that corporate management desires. The general profile produced from the evaluation of information obtained through pro forma sheets provides a quick picture of how well things are going.

Understanding Competition In a free market economy, each company tries to outperform its competitors. A competitor is a rival. A company must know, therefore, how it stands up against each competitor with regard to “arms and ammunition” - skill in maneuvering opportunities, preparedness in reacting to threats, and so on. To obtain adequate knowledge about the competition, a company needs an excellent intelligence network. Typically, whenever one talks about competition, emphasis is placed on price, quality of product, delivery time, and other marketing variables. For the purposes of strategy development, however, one needs to go far beyond these marketing tactics. Simply knowing that a competitor has been lowering prices, for example, is not sufficient. Over and above that, one must know how much flexibility the competitor has in further reducing the price. Implicit here is the need for information about the competitor’s cost structure. This article begins by examining the meaning of competition. The theory of competition is reviewed, and a scheme for classifying competitors is advanced. Various sources of competitive intelligence are mentioned, and models for understanding competitive behavior are discussed. Finally, the impact of competition in formulating marketing strategy is analyzed.

MEANING OF COMPETITION

The term competition defies definition because the view of competition held by different groups (e.g., lawyers, economists, government officials, and businesspeople) varies. Most firms define competition in crude, simplistic, and unrealistic terms. Some firms fail to identify the true sources of competition; others underestimate the capabilities and reactions of their competitors. When the business climate is stable, a shallow outlook toward the competition might work, but in the current environment, business strategies must be competitively oriented.

Natural and Strategic Competition

A useful way to define competition is to differentiate between natural and strategic competition. Natural competition refers to the survival of the fittest in a given environment. It is an evolutionary process that weeds out the weaker of two rivals. Applied to the business world, it means that no two firms doing business across the board the same way in the same market can coexist forever. To survive, each firm must have something uniquely superior to the other. Natural competition is an extension of the biological phenomenon of Darwinian natural selection. Characteristically, this type of competition - evolution by adaptation - occurs by trial and error; is wildly opportunistic day to day; pursues growth for its own sake; and is very conservative, because growth from successful trials must prevail over death (i.e., bankruptcy) by random mistake.

Strategic competition is the studied deployment of resources based on a high degree of insight into the systematic cause and effect in the business ecological system. It tries to leave nothing to chance. Strategic competition is a new phenomenon in the business world that may well have the same impact upon business productivity that the industrial revolution had upon individual productivity. Strategic competition requires (a) an adequate amount of information about the situation, (b) development of a framework to understand the dynamic interactive system, (c) postponement of current consumption to provide investment capital, (d) commitment to invest major resources to an irreversible outcome, and (e) an ability to predict the output consequences even with incomplete knowledge of inputs. The following are the basic elements of strategic competition:

• The ability to understand competitive interaction as a complete dynamic system that includes the interaction of competitors, customers, money, people, and resources.

• The ability to use this understanding to predict the consequences of a given intervention in the system and how that intervention will result in new patterns of equilibrium.

• The availability of uncommitted resources that can be dedicated to different uses and purposes in the present even though the dedication is permanent and the benefits will be deferred.

• The ability to predict risk and return with sufficient accuracy and confidence to justify the commitment of such resources.

• The willingness to deliberately act to make the commitment.

Japan’s emergence as a major industrial power over a short span of time illustrates the practical application of strategic competition. The differences between Japan and the U.S. deserve some comparative analysis. There are lessons to be learned. These two leading industrial powers came from different directions, developed different methods, and followed different strategies. Japan is a small group of islands whose total land area is smaller than a number of our 50 states. The U.S., by comparison, is a vast land. Japan is mountainous with very little arable land. The U.S. is the world’s largest and most fertile agricultural area in a single country. Japan has virtually no energy or natural resources. The U.S. is richly endowed with energy, minerals, and other vital resources. Japan has one of the oldest, most homogenous, most stable cultures. For 2,000 years or more, there was virtually no immigration, no dilution of culture, or any foreign invasion. The U.S. has been a melting pot of immigrants from many cultures and many languages over one-tenth the time span. For most of its history, the U.S. has been an agrarian society and a frontier society. The Japanese developed a high order of skill in living together in cooperation over many centuries. Americans developed a frontier mentality of self-reliance and individuality. The evolution of the U.S. into a vast industrial society was a classic example of natural competition in a rich environment with no constraints or artificial barriers. This option was not open to Japan. It had been in self-imposed isolation from the rest of the world for several hundred years until Commodore Perry sailed into Tokyo harbor and forced the signing of a navigation and trade treaty. Japan had been unaware of the industrial revolution already well underway in the West. It decided to compete in that world. But it had no resources. To rise above a medieval economy, Japan had to obtain foreign materials. To obtain foreign materials, it had to buy them. To buy abroad required foreign exchange. To obtain foreign exchange, exports were required. Exports became Japan’s lifeline. But effective exports meant the maximum value added, first with minimum material and then with minimum direct labor. Eventually this led Japan from labor intensive to capital intensive and then to technology intensive businesses. Japan was forced to develop strategic business competition as part of national policy.