Areas of Competition

Competition and Consumers

Competition is also beneficial for consumers. As we know, competition often results in innovation. This is also beneficial for consumers, as they get newer, better quality products for better prices. Consumers are also more willing to spend on better quality products, which not only benefits the firm but the economy as a whole. Innovation helps drive economic growth, which increases living standards.

Additionally, as competition leads to a more efficient process - lowering the production and operating costs of businesses - consumers also indirectly save money, as lower costs for businesses means lower prices for customers.

Types of Competition in Business

There are three types of competition in business:

• Direct competition: direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

  Coca-Cola and Pepsi.

  The two companies operate in the same industry, offer very similar products (caffeinated soft drinks), satisfy the same need and target similar customer segments. The two companies even use similar channels of distribution (vending machines, grocery shops, etc.)

• Indirect competition: indirect competitors are businesses that sell products that are not the same as yours but still operate in the same industry and satisfy the same consumer need.

  McDonald's and KFC.

  The two companies still operate in the same industry (fast food) and satisfy a similar consumer need (people who have busy lifestyles and are looking for a quick meal), however, the two companies are known for two different items - McDonald's for burgers and KFC for chicken.

• Replacement competition: also known as potential or phantom competitors, are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.

  The introduction of smartphones ultimately replaced digital cameras, even though the function of the product is completely different.

Fig. 1 - Business competition types

Advantages of knowing your competitors

Some of the advantages of competition and understanding your competitors in business are:

• Increase in innovation which benefits both businesses and consumers.

• Helps businesses understand the needs and wants of customers more deeply, which allows for more and better products.

• Helps businesses understand the specifics of the marketplace.

• Can boost the efficiency of operations and the production process.

• Studying competitors helps businesses understand or find their competitive advantage. By studying competitors' strengths and weaknesses the business can more easily identify areas that stand out from competitors and areas that need strategic improvement.

• The business can learn from the failures of competitors.

Disadvantages of competition in business

Some of the disadvantages of competition in business are:

• Customers can get confused by the wide range of similar products offered. If the business does not have a strong brand image or is not competitive price or quality-wise, the profitability of the business could be harmed.

• Businesses could end up accruing a lot of additional costs by investing too much in innovation and R&D to stand out from competitors.

• Businesses might also end up accumulating extra costs because of their marketing and advertising efforts.

• An increase in competition could also result in a decrease in market share for the business.

¹ FTC Fact Sheet, https://www.consumer.ftc.gov/sites/default/files/games/off-site/youarehere/pages/pdf/FTC-Competition_How-Comp-Works.pdf

² Feedough, https: //www.feedough.com/business-competition/