The
current market situation in every sector is set by the competition
and the influence of profits. If companies compete with prices, they
generate less profits and the sector can find itself in a bad situation.
New companies will not want to join. In sectors where companies don't
compete with price, they compete with publicity, innovation, product
quality / service, .... To determine the intensity of the competition
you have to consider the influence of the following factors:
-
Concentration
This
refers to the number of companies that compete in a sector and their
size. There is a relationship between the number of companies and
the price of their products. In computing companies (like Microsoft
with computer operating systems), the company has the freedom to fix
their prices. In the case of oligopolies (market freed by a small
group of companies) the competition in prices is limited to agreements
of "price parallels" between companies. In markets in which
two companies clearly dominate (Coca Cola y Pepsi), the competition
is not with prices, as they are similar, but with their publicity
campaigns and promotions.
-
Diversity of competitors
A
few decades ago, companies that competed within a market had similar
characteristics with regards to organiztion structure, costs, etc.
This caused less rivalry. With globalization and the opening of boarders,
the conditions companies compete in have grown greatly. Nowadays,
companies tend to outsource a lot of work. Those that don't outsource
have origins, structures, costs and different objectives, but exist
within the same market.
-
Differentiation of the product
There
is the tendancy for some consumers to substitute one product for another
if the products are on offer more frequently. This obliges companies
to reduce their prices with the aim of increasing their sales.
However,
we must talk about the product or service commodity, which is differentiated
from the rest because of its price. In this case, the competition
only has to worry about price, which is usually lower, because they
offer less benefits to the consumers. Examples of these types of products
are salt, bricks and cement, mining products,...
-
Too much capacity and exit barriers
It
is essential to consider a company's capacity, with the objective
of using all of the efficient resources available. If a company is
not able to achieve this they should reduce the price of their products
to achieve a greater sales volume. Together with this, we should refer
to the exit barriers, which are the costs that a company has to face
when leaving a sector. The exit barriers could be the investment in
lasting and specialized investments or the contractual protection
of the employees in case of dismissal.
-
Conditions of the costs: scale
economies and relationships between fixed and variable costs
This
is related to what we have already spoken about - a company's production
capacity. An excess of capacity obliges a company to lower its prices.
However, how far can we lower the prices depends on the cost structure
of the company. As a general rule, the company should cover their
variable costs. This way the in relationship between fixed and variable
costs the fixed costs will predominate. The company will try to undertake
any business to cover the variable costs.
