Tadeusz Soroka
Higher School of Labour Safety Management in Katowice (Poland)
THE IMPACT OF COMPETITION IN THE PRODUCT LIFE CYCLE
Introduction. An
open economy is a necessity when it comes to competing not only with national
entities but also with those from abroad. The level of competition is
increasing and forcing businesses to constantly improve product quality,
materials and design. The competition requires that pricing criteria be taken
into account, as well as attention to customer satisfaction. Most economists,
in addition to ordinary consumers, are convinced that competition can only be
beneficial.
Unfortunately, in practice, we also have to deal
with the negative effects of competition. As a result, some businesses may
become bankrupt. These businesses may
provide good products, but their financial situation does not allow them to
compete with powerful corporations, for whom the most important thing is
obtaining the largest segment of the market. Antitrust offices and courts are
too weak to effectively protect good, but economically weaker, businesses.
For
the purposes of this present work, the level of competition is defined as
follows: The level of competition in the region (community of countries),
country, market sector, market and industry sectors, will be defined according
to the degree of saturation of competing products available to customers.
The
level of competition is considered to be low when more than 50% of the market
is occupied by a product produced by a single manufacturer. The manufacturer is
not compromised if another market participant gains a competitive advantage.
The
level of competition is considered as sustainable (classic) when less than 33%
of the market is occupied by products produced by a single manufacturer. The
remaining market shares are held by other market participants. Competition
between all market participants most frequently takes place according to the
principles of alternation, depending on, amongst other things, who holds the
competitive edge as a result of various technological developments at the time,
better marketing campaigns, etc.. This may also be the result of mistakes by
one of the competitors, which may consequently cause the acquisition of its
share of the market by other manufacturers.
The
level of competition is considered to be high, when less than 20% of the market
is occupied by products produced by a single manufacturer. Competitors have
strong growth potential, which may result in one of the manufacturers gaining a
competitive advantage over other market participants.
A
very high level of competition occurs when products produced by one of the
manufacturers alternately occupy over 20% of the market, with competitors
constantly ready to recover the competitive edge. Such a situation lasts for a very
short period of time, due to the fact that another manufacturer, or
manufacturers, are always preparing to fight for the market with new products.
1. The
various forms of business conduct under competitive conditions.
Competing
in the market has become a necessity. The ability to convince clients that it
is worth acquiring a certain product, as well as the ability of a product to
reach as wide a client base as possible, has become necessary for the design
and manufacture of a good product. Nowadays a business cannot rely on simply
having a good product and waiting for the client to find it by themselves.
We can identify varying forms of business
conduct when examining businesses in different countries. Aggressive markets
are more difficult for Businesses to access. An inherent feature of all
businesses is an increasing tendency to limit competition. They do this through
mergers, acquisitions and agreements. Sometimes we have to deal with lobbying
in an environment where the law is constituted for such regulations, which in
fact, under the guise of protection of consumers, their goods, or the
protection of the environment, favour solutions such as those at the disposal
of selected manufacturers.
Rivalries may occur between national bodies in
closed or highly protectionist economies. These rivalries are short lived, as
more and more countries are opening their economies. As a result, the global
market is constantly growing. Competition on such a large, open market is
becoming increasingly heated. Businesses have to be strong in order to rise to
this challenge. The competition requires both a good product as well as very
good marketing. A large capital is indispensable in order to meet the
challenge. As a result we can observe the establishment of large corporations,
which are able to compete effectively. Competition between large, powerful
entities and small entities always ends in disaster for the small entities.
An
example of this competition between large and small entities can be observed
within the meat sector, particularly in the production of cold meats. Small
butcher shops, often located in small towns, produce cold meats using
traditional recipes. Large meat processing plants apply modern technology and
industrial, highly efficient production methods. As a result, from one kilogram
of meat, a small establishment can produce an average of 0.7kg of cold meat,
whereas a large plant can produce 2.2-
2. Competitive strength.
In
order to beat its competitors, a business must have competitive strength.
Competitive strength consists of the general resources held by a business,
which are essential for it to operate in a competitive market. This refers to
both fixed and financial assets, immaterial products in the form of knowledge,
technologies and organisation as well as the experience and skills of a
business's members. We can distinguish three cases:
1) The resources are greater than
competitive strength. In this case, a part of the resources does not work to
maintain the business's competitiveness. It must be decided whether or not to
dispose of the resources as the non-working asset is always ineffective.
2) The resources are equal to
competitive strength. This is a theoretical situation. In reality, we have to
deal with an approximate comparability. In this case, we are talking about the
effective use of resources.
3) The resources are less than
competitive strength. Such a situation may mean that the objective facing a
business is impossible to accomplish. If this poses the risk of a loss of
competitiveness, the possibility of acquiring additional resources should be
agreed upon by the stakeholders.
3. Competitive position.
Competitive
position is the relatively stable place of a business within a competitive
market. This refers to a business's participation in the market whilst
maintaining positive accumulation. There is no single definition of competitive
position.
It
is difficult in practice to analyse a business's competitive position within
the entire market. This is especially true for analyses carried out by the
businesses themselves. Participation in the domestic market or selected
markets, particularly important for the company, is therefore also frequently
examined. The economic condition of a business is demonstrated using these
ratios:
– Returns,
– Liquidity,
– Debts,
– Activity.
This
ratio refers primarily to mature markets, where a business's market price
reflects its true value. In
The
sum of the value of the business, reduced by its debt, is important for the
stockholders. The competitive position of the business is perceived differently
by the Management Board, the employees, the owners as well as its competitors.
We are primarily interested in the position according to market competitors.
4. Businesses' competitiveness and
economic risks.
Similarly
to competitiveness, economic risk can be defined in many different ways. The
page IPO.pl displays the following entry: "Economic risk mixes the risk
associated with a country's situation, inflation, interest rates, the risk
associated with the various branches of the economy as well as the concrete
risks associated with the situation a given company" [8]. This definition mainly focuses
on external factors. Competitiveness consists of the ability of a business to
adapt to the conditions under which it is competing. This requires the
selection of appropriate instruments and methods in order to gain a competitive
advantage.
By
analysing the different definitions of economic risk in regards to businesses'
competitiveness, the following definitions may be formed:
"Economic
risk is the likelihood of the loss or reduction of a business's competitive
edge."
"Economic
risk management is a conscious action to maintain or increase a business's
competitive edge."
5. National competitiveness,
sector competitiveness and Businesses.
We
can say that a national economy is competitive, if both businesses and citizens
constantly improve its revenue. A country should take care to ensure that
businesses pay off by investing and creating jobs.
The evaluation of the competitiveness of individual
countries/economies has been carried out for the last dozen or so years,
according to the theoretical and practical instructions of M.E. Porter. This is
due to the proven thesis, which says that businesses' competitiveness is
dependent on national competitiveness. Rankings for national competitiveness
are issued every year. The main agencies publishing such rankings include: The
World Economic Forum and International Management Development. In these
reports, apart from just the rankings, we can also find out which conditions in
a particular country promote businesses' activity and which conditions hinder
them. Businesses use this information in order to decide which countries to
invest in; however, this information should also be used by national
governments which rely on attracting capital in order to improve legal
procedures, fiscal policy and other facilities.
Similarly, since the mid 1990s, Poland has been
creating special economic zones, industrial parks, technological centres and
so-called "Technological (Silicon) Valleys". This is all to attract
modern technologies together with the development of businesses and sectors, to
ensure the country's industrial development, thereby creating new jobs and
growth of the welfare state and its citizens. Many countries dedicate
substantial amounts of money to research and development. Businesses are also
doing this. Another important element is the funding of education. New
technologies increasingly require more highly qualified employees.
Crisis periods evoke, more than anything, emotions
regarding the desired direction for country's economic recovery. Many
economists dispute which methods should be applied. One such example is the
near collapse of the Greek economy (2012), which may affect other countries
within the euro zone, as well as those outside it. The aid scheme for Greece,
drawn up by the Federal Republic and the French Republic, provides financial
support in return for significant savings. Many critics of the programme point
out that this de facto program helps endangered French and German banks
involved in the purchase of Greek (now toxic) debts, however this does not help
Greece. The change in the French President's position has caused EU member
states to begin talks about a development plan, which would also give Greece a
chance to earn money in order to one day repay the European aid. This
development program consists of intervention from European Union member states
with the aim of increasing the competitiveness of EU economies and businesses.
Recent
years have been a testing time for many international organisations in terms of
national competitiveness. The best known
models for competitiveness, by means of which individual countries are
analysed, are:
– Porter’s rhombus,
– Model WEF (World Economic
Forum),
– Model IMD (International
Management Development)Model BERI (Business Enviroment Risk Ind).
The
World Economic Forum distinguishes 12 pillars of competitiveness. Fig. 1 shows the grouped pillars of
competitiveness, which, respectively, are key to obtaining national
competitiveness.
Fig. 1. The 12 pillars of competition. (Study carried out on the
basis of The Global Competitiveness Report 2010-2011 in The 2010 World Economic
Forum)
Every
year, the World Economic Forum and International Management Development publish
the rankings of countries in terms of competitiveness.
The
World Economic Forum presented "10 Golden Rules of Competitiveness".
These are:
1. "Create a stable and
transparent law.
2. Implement a flexible and
thriving organisational structure.
3. Invest in infrastructure.
4. Promote frugality and domestic
investments.
5. Support exports and take care
of attractiveness for foreign investors.
6. Take care of the quality,
efficiency and transparency of national and local administration.
7. Maintain an appropriate relationship
between wage level, productivity and taxes.
8. Prevent the exaggerated
differentiation of wages and take care of the development of the middle classes.
9. Invest in education, especially
at secondary and higher levels.
10. Maintain a balance between the
benefits of globalisation and the local market" [6].
The
rankings sometimes divide small countries (up to 20 million inhabitants) and
large countries (over 20 million inhabitants). Since 2002, Poland has held a
place somewhere between thirtieth and fiftieth in the rankings issued by
International Management Development. Among the countries of the European
Union, Poland is in 14th place, and leads the strong economies of the so-called
"old European Union" (Sweden, Germany, Finland, the Netherlands,
Denmark, the United Kingdom, France, Austria, Belgium, Luxembourg, Ireland)
including two countries form the new European Union, i.e. Estonia and the Czech
Republic.
Among
the factors important for competitiveness there are also these so-called
"soft" or social factors. These include organisational culture,
habits and traditions, the ratio of employees to jobs, wages as well as care
for the work place and machinery and tools. Another important factor for the
competitiveness of economies is the maturity of the relationship between
employers and employees. This applies in particular to innovative economic
sectors where highly qualified, professional staff are required.
The
World Economic Forum issues a country's ranking for an individual year in terms
of the employee-employer relationship. These rankings show that this
relationship is most confrontational in Singapore and most cooperative in
Venezuela. A cooperative employee-employer relationship does not always
guarantee good relations between them.
National
competitiveness is subject to monetary policy. An example of such policy, which
strongly promotes exports, can be found in the monetary policy of the People's
Republic of China.
In
2008, the People's Bank of China, in the interests of curbing inflation,
purchased dollars whilst simultaneously selling RMB (Yuan). The strengthening
of the Yuan and the dollar took place after the world-wide outbreak of
financial crisis. Most of the countries set national exchange rates in relation
to the so-called monetary basket, in which there are: the US Dollar, the Euro,
the Japanese Yen, the South Korean Won, the British Pound, the Russian Ruble,
the Thai Baht, the Australian Dollar, the Canadian Dollar, the Singapore
Dollar. From the year 2008, the exchange rate for the Yuan amounts to 6,83
Yuan/$.
The
undervalued Yuan is not just an excess reserve of currency in the Central Bank
of China. It is above all a continuation of the competitive advantage of the
Chinese economy and Chinese businesses. Nowadays, in order to be competitive,
manufacturing has to be done in so-called "low priced country". China
is, amongst other things, a low priced country. Many countries anticipate the
appreciation of the Yuan in order to improve the competitiveness of their
economies. However, this is not in the interest of the Chinese authorities. The
use of competitive exports has been an element of China's expansion in many
regions of the world such as Africa and Latin America. Against such
"closed" state policies, other countries such as the US, Japan and
the European Union are protesting more and more frequently. For the time being,
these protests are ineffective.
6. Life cycle under conditions of
limited competition.
Not all of the world's countries open their
economies. Some are run according to different rationales. This most often
applies to countries ruled by authoritarian regimes. For regimes in such
countries, the collision of products characterised as being high quality,
modern technology and high-class materials with poor technological
opportunities of the native economy may be perceived as a danger to authority
and the regime. North Korea and Cuba are two such examples. A natural hindrance
to competition is the lack of a market economy, the result of which is a
non-exchangeable national currency. Consequently, there is no opportunity for
market rivalry. In such countries, we have to deal with planning and central
distribution. Economies constructed in this way are characterised by a lack of
overproduction. There is therefore no opportunity for market competition.
Despite an economy based on socialist canons, the market and competition were
limited in former Eastern Block countries such as Poland, amongst others. This
was due to the fact that a certain proportion of the production measures were
privately owned. Amongst them were: agriculture, crafts and fine manufacturing.
Other countries apply a strong national
protectionism which does not allow for the import of products from other
countries. Tools used by these countries include high import duties and a fixed
exchange rate for native currency in relation to other currencies. Both methods
result in prices of imported products being very high and as such they are able
to compete with native products. Examples of countries in which such practices
were, or still are, employed include Japan, South Korea and China.
In extreme cases, so-called "soft"
methods may be applied. These include legal provisions, which impose very
stringent requirements in relation to imported products, the fulfilment of
which is very difficult and sometimes even impossible. These methods are
applicable in the event of a so-called product war. The state decides to close
its territory to goods from a given country, several countries, or to an entire
family of products. In this way, the level of competition in a particular
market sector is limited in that country. Such cases have occurred in the
relationship between Poland and Russia, in the field of food products.
Methods of restricting competition may take the
form of import quotas. The state uses this instrument to try and limit the
level of competition in a particular market sector. The state believes that in
this way it is allowing domestic businesses to develop whilst simultaneously
encouraging them to compete with foreign entities. Such limited competition may
stimulate innovation and constant improvement of internal production. Taiwan
serves as such an example.
A lack of competition or limited competition
determines the life cycle of a product. In the first phase of a product's life
we are dealing with a novelty. The manufacturer obtains a novelty bonus and the
demand the product is high.
Fig. 2. Diagram of the life
cycle of a product under limited competition
7.
Product life cycle under conditions of sustainable competition.
Competition
for sustainable (classic) The chart of product life for sustainable (classic)
competition looks like this, as presented by the authors of most economic text
books (Griffin, amongst others). As in the case of limited competition, there
are large time intervals between phases. Businesses have time for research and
development. The competition is not overwhelming. The competitive edge, as a
general rule, is not too great. Businesses do not conduct price wars.
There
are known cases of competing businesses working in cooperation. The production
of Ford Ka cars in the Tychy FIAT plant are an example of this. Samsung buys
processors from its competitor Apple. Many television manufacturers acquire
matrices from the Korean company LG.
The
technological Race that we can see all over the globe, in addition to
competition, also requires cooperation. Concerns investing in innovations
become the owners of selected technologies, construction and materials. This is
not enough to create a complete product.
Component manufacturers therefore split from concerns and compete with
other components manufacturers. In the past the situation was completely
different.
The
dominance of large concerns has become the calling card of the 20th century.
Will this picture change in the near future?
Fig.
3. Diagram
of the life cycle of a product under conditions of sustainable competition
8. The
life cycle of a product under conditions of ultracompetition
The life of a product under the conditions of
stronger competition starts before its "birth". Concerns begin to
fight over the market for the new product for a few months before the product
becomes available on the market. The reason for this is very strong
competition, which results in the product having a shorter life span. Concerns
are forced to frequently introduce new products onto the market so that they do
not lose clients. Passenger cars are an example of this. Popular cars make up
the largest sector. Strong competition has led to the necessity of introducing
new car models every year. Promotion begins at auto showrooms in Detroit,
Geneva, Paris or Frankfurt. Next the marketing campaign is distributed through
all available forms of media. Automotive concerns must encourage customers to
buy a car for the short term, due to the fact that in a year’s time the will to
promote a new model.
Such a situation requires the creation of large
concerns, which:
1. Will
possess adequate capital to finance both production and the marketing campaign
2. Will be
able to sell an adequate amount of cars, so that the cost per unit is
comparable to that of other concerns
3. Will be
competent in designing competitive car models
4. Will
possess an adequate brand, which customers will equate with superior quality.
Fig. 4.
Diagram of the life cycle of a product under conditions of strong competition
Summary. Contemporary
business management requires the comprehensive treatment of any and all
problems arising during any part of the process as a whole. Effective and
efficient management means radical change to the traditional approach to
management.
The
new paradigm of management sciences is forcing a departure from the traditional
methods and organisational structures. Business
management in practice means "earning more and more money". To earn
more is to be more competitive. To be more competitive is to better manage
competitiveness.
Strong
competition is the most important instrument for the restructuring of
companies. It eliminates the weak, and the strong need to become even stronger
in order to keep going. Strong competition alters the life cycle of products
and significantly reduces its life span.
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