Competition

The Traditional Economic View on Competition

Economists traditionally consider competition to be one of the major drivers of economic improvement, growth, and social welfare. According to economists, economies improve when they generate and offer more products and services that satisfy the customers' needs and preferences better, more cheaply, or faster (effectiveness), thereby consuming an ever-decreasing quantity of resources (efficiency). In its analysis of the different degrees and forms of competition, economic theory distinguishes situations where an organization has no competitors at all (a monopoly), from situations where only a limited number of firms are competing against each other (an oligopoly), and from situations where numerous firms compete against each other for customers in a completely transparent way (perfect competition). The intensity of rivalry or competition is considered to have implications for the margins and thus the profits companies can earn. Competition will as a general rule drive down prices, margins, and opportunities for obtaining financial profit. Perfect competition will, according to economic theory, result in zero margins and thus zero profits for all competitors. On the other hand, the profit generation of monopolistic firms can be substantial. Profit generation by monopolists may eventually lead to restrictions imposed by public bodies through laws and regulations in order to protect the customer against the monopolist's profit-maximizing behavior.

The Traditional Strategic Management View on Competition

In traditional strategic management theory, the term competition is associated with the creation of superior products and services and with the associated generation of superior economic rents. The influential work of Michael Porter provides the dominant framework for analyzing and understanding competitiveness from a traditional strategic management perspective. Porter argues that companies compete against five “competitive forces” or five categories of opponents. The first category of opponents is called “the direct competitors.” Direct competitors are opponents that offer [Page 218](nearly) the same products and services to the same customers. The second category of opponents is labeled “the entrants.” Entrants are firms that are not yet competitors today, but that may become competitors in the future as they are trying to overcome existing entry barriers to an industry. The third category of opponents contains all firms offering substitute products or services. They serve the same customer needs by offering products and services that are based on different technologies. Finally, buyers and suppliers are respectively the fourth and the fifth category of opponents, since they will exercise power over the firm to limit the margins a firm can earn (suppliers will try to get higher prices for the goods delivered; customers will try to obtain lower prices for products and services they buy and consume).

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