Who are our competitors and what are their respective market shares? Are our competitors doing something better than us? What do we do better than them? If there are existing competitors in the market that are more established it might be difficult to compete. Established businesses may benefit from having recognisable brands and trusted relationships with consumers. The consequent customer loyalty may prevent customers from switching to a product offered by a new market entrant.
How does our cost structure compare with our competitors? Do we have higher fixed/variable costs? If so, why? Will this impact upon our ability to compete on price and thus attract customers if we enter/remain in that market? Established businesses are more likely to receive preferential rates from supply chain participants such as suppliers, reducing costs to a level that new businesses would struggle to match (having had little or no opportunity to earn good will or trust). In addition, an established business may benefit from economies of scale, enabling superior cost control and wider profit margins than that which a new entrant may be able to attain. Consequently, established firms may be able to undercut prices charged by new entrants.
How do competitors behave? Do companies in the market collaborate? Do they engage in price wars (e.g. gas stations/airlines)? Do they use advertising to diminish the reputation of their competitors?
- Price War: occurs when two or more companies repeatedly undercut each other’s prices in order to persuade customers to purchase their products over competitors’. Price wars can therefore be beneficial for consumers (provided the drop in price does not correlate with a drop in quality). Price wars may however lead to smaller businesses (which typically have less control over costs) making losses or being unable to compete.
“Barriers to entry” may reduce the chances of a business successfully starting up or entering a new market. If the company plans to enter a new market, does it face any barriers to entry? To compete in saturated markets (markets with many competitors), the company may need a unique selling point. Does it offer a product or service with unique attributes that differentiates that product from those sold by competitors? Can it find a way to significantly undercut competitor prices (as Ryanair did in the airline industry)? Such unique selling points could provide new entrants with a competitive advantage, resulting in a greater chance of success.
- Barriers To Entry: barriers to entry may reduce the chances of a business successfully starting up or entering a new market. Such barriers include: financial barriers; complicated or restrictive regulation (for instance certain jurisdictions may not allow foreign businesses to enter particular local markets); an inability to compete against established competitors; various risks and uncertainties; and a lack of resources.
Is the market heavily regulated? If so, how does the legal environment affect companies’ ability to trade, market their products and expand? Certain industries are regulated more than others (e.g. Tobacco, Alcohol, Arms etc.).
How is the market structured? Is it fragmented? Is there a monopoly or oligopoly? If so, this could indicate that new entrants would struggle to compete. How many firms are operating in the market and competing to sell to the same customers? This information is relevant as the ratio of suppliers to customers can affect buyer and supplier power. Does one supplier have a monopoly or are there many suppliers that compete on price?
- Fragmented Market: a fragmented market is a market in which many firms operate and most (or all) of these firms each have a relatively small market share.
- Monopoly / Oligopoly: where a firm (or a small group of firms in the case of an oligopoly) owns such a large share of its market that it has total (or substantial) control over trade within that market. A monopoly/oligopoly can arise where certain companies have a unique selling point that other companies struggle to compete against and/or entering the market involves significant costs/investment. The control afforded by a monopoly/oligopoly can therefore make it difficult for competitors to emerge. This can enable those with a monopoly (or those that are part of an oligopoly) to charge inflated prices, reduce the quality of their products (to cut costs) and/or refrain from innovating (improving the products), in the knowledge that consumers cannot purchase the same products from alternate suppliers. Monopolies/oligopolies may therefore be deemed anti-competitive and thus illegal, depending on the extent to which competition is reduced. This can be problematic if companies want to merge.
What are the key market segments within the market as a whole and how have these grown/retracted over time? If the company is looking to grow, should it try to sell more to its existing markets or move into new markets? Which segments do our competitors focus on? Have we focused our business on the segments that are growing? For instance, if you are a mobile phone manufacturer producing simple and cheap handsets, are the major competitors in your market also producing cheap handsets (i.e. focusing on the same market segment as you) or do they focus on a different segment (i.e. high end technologically advanced mobile phone handsets)? Are the market segments that you focus upon likely to remain profitable in the future?
- Market Segment: markets can typically be subdivided into segments (different sections) based on different factors, for instance the age, gender or income of consumers. For instance, within the mobile phone handset market, there are high-end, expensive handset models (e.g. the iPhone) and cheaper, basic handset models and these are targeted to different customer groups depending on their income/purchasing patterns.
What are the key problems and challenges relating to a particular market segment (e.g. luxury goods or basic goods)/the industry as a whole? Is the industry as a whole stable? Have industry revenues remained consistent across the year? Have there recently been any significant changes in supply/demand? How is the industry evolving/changing? Is the company well positioned to deal with these problems? Are competitors better placed to deal with them? For instance, if there is a recession and you sell only luxury goods, you may see a decrease in sales as consumers will generally be less willing to purchase expensive goods. However, if you also offer cheaper product ranges, or have a high enough profit margin that you are able to reduce the prices of luxury goods, you may be well positioned to deal with this issue.
By Jake Schogger - City Career Series