may be necessary to underpin economies of scale in lowering supply costs and prices) as its nature that matters. Porter emphasizes the importance of the presence of sophisticated and demanding buyers in stimulating the innovation and introduction of new products capable of being ‘transferred’ into global markets. The category of ‘related and supporting industries’ provides an important bedrock for competitive success through a network of suppliers and commercial infrastructure (see CLUSTERS). The final quadrant, ‘firm strategy, structure and rivalry’, Porter suggests, may be the most important of all, especially the element of fierce local competition. While international rivalries tend to be ‘analytical and distant’, local rivalries become intensively personal but nonetheless beneficial in providing a ‘springboard’ for international success. All these factors, it is suggested, are interrelated, creating a ‘virtuous circle’ of resource generation and application, and sensitivity in meeting customer demands.
competitive advantage (of firms) the possession by a firm of various assets and attributes (low-cost plants, innovative brands, ownership of raw material supplies, etc.) that give it a competitive edge over rival suppliers. To succeed against competitors in winning customers on a viable (profitable) and sustainable (long-run) basis, a firm must, depending on the nature of the market, be cost-effective and/or able to offer products that customers regard as preferable to the products offered by rival suppliers. The former enables a firm to meet and beat competitors on price, while the latter reflects the firm’s ability to establish PRODUCT DIFFERENTIATION advantage over competitors.
Cost advantages over competitors are of two major types:
(a) absolute cost advantages, that is, lower costs than competitors at all levels of output deriving from, for example, the use of superior production technology or from VERTICAL INTEGRATION of input supply and assembly operations;
(b) relative cost advantages, that is, cost advantages related to the scale of output accruing through the exploitation of ECONOMIES OF SCALE in production and marketing and through cumulative EXPERIENCE CURVE effects. Over time, investment in plant renewal, modernization and process innovation (either through in-house RESEARCH AND DEVELOPMENT or the early adoption of new technology developed elsewhere) is essential to maintain cost advantages.
Product differentiation advantages derive from:
(a) a variety of physical product properties and attributes (notably the ability to offer products that are regarded by customers as having unique qualities or as being functionally better than competitors’ products);
(b) the particular nuances and psychological images built into the firm’s product by associated advertising and sales promotion. Again, given the dynamic nature of markets, particularly product life cycle considerations, competitive advantage in this area needs to be sustained by an active programme of new product innovation and upgrading of existing lines. See COMPETITIVE STRATEGY, RESOURCE BASED THEORY OF THE FIRM, BARRIERS TO ENTRY, MOBILITY BARRIERS, VALUE-CREATED MODEL, VALUE CHAIN ANALYSIS.
competitive strategy an aspect of BUSINESS STRATEGY that involves the firm developing policies to meet and beat its competitors in supplying a particular product. This requires the firm to undertake an internal appraisal of its resources and capabilities relative to competitors to identify its particular strengths and weaknesses. It also requires the firm to undertake an external appraisal of the nature and strength of the various ‘forces driving competition’ in its chosen markets (see Fig 27), namely:
(a) rivalry amongst existing firms;
(b) bargaining power of input suppliers;
(c) bargaining power of customers;
(d) threat of new entrants; and
(e) the threat of substitute products.
The key to a successful competitive strategy is then:
(a) to understand fully what product attributes are demanded by buyers (whether it be low prices or product sophistication) with a view to;
(b) establishing, operationally, a position of COMPETITIVE ADVANTAGE that makes the firm less vulnerable to attack from established competitors and potential new entrants, and to erosion from the direction of buyers, suppliers and substitute products.
Fig. 27 Competitive strategy. (a) Forces driving competition in a market. (b) Three generic strategies. Source: Michael Porter.
There are three generic strategies for competitive success (Fig. 27 (b)): cost leadership, product differentiation and ‘focus’. Low costs, particularly in commodity-type markets, help the firm not only to survive price competition should it break out but, importantly, enable it to assume the role of market leader in establishing price levels that ensure high and stable levels of market profitability. The sources of cost-effectiveness are varied, including the exploitation of ECONOMIES OF SCALE, investment in best state-of-the-art technology and preferential access to raw materials or distribution channels. By adopting a PRODUCT DIFFERENTIATION strategy, a firm seeks to be unique in its market in a way that is valued by its potential customers. Product differentiation possibilities vary from market to market but are associated with the potential for distinguishing products by their physical properties and attributes and the experience of satisfaction – real and psychological – imparted by the product to consumers. General cost leadership and differentiation strategies seek to establish a COMPETITIVE ADVANTAGE over rival suppliers across the whole market. By contrast, ‘focus’ strategies aim to build competitive advantages in narrower segments of a market but, again, either in terms of cost or, more usually, differentiation characteristics, with ‘niche’ suppliers primarily catering for speciality product demands. See MARKET STRUCTURE, MARKET CONDUCT, MARKET PERFORMANCE, RESOURCE-BASED THEORY OF THE FIRM.
competitive tender an invitation for private sector firms to submit TENDERS (price bids) for contracts to supply goods or services to the public sector which the public sector has traditionally supplied for itself. Competitive tendering seeks to introduce competition in the provision of goods or services and thus reduce the costs to government departments, local authorities and health authorities. See DEREGULATION.
competitor a business rival of a firm supplying a good or service that offers buyers an identical or similar product. See COMPETITION, COMPETITIVE ADVANTAGE, COMPETITIVE STRATEGY, PRODUCT DIFFERENTIATION.
complementary products GOODS or SERVICES whose demands are interrelated (a joint demand) so that an increase in the price of one of the goods results in a fall in the demand for the other. For example, if the price of tennis rackets goes up, this results not only in a decrease in the demand for rackets but, because less tennis is now played, a fall also in the demand for tennis balls. See SUBSTITUTE PRODUCTS, CROSS-ELASTICITY OF DEMAND.
complete contract see CONTRACT.
complex monopoly a situation defined by UK COMPETITION POLICY as one in which two or more suppliers of a particular product restrict competition between themselves. ‘Complex monopoly’ in essence refers to an OLIGOPOLY situation where the firms concerned, although pursuing individual (i.e. non-collusive) policies, nonetheless behave in a uniform manner and produce a result that is non-competitive (i.e. similar to COLLUSION). The problem is that it is often difficult to distinguish between competitive and non-competitive situations. For example, if firms charge identical prices, is this reflective of competition (i.e. prices that are brought together because of competition) or a deliberate
