Competition is basic to the free enterprise system. It is involved in all observable phenomena of the market - the prices at which products are exchanged, the kinds and qualities of products produced, the quantities exchanged, the methods of distribution employed, and the emphasis placed on promotion. Over many decades, economists have contributed to the theory of competition. A well-recognized body of theoretical knowledge about competition has emerged and can be grouped broadly into two categories: (a) economic theory and (b) industrial organization perspective. These and certain other hypotheses on competition from the viewpoint of businesspeople will now be introduced.

Economic Theory of Competition Economists have worked with many different models of competition. Still central to much of their work is the model of perfect competition, which is based on the premise that, when a large number of buyers and sellers in the market are dealing in homogeneous products, there is complete freedom to enter or exit the market and everyone has complete and accurate knowledge about everyone else.

Industrial Organization Perspective The essence of the industrial organization (IO) perspective is that a firm’s position in the marketplace depends critically on the characteristics of the industry environment in which it competes. The industry environment comprises structure, conduct, and performance. Structure refers to the economic and technical perspectives of the industry in the context in which firms compete. It includes (a) concentration in the industry (i.e., the number and size distribution of firms), (b) barriers to entry in the industry, and (c) product differentiation among the offerings of different firms that make up the industry. Conduct, which is essentially strategy, refers to firms’ behavior in such matters as pricing, advertising, and distribution. Performance includes social performance, measured in terms of allocative efficiency (profitability), technical efficiency (cost minimization), and innovativeness. Following the IO thesis, the structure of each industry vis-à-vis concentration, product differentiation, and entry barriers varies. Structure plays an important role in the competitive behavior of different firms in the market. Businesspeople must be continually aware of the structure of the markets they are presently in or of those they seek to enter. Their appraisal of their present and future competitive posture will be influenced substantially by the size and concentration of existing firms as well as by the extent of product differentiation and the presence or absence of significant barriers to entry. If a manager has already introduced the firm’s products into a market, the existence of certain structural features may provide the manager with a degree of insulation from the intrusion of firms not presently in that market. The absence, or relative unimportance, of one or more entry barriers, for example, supplies the manager with insights into the direction from which potential competition might come. Conversely, the presence or absence of entry barriers indicates the relative degree of effort required and the success that might be enjoyed if the manager attempted to enter a specific market. In short, a fundamental purpose of marketing strategy involves the building of entry barriers to protect present markets and the overcoming of existing entry barriers around markets that have an attractive potential.

Business Viewpoint From the businessperson’s perspective, competition refers to rivalry among firms operating in a market to fill the same customer need. The businessperson’s major interest is to keep the market to himself or herself by adopting appropriate strategies. How and why competition occurs, its intensity, and what escape routes are feasible have not been conceptualized. In other words, there does not exist a theory of competition from the business viewpoint. In recent years, however, Henderson has developed the theory of strategic competition discussed above. Some of the hypotheses on which his theory rests derive from military warfare:

• Competitors who persist and survive have a unique advantage over all others. If they did not have this advantage, then others would crowd them out of the market.

• If competitors are different and coexist, then each must have a distinct advantage over the other. Such an advantage can only exist if differences in a competitor’s characteristics match differences in the environment that give those characteristics their relative value.

• Any change in the environment changes the factor weighting of environmental characteristics and, therefore, shifts the boundaries of competitive equilibrium and “competitive segments.’’ Competitors who adapt best or fastest gain an advantage from change in the environment.

Henderson presents an interesting new way of looking at the marketplace: as a battleground where opposing forces (competitors) devise ways (strategies) to outperform each other. Some of his hypotheses can be readily observed, tested, and validated and could lead to a general theory of business competition. However, many of his interlocking hypotheses must still be revised and tested.

CLASSIFYING COMPETITORS Abusiness may face competition from various sources either within or outside its industry. Competition may come from essentially similar products or from substitutes. The competitor may be a small firm or a large multinational corporation. To gain an adequate perspective on the competition, a firm needs to identify all current and potential sources of competition. Competition is triggered when different industries try to serve the same customer needs and demands. For example, a customer’s entertainment needs may be filled by television, sports, publishing, or travel. New industries may also enter the arena to satisfy entertainment needs. In the early 1980s, for example, the computer industry entered the entertainment field with video games. Different industries position themselves to serve different customer demands - existing, latent, and incipient.

Existing demand occurs when a product is bought to satisfy a recognized need. An example is Swatch Watch to determine time. Latent demand refers to a situation where a particular need has been recognized, but no products have yet been offered to satisfy the need. Sony tapped the latent demand through Walkman for the attraction of “music on the move.” Incipient demand occurs when certain trends lead to the emergence of a need of which the customer is not yet aware. A product that makes it feasible to read articles while sleeping would illustrate the incipient demand. A competitor may be an existing firm or a new entrant. The new entrant may enter the market with a product developed through research and development or through acquisition. For example, Texas Instruments entered the educational toy business through research and development that led to the manufacture of their Speak and Spell product. Philip Morris entered the beer market by acquiring Miller Brewing Company. Often an industry competes by producing different product lines. General Foods Corporation, for example, offers ground, regular instant, freeze-dried, decaffeinated, and “international” coffee to the coffee market. Product lines can be grouped into three categories: a me-too product, an improved product, or a breakthrough product. A me-too product is similar to current offerings. One of many brands currently available in the market, it offers no special advantage over competing products.

An improved product is one that, while not unique, is generally superior to many existing brands. A breakthrough product is an innovation and is usually technical in nature. The digital watch and the color television set were once breakthrough products. In the watch business, companies have traditionally competed by offering me-too products. Occasionally, a competitor comes out with an improved product, as Seiko did in the 1970s by introducing quartz watches. Quartz watches were a little fancier and supposedly more accurate than other watches. Texas Instruments, however, entered the watch business via a breakthrough product, the digital watch. Finally, the scope of a competing firm’s activities may be limited or extensive. For example, General Mills may not worry if a regional chain of Italian eateries is established to compete against its Olive Garden chain of Italian restaurants. However, if McDonald’s were to start offering Italian food, General Mills would be concerned at the entry of such a strong and seasoned competitor. Currently, the thrust of the market is to satisfy existing demand. An example of a product to satisfy latent demand would be a liquid that promises weight loss; a liquid to prevent aging would be an example of a product to satisfy incipient demand. The industries that currently offer products to quench customer thirst are the liquor, beer, wine, soft drink, milk, coffee, tea, drinking water, and fruit juice industries. Arelatively new entrant is mineral and sparkling water. Looking just at the soft drink industry, assuming that this is the field that most interests our company, we see that the majority of competitors offer me-too products (e.g., regular cola, diet cola, lemonade, and other fruit-based drinks). However, caffeine- free cola has been introduced by two major competitors, Coca-Cola Company and PepsiCo. There has been a breakthrough in the form of low-calorie, caffeine-free drinks. A beverage containing a day’s nutritional requirements is feasible in the future. The companies that currently compete in the regular cola market are Coca- Cola, PepsiCo, Seven-Up, Dr. Pepper, and a few others. Among these, however, the first two have a major share of the cola market. Among new industry entrants, General Foods Corporation and Nestle Company are likely candidates (an assumption). The two principal competitors, Coca-Cola Company and PepsiCo, are large multinational, multibusiness firms. This is the competitive arena where our company will have to fight if it enters the soft drink business.