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Four Models of Competition and Their Implications For Marketing Strategy
Four Models of Competition and Their Implications For Marketing Strategy
Marketing Strategy
James E Nelson
This paper has two purposes. One is to improve our
understanding of competition by expanding bases of
thought from models in economics to models from
biology, globalization, and social- psychology. As used
in this paper, "competition" is defined as a struggle
between two or more entities for possession of some-
thing that is scarce and prized. The paper's other pur-
pose is to draw managerial implications from each
model, to provide guidance for marketing decision
This paper by Nelson focuses on four models makers attempting to achieve strategic competitive ad-
or views of competition—economic, vantage. As used in this paper, "strategic competitive
biological, globalization, and social- advantage" is defined as the long-term ability of an
psychological. Each model helps understand enterprise to offer superior value to the marketplace
(Day and Wensley, 1988; Porter, 1985).
competition as a complex social and
individual phenomenon and draws strategic Essentially, then, the paper attempts to answer
implications for marketing managers. these two questions:
James E Nelson is Associate Professor at the • What does it mean to compete, based on the four
College of Business Administration, University of models?
Colorado at Boulder, Boulder Colorado, USA. • What insights do the models give marketing
managers in making strategic decisions?
The following sections in this paper review and
explain economic, biological, globalization, and social-
psychological models of competition. The sections
necessarily are abbreviated—the literature that details
each of these models is enormous. After each discus-
sion, the section draws managerial implications.
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4
• Economic models stress that competitive ad
vantage cannot be maintained in the long run, ex
cept in the case of monopolies. Supranormal profits
always attract new competitors, like bees to honey.
Thus, competitors possessing competitive ad
vantage must move quickly to benefit from their
advantage, must take action to protect their com
petitive advantage, and must look constantly for
new competitive advantages. Competitive ad
vantage, like fame, is fleeting.
• Economic models show the value of offering the
market differentiated products and services. Dif
ferentiated products and services permit the com
petitor to exercise some "monopoly power" where
consumers will pay higher than "market" prices to
obtain greater satisfaction in their consumption.
Consumers, after all, are purchasing value as
sociated with their consumption experience — not the Relative Quality or Performance
physical, tangible product. Value comes either from Source : Buzzell and Bradley, 1989.
product quality (durability, reliability, consistency)
or product performance (speed, convenience, size, Thus, competitors may occasionally avoid compet-
style). ing and instead adopt cooperative tactics and
strategy for the greater good of the industry.
• Economic models show the advantage (to sellers)
of having only a few competitors, making it easier • Economic models stress the importance to strategy
to exercise monopoly power. Thus, strategies of of costs, price, product differentiation, and, to some
acquiring and merging, targeting weak com degree, advertising. The models neglect distribu-
petitors to force withdrawal or demise, and tion (Eliashberg and Chatterjee, 1985). Implications
for strategy as proposed by two specific economic
preventing potential competitors from entering a
models appear below:
market can move an industry from the less attrac
tive, monopolistic competition- model to an When one firm has a cost advantage, the best
oligopoly. strategy for rival firms may be to use different
competitive tools. For example, if the lower-cost
• Economic models highlight the exchange of firm spends more on advertising, the best policy
economic value between buyer and seller, where for rivals may be to charge a lower price, rather
economic value is ultimately set by the purchaser. than to match the advertising (Gupta and Krish-
If price for an item is raised beyond this value, nan, 1967).
exchange will not occur. This idea is expressed
succinctly in the idea of a value map, illustrated in In highly competitive situations, all companies
Figure 2 (Buzzell and Gale, 1989). The map shows are likely to adopt niching strategies by
a value relationship between relative quality or specialization; in relatively noncompetitive
situations, a market leader is more likely to adopt
performance and relative price. Competitors strive
a broad-based strategy that has universal appeal
to locate their products or services along the
while smaller competitors will again seek
diagonal at either economy, average, or premium
specialization (Ballou and Pipkin, 1980).
positions. Competitors strive also to move their
products or services downward to the right, offer- • Economic models imply that relationships among
ing better value and gaining competitive ad- competitors in the most competitive market struc-
vantage. ture—perfect competition—are almost never
• Economic models indicate that competition enemies or antagonists as arising from economic
benefits buyers at the expense of sellers. Increased considerations. For example, two farmers usually
competitive activity usually leads to lower prices will consider each other to be friends, not oppo-
and a reduction of economic profits; it sometimes nents or rivals, because any action either might take
leads to reductions in the number of competitors. will have no impact on the other.
6 Vikalpa
of interrelated changes in many others that greatly im- • Older enterprises have unique advantages over
pacts an environment. younger enterprises (Henderson, 1983). Older
enterprises have learned a great deal about how to
Strategic Implications of the Biological Model compete and about how their competitors compete.
• Only the fittest competitors survive. Eat or be eaten. Suppliers and customers in the industry have also
Live high on the food chain. Such adages stress that learned about these companies by reputation and
biological competition is competition to outlast all by experience. Moreover, suppliers and customers
competitors. Strategies consistent with this idea are are reluctant to alter their knowledge and be
combative, aggressive, and central to the con haviour unless younger enterprises offer strong in
tinuance of the enterprise. centives. However, advantages of age and
experience come at a price. Older enterprises must
• Competitors must live within environmental con constantly be on the guard against complacency
straints and adapt to environmental changes. Con and against fixation with their existing product and
straints on primary and industry resources mean process technologies.
that competitors often succeed or fail based on their
abilities to capture or control scarce resources. Con • Enterprises that are most similar to each other will
tracts, patents, trademarks, and copyrights are all compete most intensively. When one competitor
aspects of strategy that capture or control resources. has a clear and visible superiority, competition
Changes or transition periods in environments rep from the others will be limited (Henderson, 1983).
resent both problem and opportunity for com . As an example, when Kmart enters Singapore in
petitors. Leaders may find that factors which 1994, it will face its stiffest competition not from
produced their superior position now come to "Mom & Pop" neighbourhood stores but from
operate as an anchor. Challengers may find the Asian firms already entrenched and already using
transition period to be a window of opportunity retailing concepts adopted from the US. Kmart is
where their particular skills now show a better fit entering Southeast Asia partly because it felt no one
with market demands (Abell, 1978). competitor—Sogo, Takashimaya, Yao han, Isetan-
was dominant (Asian Wall Street Journal, August 17,
• Competitors must respect and sustain their en 1993).
vironments. Global sustainable development in
terms of improved efficiency, stabilized popula • Competitors that enter a market early generally will
tion, and restrained consumption offers great prob grow more rapidly and attain larger size than later
entrants. Typically, market shares of pioneers in an
lem and opportunity for competitors (Business
industry are some 10 to 20 percentage points higher
Week, May 11, 1992). Japan's efforts are notable.
than their largest competitor, depending on the
Tokyo's Research Institute of Innovative Technol
industry and its maturity (Robinson and Fornell,
ogy for the Earth has a $ 40 million annual budget. 1985, Robinson, 1988). Reasons for the success of
Japan uses only 50 per cent of the materials and early entrants are numerous (Czepiel, 1992).
energy as the US to produce a unit of GNP. On Pioneers as compared to late entrants find it easier
many products, this translates into a 5 per cent cost to gain share in the growing market, gain valuable
advantage. experience, and secure channel participation before
• Competitors in an environment often try to locate competitors, deter potential competitors from
themselves in an advantageous position or niche. entering, set prices to earn profits, and develop
The niche should be positioned some distance from loyal customers. However, pioneers face greater
immediate competitors, with the intent that com uncertainties in terms of changes in technology and
petition will be diminished. As examples, many greater risks in terms of development costs.
high-tech companies in Hong Kong, Korea, Singa • Competitors and, less frequently, markets can be
pore, and Taiwan are niched as follows: Hong Kong come extinct. The best defensive strategy is for
firms tend to specialize in electronic games, competitors to focus not on the products and ser
telephones, and audio appliances; Korea's in vices they produce but on the needs of its customers
memory chips, video appliances, and aerospace; and the benefits its customers derive from their
Singapore's in digital communications, software, consumption experience. Products and services
and biotechnology; and Taiwan's in computer may disappear but needs and benefits will endure.
peripherals, PCs, and application specific chips • Competitors sometimes avoid competition in cer
(Business Week, December 7,1992). tain tasks and instead cooperate like a school of fish
8 Vikalpa
petitors have emerged almost overnight. GATT force and distribution channels, two elements of the
negotiations have brought about liberalizations of in- marketing mix that multinationals will find dif-
ternational trade policy, stimulating trade and ficult to match. The firm might search for its own
heightening competition. multinational with whom to enter into a form of
partnership—if one multinational enters a market,
All these changes mean that managers today must others are almost certain to follow. The firm might
think globally even if they act only locally. Almost all recognize that often its best defensive strategy is a
small and medium scale enterprises already face inter- strong offensive strategy.
national competition in varying degrees in their local
• Enterprises have a number of available offensive
markets. This competition will only increase. Conse-
strategies in the face of multinational entry. At a
quently, many small and medium scale enterprises
minimum, the firm must recognize that competi
have begun to think and act internationally by export- tion is about to increase by an order of magnitude
ing, licensing, or forming joint ventures abroad. Some and prepare itself for battle. The firm must estimate
of these enterprises will soon find it beneficial to shift the strength of its enemy and consider just where
from this "part-time" international orientation to a "full- his weakness lies, how long the weakness will be
time" orientation, first seeing neighbouring markets as permitted to exist, and what actions can be taken
attractive as their own and then looking at more distant when the weakness disappears. The firm might
possibilities. It can be done—approximately 15 per cent attempt to build strong core brands and core brand
or $ 43 billion of Japan's total foreign investment is images to achieve customer loyalty at consumer
accounted for by businesses having fewer than 500 and channel of distribution levels. "Flanker" brands
employees (Asian Wall Street Journal, August 25,1993). and related products can be added to make market
entry even less attractive. Hindustan Lever seems
Strategic Implications of the Globalization Model
to be following such a strategy—it has introduced
• The globalization model of competition highlights more brands and brand extensions in the Indian
the importance to marketing strategy of knowing market over the last year than it has in its 100 year
local market conditions. However, the value of this history. An offensive strategy will require a
knowledge may disappear in a moment with the capable, loyal, and competitively oriented sales-
entry of a large multinational who changes the force. Publicity and advertising may build plat
fundamental nature of an industry. Competition forms on product value and, sometimes, on a
switches abruptly from competition of quantity "Made in ...." position. Most importantly, the
and price to competition "from the new com enterprise must develop its own reputation as a
modity, the new technology, the new source of formidable competitor. It must innovate, take chan
supply, the new type of organization—competition ces, and attack the invader.
which commands a decisive cost or quality ad • Marketing strategy may rely to some degree on
vantage and which strikes not at the margins of absolute and comparative advantages present in
profits and outputs of the existing firms but at their the local market. However, such advantages fre
foundations and their very lives" (Schumpeter, quently diminish or disappear quickly in the face
1942, p 84). In short, competition in a global model of strategic competitive advantage. Porter (1986, p
is ever changing—from directions and sources that 38) makes the point nicely: "Many forms of compe
are extremely difficult to anticipate. Strategy under titive advantage for the global firm derive less from
such conditions must emphasize the firm's en where it performs activities than from how it per
vironmental monitoring, anticipation, flexibility, forms them on a worldwide basis; economies of
quick reactions, efficiency, and most importantly, scale, proprietary learning, and differentiation with
delivery of value to its customers. multinational buyers are tied not to countries but to
• Specific strategic options available to firms the configuration and coordination of the firm's
threatened by a multinational entry can be placed worldwide system." In other words, marketing
into offensive and defensive categories. Enterprises strategy should emphasize first effectiveness, then
may tend to emphasize defensive strategies. For efficiency.
example, firms may downsize and niche by focus • Enterprises should seek markets either for export
ing on a smaller market segment for which the or entry where their existing successful strategies
firm's products and services are ideally suited. The appear to "fit" local conditions. Such markets would
firm might stress superiority in terms of its sales- demand a similar product, react similarly to com-
10 Vikalpa
ing the number of paper clips in a box—unless the What is a winning attitude? Fundamentally, it is a
knowledge can be applied. Such is the domain of skills, belief in self and in the product or service that you
the manager's ability to make decisions, and to take market. It is a belief that you can win, that you are better
action. Competitors acquire skills from practice, coach- than all competitors, and that you have the will to win.
ing, and competing. Together, knowledge and skills Chi-Chu Chen of Taiwan's International Commercial
(along with goals and strategy) are part of each Bank describes this will from the perspective of the
competitor's preparation to win. Taiwanese:
To win requires creativity and a customer focus. To What is the difference between Taiwan and unsuc-
see this, consider two ways to develop strategic com- cessful poor countries? My conclusion is that we are
petitive advantage. One way may be termed "linear" economic animals, probably the greediest people
(Chaffee, 1985): the enterprise sets long-term goals and on earth. The most important thing is to give the
allocates its resources to achieve these goals. It studies man in the street an incentive to work. Here self-in-
competitors and consumers, segments markets, terest has been given a free rein (The Economist,
chooses attractive target markets, designs marketing 1991, p 4).
mixes to satisfy these targets, delivers these mixes, and
monitors results. All this is linear, logical, and left brain Indeed, the whole of Southeast Asia is known for
in origin. Contrast this with the creativity and customer its optimism and its readiness to work hard to ensure
focus shown in the following example (Ohmae, 1988): that life will get better.
12 Vikalpa
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