The Competitive Nature of Current Industries
The Competitive Nature of Current Industries
Due to the current trend of globalization, industries of all sectors are becoming more and more competitive. Rivalry between firms is determined by the industries´ competitive structure which again is determined by globalization and the fact that leading economies are stagnating or show very little growth. This reflects on consumer expenditure as the end consumer is left with less money to spend, thus affecting choices made and at the end of the day also effecting firms who are confronted with a weaker demand condition.
An industry like the airline industry serves as a good example as to how intensive competition can develop; Especially in Europe, which has seen a rapid growth in the low cost carrier sector, established airlines are feeling the competition of these low cost carriers. Exit barriers in this industry are high, as high investments are needed to start up an airline company. Also the fact that a highly specialised infrastructure within the company has to be created makes it difficult for an exit from this industry.
Mostly when a company is doing badly in this sector, it either results in bankruptcy (see Swissair in 2002) or takeovers against a symbolic fee (Deutsche BA takeover by German textile magnate H.R.Wöhrl in 2002 against 1 from British Airways, who accepted to get a 25% share of profits until 2006 and will support the operation till then with 35Mio. ) . Especially the second example shows how difficult it is to exit from this industry and that firms are even willing to hand over management to someone else practically for free and even support the operation for a period of time rather than exiting completely from the business, by which even more costs would be incurred.
The Deutsche BA which had been founded in 1992 as a daughter airline of British Airways can be considered as an established business within the industry, however due to the highly competitive structure of the industry, paired with the terrorist attack on New York of September 11, 2001, which had a highly negative on the industry led British Airways to this decision.
Therefore it is fact that the competitive structures of an industry as well as the demand conditions existing, lead to an increased rivalry or competition between established firms. However this statement only applies up to a certain point, where it becomes highly unprofitable for a firm to compete any longer. This was the case in above named example of the Deutsche BA airline, where British airways decided to bypass the exit barriers existing (staff layoff difficult due to unionisation, problems to liquidise the large technical infrastructure which had been built up).
I would like to take the statement that in weak demand conditions with high exit barriers rivalry between established firms can develop even a step further by also including new firms. Again the airline industry will serve as an example; when the EU de-regulated airline business on continental Europe it was the time for Low Cost carriers to penetrate the market. This was immediately felt by established airlines that lost large numbers of their clients, mainly in the leisure sector. Rather than competing against each other, in this case the established airlines decided to team up and create so called “alliances”.
The largest alliance nowadays is the “Star Alliance” comprising of 15 National carriers and according to own words controlling two thirds of world aviation. This enabled the partnering airlines a favourable cost structure as resources are split and routes not covered by one airline being covered by another airline, thus boosting a large network lucrative especially for the business traveller. In July 2003 the Star Alliance decided to use its position to gain from economies of scale by ordering a number of planes at the value of together 7-8 billion USD and achieving a discount in prices.
Other airlines that did not form part of the Star Alliance quickly reacted too, and in 1999 the “one world” Alliance was founded. This fact again contradicts that all established airlines are working together as the Star Alliance and one world Alliance are in competition. However the fact that established airlines are teaming up into large groups mostly to achieve economies of scale shows that there is a certain force keeping them together as opposed to them directly competing against each other. This force is to avoid low cost airlines taking a too high market share from the established airlines. To sum up this point, it is not always fact that intensive competition develops when demand is weak and exit barriers are high. Therefore, the statement that “intensive competition can develop” can be confirmed as being valid, always depending on the nature of the industry.
When exit barriers are low and demand is high, competition between firms will be at a lower level, as an uncompetitive firm will choose to exit the market, leaving its share for the remaining companies operating. The fact however, that a firm exiting will leave its share for other companies to take over, in itself also shows that rivalry between remaining companies will increase as to be able to capture the “left over” market share. Nevertheless this should be considered as a short-time effect which cannot be compared to an industry with high exit barriers.
Changing demand conditions on the other hand will always affect the rivalry between firms. The extent of rivalry however depends on what demand conditions apply. Strong demand will cause firms to try and expand as to increase its market share or to become more competitive as to prevent new firms from entering the market. Consequently, rivalry cannot be described as moderate, but as high, although this is a rather short-term condition. Once the shares are split, rivalry again can be described as moderate.
Once more I would like to take the statement that “strong demand conditions moderate the competition among established companies” a bit further. In fact, I think one cannot but look at the entry barriers of an industry under such conditions. When entry barriers are high, I can only agree to the fact that strong demand will craft a moderate rivalry situation between established firms as the danger of new firms entering the market is not that high.
However in the case of a low entry barrier in less specialised industries with a high demand, the possibility of new entrants to the industry is at hand. This can result in two situations: Firstly and most likely, the established firms will try to become more competitive and try to guarantee their market share. The second situation can be that established firms team up with buyers to create a bilateral oligopoly, where “contracts are usually negotiated on a long term basis and negotiated bilaterally” . The retailing industry can be seen as an example in this case. It is a highly concentrated market both on the seller and buyer side, where as a result both buyers and sellers exercise their market power, creating an oligopoly. In such a market structure it is difficult for new firms to penetrate as an entry barrier is created by existing firms (long term contracts).
Hence one has to specify in this case at what level entry barriers to an industry are as to be able to say that “strong demand conditions moderate the competition among established companies”.
The fact that expansion is also lucrative for firms in strong market conditions again implies a certain amount of rivalry between the firms; who is going to expand first? Who is going to be the most competitive firm the buyer will choose to purchase from? The nature of these questions shows that also in a market where expansion is possible due to high demand, rivalry cannot entirely be described as “moderate”.
To sum up, the arguments brought up in the initial question of this paper apply in the majority, however I think certain exceptions which where discussed in the process of this paper have to be applied, always according to the market and conditions which were not stated or only partially stated.
*Thompson & Strickland, Strategic Management, Concepts and Cases, © 2003, McGraw-Hill, New York
*Mansfield & Yohe, Micro Economics, 10th Ed., ©2000, W.W. Norton & Company; New York, London