Thursday, October 4, 2012

Growing the Pie: A look into rivalries

Anyone who's watched TV can tell you that rivalry is prominent in today's markets. From geckos telling you what insurance to buy to beer commercials with "sophisticated men", businesses and politicians alike are always vying for attention. But when is this rivalry destructive? When does it take the companies in an industry and drive them into the ground via a price war? Or when does it actually foster innovation and a better market for consumers?

To anyone who's learned about Porter's Five Forces (below is a youtube video for those that haven't), the thought of rivalries shaping an industry is no surprise. Yet, is it really relevant to describe 'how much' rivalry, or 'how strong' rivalries in an industry are? With the exception of maybe funeral services and doctors, every industry is rampant with companies fiercely competing for every cent and second of consumer attention. Our brains are so full with brand images and slogans that it's been shown that kids often know brand mascots and symbols before they know important historical figures (think knowing Ronald McDonald before MLK or Ghandi). Rather, I like to think that it's much more important to think about 'what kind' of rivalry there is in an industry.

When taking a look at different industries, it becomes apparent that those you may say are 'equally competitive' have completely different effects from the rivalry. You see industries like the air industry and insurance which have, in most cases, been pushed to the absolute smallest amount of profitability needed to stay in business. On the other end, there are industries like the computer industry (think Apple and Microsoft) which, while as competitive and cutthroat as any industry out there, has grown rapidly over the past years. 

Although much of this growth could be attributed to the overall grown of the technology sector, it can also be seen that by Microsoft and Apple have taken the rivalry as a chance to focus and differentiate, or rather, make products that aim towards ultimately pleasing a different consumer group. This is the key to what some call the 'make the pie bigger' type of industry rivalry. Instead of companies battling harder and harder for the same amount of pie, some industries have found ways to simply make the pie bigger by focusing on different consumer groups, and innovating to push the boundaries of what their industry represents.  

Make it bigger rather than changing 
the way it's divided up.

This really differentiates rivalry between the 'I can do it cheaper and I'm going to take every customer you have' and the 'I can do it better than you and therefore you'll be caught having to catch up'. Although it may seem to be a small difference, this change in the ways companies go about rivalry in an industry can drastically alter the outcome.

So which is better? It's hard to say if one is necessarily better overall. Whereas cheaper things are always good for consumers, innovation and industry growth almost certainly create even greater positive effects for the consumer. Additionally, not all industries have the opportunity to simply 'pick' which type of rivalry they'd like to have. Not only is it dependent on the other competitors (you can't make them not want to be cheaper), but it is also reliant on the ability for companies to actually innovate and change, something that in some industries, especially those seen as commodities, is not realistic or possible.

Overall, the argument on that rivalry has a significant effect on industries is one that is rather cemented as fact, yet the discussion on the types of rivalry is one that is still up for discussion. What do you think about rivalries shaping industries?

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