5.2 Types of Rivalry

We mostly think about rivalry in the context of competitive markets for goods and services. Discussions of competitiveness often focus on high-level measures such as sales growth and market share. However, these are not factors over which we can have any direct effect, but are the results of success in winning, developing, and retaining important resources.

Since most of what we know about rivalry comes from studies of price- and value-based markets, it is perhaps not surprising that customer markets grab all the attention. This focus has a most unfortunate consequence: competitive strategy seems to have little relevance for nonprofit sectors such as public services, the voluntary sector, and nongovernmental organizations (NGOs). Yet nothing could be further from the truth; these organizations constantly compete for resources. Skilled staff are the obvious example, but supporters, cash, and other resources require the organization to compete.

Nevertheless, customers are still the most obvious resource that must be won and retained against rivals, so this is where we will focus first. However, most of the principles explained here are readily applicable to rivalry for staff and some other resources as well.

There are three main forms of rivalry, which sometimes operate alone but more often play out alongside each other:

• Type 1: The battle to win new customers who do not yet buy your kind of product from anyone (potential customers).
• Type 2: The struggle to capture existing customers from rivals while keeping your own customers from switching to rivals.
• Type 3: The fight for the best possible share of business from customers who are not exclusively with you or anyone else.

5.2.1  Type 1 Rivalry: Competing for Potential Customers

As new potential customers develop, rivals fight to win them and develop this potential pool of resources for their own. The challenge for organizations that are developing potential customers is to understand what is driving customers’ choice for which “pipe” to flow through. That is, what motivates their buying behavior? Their choices will be driven by competitors’ decisions and actions, especially marketing and sales activities, relative price, relative perceived performance of competing products, and mechanisms such as word of mouth reinforcing growth.

5.2.2  Type 2 Rivalry: Competing for Rivals’ Customers

Competitors battle to steal resources that have been developed and controlled by their rivals at the same time as they fight to prevent their own resources from being lured away. The rate at which customers choose to leave one firm for another reflects the comparison of price and benefits (value for money) between the rivals. This flow of customers between competing suppliers may, however, be moderated by switching costs.

Type 2 rivalry has certain features that can be understood only by tracking and understanding what is driving these switch rates. First, switching rates accelerate as the customer benefits move further ahead of the cost of switching. In other cases, switching costs can be considerable. Owners of game consoles accumulate expensive libraries of game titles, plus networks of friends with whom they share enthusiasm for their platform. Persuading these consumers to switch is much tougher than keeping them or winning them as they get started in gaming.

Many markets feature a group of hard-to-persuade customers who fail to move despite strong inducements, either because of emotional reasons, such as loyalty or comfort, or because of simple inertia. The deregulation of utility markets was supposed to encourage the mass migration of customers from inefficient incumbent suppliers to the many new entrants who would offer competitive prices. In practice, many customers failed to switch despite the prospect of considerable savings.

Type 2 rivalry increases in importance as markets develop. Firms are fighting to pull customers out of their rivals’ resource systems and into their own, so the more customers are in that state (rather than in an undeveloped potential pool), the more intense Type 2 rivalry becomes. Customers benefit from a range of incentives to stay or join, which is why regulatory competition policies focus so strongly on eliminating switching costs.

As with the race to develop potential customers, it is often necessary to understand customer switching between multiple competitors. This can be achieved by grouping competitors and tracking the few most likely to attack your firm or most vulnerable to attack from you.

5.2.3  Type 3 Rivalry: Competing for Sales to Shared Customers

In Type 1 and Type 2 rivalry, we have assumed that all customers purchase exclusively from one firm or another. This is true only in certain markets. Mobile phone subscribers hardly ever use two services, for example, and most households purchase electricity from a single supplier.

In many markets, however, customers tend to allocate buying between two or more suppliers. In these cases, rivals are fighting for a larger share of sales to customers who purchase from several suppliers. Since these customers already buy from more than one source, the cost of switching for any single buying decision is generally low. Share of sales can therefore swing quickly between rivals. One market where competition for sales to shared customers takes place is fast-moving consumer goods such as food and drink.

Source:

Section 5.2 Types of Rivalry is edited and adapted from the chapter ‘Types of Rivalrys?’ appearing in ‘Strategic Management’ Copyright © 2020 by John Morris and is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.