*Chapter 4: Understanding Competition

Question 1

Define competitors

Answer 1

These are businesses/organisations that offer products and services to the same target market and try to satisfy the same consumer needs

Question 2

Name the different types of competition

Answer 2

1. Direct competitors - offer the same or similar products to satisfy the same need. For example Coca-Cola vs Pepsi
2. Close competitors - offer different products to satisfy the same need. For example Coca-Cola & Pepsi vs other soft drinks (no name brand)
3. Substitute product - offer different product to satisfy the same need. For example juice substitute for Coca-Cola & Pepsi
4. Indirect competitors - offer different products, that may satisfy different need. They also include the products that are easily substituted, for example a cell phone vs camera.

Question 3

What are the 2 main reasons that organisations need to differentiate themselves from competitors in the market environment

Answer 3

• consumers are well informed about product choices
• competition is becoming intense. the threat of new market entrants

Question 4

Name the main types of economic competitions (pg 128)

Answer 4

1. Monopoly
2. Monopolistic competition
3. Oligopoly
4. Pure competition

Question 5

Explain monopoly

Answer 5

One firm owns all or or nearly all of the available resources. The product is unique and there are no substitutes. Market entry is blocked and there is complete price control.

Question 6

Explain monopolistic competition

Answer 6

There are numerous competitors that have some control over the market price.

Firms produce perfectly substitute products, so in someway their products are differentiated through quality, price and other distinguishing features of value to customers. There are few barriers to entry.

For example bookstores, restaurants

Question 7

Explain oligopoly

Answer 7

A few competitors control the market price. Their products are similar. And there are high entry barriers. It is expensive for new competing firms to enter the market. They have some level of price control.

Question 8

Explain pure competition/perfect competition

Answer 8

Many competitors sell the same (homogeneous) products. Each seller has no control over the price - as it is determined by the market. There are no barriers to entry.

Question 9

Long-term impact of competition in relation to marketing and promotion

Answer 9

Monopoly - little to no promotion. Their marketing task is to maintain blocked entry through public relations, advertising expenditure etc.

Monopolistic competition - promotion is very important. Their key marketing task is to maintain differentiated products

Pure/perfect competition - the importance of promotion is unimportant. Their key marketing task is to obtain lower product and distribution cost

Question 10

What does industry structure refer to

Answer 10

It refers to the number and size of competitors in an industry

Question 11

What are the Porter’s five forces model that shape competition

Answer 11

1. The threat of new entrance
2. The bargaining power of suppliers
3. The bargaining power of customers
4. Threat of substitute product
5. Rivalry among existing competitors

These five forces are regarded as competitors in this model

Question 12

Further explain the threat of new entrants

Answer 12

One of the objectives of new entrance is to gain market share. In which they will use aggressive marketing strategies.

The threats of new entrance into an industry depends on two factors:
1. the prevailing barriers to entry
2. the reaction of existing competitors that new entrants can expect

Question 13

Name the sources of barriers to entry (pg 130)

Answer 13

• Capital requirements
• Unequal access to distribution channels
• Supply side economies of scale
• Demand side benefits of scale
• Restrictive government policies
• Incumbency advantages
• Customer switching costs

Question 14

What is the bargaining power of suppliers

Answer 14

Suppliers can strongly influence the profitability of competitors in an industry and the bargaining power of members of the distribution channel, they can do this by raising prices, shifting costs to other participants or limiting the quality of goods and services they provide

Question 15

What is the bargaining power of customers

Answer 15

Influential customers can force prices down demand higher quality or better service or even play competitors of against one another, this can negatively influence the profits of the whole industry

Question 16

It is impossible to focus on all competitors, what competitors should a firm focus on understanding

Answer 16

Understanding current competitors and potential competitors

Question 17

How can organisations understand current competitors and potential competitive

Answer 17

Current competitors
- by analysing market size, growth and profitability
- recognising the strength and weaknesses of their competitors

Potential competitors
- the process starts by identifying the firms for whom the barriers to entry are low and easily surmountable

Question 18

What are examples of organizations with low and surmountable barriers to entry (pg 134)

Answer 18

• firms that possess the necessary technology
• films with current market access
• firms with a strong brand in a specific product category
• firms with operating knowledge and skills in a specific area/region

Question 19

What is a competitor audit

Answer 19

The process of evaluating competitors strengths and weaknesses

Question 20

What are the five competitive positions

Answer 20

• dominant: have strong and protected technological leadership or monopoly
• strong: have sufficient access to resources and capabilities
• favorable: have exploitable strength and better opportunity
• tenable: they are vulnerable, perform just satisfactorily
• weak: unsatisfactory performance, inefficient and ineffective (any failing business)

Question 21

Explain the threat of substitute products

Answer 21

Competition from substitute products or services limits an industries profit potential by lowering the prices firms can change. Firms facing intense competition from substitutes must adequately differentiate themselves, otherwise the earnings and profitability will suffer