Tadeusz Soroka

Higher School of Labour Safety Management in Katowice (Poland)

THE IMPACT OF COMPETITION IN THE PRODUCT LIFE CYCLE

 

Introduction. An open economy is a necessity when it comes to competing not only with national entities but also with those from abroad. The level of competition is increasing and forcing businesses to constantly improve product quality, materials and design. The competition requires that pricing criteria be taken into account, as well as attention to customer satisfaction. Most economists, in addition to ordinary consumers, are convinced that competition can only be beneficial.

Unfortunately, in practice, we also have to deal with the negative effects of competition. As a result, some businesses may become bankrupt. These businesses may provide good products, but their financial situation does not allow them to compete with powerful corporations, for whom the most important thing is obtaining the largest segment of the market. Antitrust offices and courts are too weak to effectively protect good, but economically weaker, businesses.

For the purposes of this present work, the level of competition is defined as follows: The level of competition in the region (community of countries), country, market sector, market and industry sectors, will be defined according to the degree of saturation of competing products available to customers.

The level of competition is considered to be low when more than 50% of the market is occupied by a product produced by a single manufacturer. The manufacturer is not compromised if another market participant gains a competitive advantage.

The level of competition is considered as sustainable (classic) when less than 33% of the market is occupied by products produced by a single manufacturer. The remaining market shares are held by other market participants. Competition between all market participants most frequently takes place according to the principles of alternation, depending on, amongst other things, who holds the competitive edge as a result of various technological developments at the time, better marketing campaigns, etc.. This may also be the result of mistakes by one of the competitors, which may consequently cause the acquisition of its share of the market by other manufacturers.

The level of competition is considered to be high, when less than 20% of the market is occupied by products produced by a single manufacturer. Competitors have strong growth potential, which may result in one of the manufacturers gaining a competitive advantage over other market participants.

A very high level of competition occurs when products produced by one of the manufacturers alternately occupy over 20% of the market, with competitors constantly ready to recover the competitive edge. Such a situation lasts for a very short period of time, due to the fact that another manufacturer, or manufacturers, are always preparing to fight for the market with new products.

1. The various forms of business conduct under competitive conditions.

Competing in the market has become a necessity. The ability to convince clients that it is worth acquiring a certain product, as well as the ability of a product to reach as wide a client base as possible, has become necessary for the design and manufacture of a good product. Nowadays a business cannot rely on simply having a good product and waiting for the client to find it by themselves.

We can identify varying forms of business conduct when examining businesses in different countries. Aggressive markets are more difficult for Businesses to access. An inherent feature of all businesses is an increasing tendency to limit competition. They do this through mergers, acquisitions and agreements. Sometimes we have to deal with lobbying in an environment where the law is constituted for such regulations, which in fact, under the guise of protection of consumers, their goods, or the protection of the environment, favour solutions such as those at the disposal of selected manufacturers.

Rivalries may occur between national bodies in closed or highly protectionist economies. These rivalries are short lived, as more and more countries are opening their economies. As a result, the global market is constantly growing. Competition on such a large, open market is becoming increasingly heated. Businesses have to be strong in order to rise to this challenge. The competition requires both a good product as well as very good marketing. A large capital is indispensable in order to meet the challenge. As a result we can observe the establishment of large corporations, which are able to compete effectively. Competition between large, powerful entities and small entities always ends in disaster for the small entities.

An example of this competition between large and small entities can be observed within the meat sector, particularly in the production of cold meats. Small butcher shops, often located in small towns, produce cold meats using traditional recipes. Large meat processing plants apply modern technology and industrial, highly efficient production methods. As a result, from one kilogram of meat, a small establishment can produce an average of 0.7kg of cold meat, whereas a large plant can produce 2.2-2.6 kg of cold meat. The extra weight is made up from various kinds of additives, the price of which is much lower than the raw material for production. On the assumption that 1 kg of meat for production costs 12 PLN, 1 kg of cold meats from a small establishment may not cost less than 26 PLN, whereas it costs 15 PLN from a large plant. Large plants generally have access to many channels of distribution (Trade networks). Meanwhile, goods from small establishments are only able to reach a limited number of consumers within the small town, which leads to more expensive cold meats.

2. Competitive strength.

In order to beat its competitors, a business must have competitive strength. Competitive strength consists of the general resources held by a business, which are essential for it to operate in a competitive market. This refers to both fixed and financial assets, immaterial products in the form of knowledge, technologies and organisation as well as the experience and skills of a business's members. We can distinguish three cases:

1) The resources are greater than competitive strength. In this case, a part of the resources does not work to maintain the business's competitiveness. It must be decided whether or not to dispose of the resources as the non-working asset is always ineffective.

2) The resources are equal to competitive strength. This is a theoretical situation. In reality, we have to deal with an approximate comparability. In this case, we are talking about the effective use of resources.

3) The resources are less than competitive strength. Such a situation may mean that the objective facing a business is impossible to accomplish. If this poses the risk of a loss of competitiveness, the possibility of acquiring additional resources should be agreed upon by the stakeholders.

3. Competitive position.

Competitive position is the relatively stable place of a business within a competitive market. This refers to a business's participation in the market whilst maintaining positive accumulation. There is no single definition of competitive position.

It is difficult in practice to analyse a business's competitive position within the entire market. This is especially true for analyses carried out by the businesses themselves. Participation in the domestic market or selected markets, particularly important for the company, is therefore also frequently examined. The economic condition of a business is demonstrated using these ratios:

Returns,

Liquidity,

Debts,

Activity.

This ratio refers primarily to mature markets, where a business's market price reflects its true value. In Poland, the market is still dominated by speculative capital, which means that the market/stock exchange value of listed company is often unequal to its true value. Our market is becoming more and more mature, with more and more companies implementing so-called "Good Practice for listed companies on the WSE" (Warsaw Stock Exchange), thereby increasing their transparency.

The sum of the value of the business, reduced by its debt, is important for the stockholders. The competitive position of the business is perceived differently by the Management Board, the employees, the owners as well as its competitors. We are primarily interested in the position according to market competitors.

4. Businesses' competitiveness and economic risks.

Similarly to competitiveness, economic risk can be defined in many different ways. The page IPO.pl displays the following entry: "Economic risk mixes the risk associated with a country's situation, inflation, interest rates, the risk associated with the various branches of the economy as well as the concrete risks associated with the situation a given company" [8]. This definition mainly focuses on external factors. Competitiveness consists of the ability of a business to adapt to the conditions under which it is competing. This requires the selection of appropriate instruments and methods in order to gain a competitive advantage.

By analysing the different definitions of economic risk in regards to businesses' competitiveness, the following definitions may be formed:

"Economic risk is the likelihood of the loss or reduction of a business's competitive edge."

"Economic risk management is a conscious action to maintain or increase a business's competitive edge."

5. National competitiveness, sector competitiveness and Businesses.

We can say that a national economy is competitive, if both businesses and citizens constantly improve its revenue. A country should take care to ensure that businesses pay off by investing and creating jobs.

The evaluation of the competitiveness of individual countries/economies has been carried out for the last dozen or so years, according to the theoretical and practical instructions of M.E. Porter. This is due to the proven thesis, which says that businesses' competitiveness is dependent on national competitiveness. Rankings for national competitiveness are issued every year. The main agencies publishing such rankings include: The World Economic Forum and International Management Development. In these reports, apart from just the rankings, we can also find out which conditions in a particular country promote businesses' activity and which conditions hinder them. Businesses use this information in order to decide which countries to invest in; however, this information should also be used by national governments which rely on attracting capital in order to improve legal procedures, fiscal policy and other facilities.

Similarly, since the mid 1990s, Poland has been creating special economic zones, industrial parks, technological centres and so-called "Technological (Silicon) Valleys". This is all to attract modern technologies together with the development of businesses and sectors, to ensure the country's industrial development, thereby creating new jobs and growth of the welfare state and its citizens. Many countries dedicate substantial amounts of money to research and development. Businesses are also doing this. Another important element is the funding of education. New technologies increasingly require more highly qualified employees.

Crisis periods evoke, more than anything, emotions regarding the desired direction for country's economic recovery. Many economists dispute which methods should be applied. One such example is the near collapse of the Greek economy (2012), which may affect other countries within the euro zone, as well as those outside it. The aid scheme for Greece, drawn up by the Federal Republic and the French Republic, provides financial support in return for significant savings. Many critics of the programme point out that this de facto program helps endangered French and German banks involved in the purchase of Greek (now toxic) debts, however this does not help Greece. The change in the French President's position has caused EU member states to begin talks about a development plan, which would also give Greece a chance to earn money in order to one day repay the European aid. This development program consists of intervention from European Union member states with the aim of increasing the competitiveness of EU economies and businesses.

Recent years have been a testing time for many international organisations in terms of national competitiveness. The best known models for competitiveness, by means of which individual countries are analysed, are:

Porters rhombus,

Model WEF (World Economic Forum),

Model IMD (International Management Development)Model BERI (Business Enviroment Risk Ind).

The World Economic Forum distinguishes 12 pillars of competitiveness. Fig. 1 shows the grouped pillars of competitiveness, which, respectively, are key to obtaining national competitiveness.

 

Fig. 1. The 12 pillars of competition. (Study carried out on the basis of The Global Competitiveness Report 2010-2011 in The 2010 World Economic Forum)

 

Every year, the World Economic Forum and International Management Development publish the rankings of countries in terms of competitiveness.

The World Economic Forum presented "10 Golden Rules of Competitiveness". These are:

1. "Create a stable and transparent law.

2. Implement a flexible and thriving organisational structure.

3. Invest in infrastructure.

4. Promote frugality and domestic investments.

5. Support exports and take care of attractiveness for foreign investors.

6. Take care of the quality, efficiency and transparency of national and local administration.

7. Maintain an appropriate relationship between wage level, productivity and taxes.

8. Prevent the exaggerated differentiation of wages and take care of the development of the middle classes.

9. Invest in education, especially at secondary and higher levels.

10. Maintain a balance between the benefits of globalisation and the local market" [6].

The rankings sometimes divide small countries (up to 20 million inhabitants) and large countries (over 20 million inhabitants). Since 2002, Poland has held a place somewhere between thirtieth and fiftieth in the rankings issued by International Management Development. Among the countries of the European Union, Poland is in 14th place, and leads the strong economies of the so-called "old European Union" (Sweden, Germany, Finland, the Netherlands, Denmark, the United Kingdom, France, Austria, Belgium, Luxembourg, Ireland) including two countries form the new European Union, i.e. Estonia and the Czech Republic.

Among the factors important for competitiveness there are also these so-called "soft" or social factors. These include organisational culture, habits and traditions, the ratio of employees to jobs, wages as well as care for the work place and machinery and tools. Another important factor for the competitiveness of economies is the maturity of the relationship between employers and employees. This applies in particular to innovative economic sectors where highly qualified, professional staff are required.

The World Economic Forum issues a country's ranking for an individual year in terms of the employee-employer relationship. These rankings show that this relationship is most confrontational in Singapore and most cooperative in Venezuela. A cooperative employee-employer relationship does not always guarantee good relations between them.

National competitiveness is subject to monetary policy. An example of such policy, which strongly promotes exports, can be found in the monetary policy of the People's Republic of China.

In 2008, the People's Bank of China, in the interests of curbing inflation, purchased dollars whilst simultaneously selling RMB (Yuan). The strengthening of the Yuan and the dollar took place after the world-wide outbreak of financial crisis. Most of the countries set national exchange rates in relation to the so-called monetary basket, in which there are: the US Dollar, the Euro, the Japanese Yen, the South Korean Won, the British Pound, the Russian Ruble, the Thai Baht, the Australian Dollar, the Canadian Dollar, the Singapore Dollar. From the year 2008, the exchange rate for the Yuan amounts to 6,83 Yuan/$.

The undervalued Yuan is not just an excess reserve of currency in the Central Bank of China. It is above all a continuation of the competitive advantage of the Chinese economy and Chinese businesses. Nowadays, in order to be competitive, manufacturing has to be done in so-called "low priced country". China is, amongst other things, a low priced country. Many countries anticipate the appreciation of the Yuan in order to improve the competitiveness of their economies. However, this is not in the interest of the Chinese authorities. The use of competitive exports has been an element of China's expansion in many regions of the world such as Africa and Latin America. Against such "closed" state policies, other countries such as the US, Japan and the European Union are protesting more and more frequently. For the time being, these protests are ineffective.

6. Life cycle under conditions of limited competition.

Not all of the world's countries open their economies. Some are run according to different rationales. This most often applies to countries ruled by authoritarian regimes. For regimes in such countries, the collision of products characterised as being high quality, modern technology and high-class materials with poor technological opportunities of the native economy may be perceived as a danger to authority and the regime. North Korea and Cuba are two such examples. A natural hindrance to competition is the lack of a market economy, the result of which is a non-exchangeable national currency. Consequently, there is no opportunity for market rivalry. In such countries, we have to deal with planning and central distribution. Economies constructed in this way are characterised by a lack of overproduction. There is therefore no opportunity for market competition. Despite an economy based on socialist canons, the market and competition were limited in former Eastern Block countries such as Poland, amongst others. This was due to the fact that a certain proportion of the production measures were privately owned. Amongst them were: agriculture, crafts and fine manufacturing.

Other countries apply a strong national protectionism which does not allow for the import of products from other countries. Tools used by these countries include high import duties and a fixed exchange rate for native currency in relation to other currencies. Both methods result in prices of imported products being very high and as such they are able to compete with native products. Examples of countries in which such practices were, or still are, employed include Japan, South Korea and China.

In extreme cases, so-called "soft" methods may be applied. These include legal provisions, which impose very stringent requirements in relation to imported products, the fulfilment of which is very difficult and sometimes even impossible. These methods are applicable in the event of a so-called product war. The state decides to close its territory to goods from a given country, several countries, or to an entire family of products. In this way, the level of competition in a particular market sector is limited in that country. Such cases have occurred in the relationship between Poland and Russia, in the field of food products.

Methods of restricting competition may take the form of import quotas. The state uses this instrument to try and limit the level of competition in a particular market sector. The state believes that in this way it is allowing domestic businesses to develop whilst simultaneously encouraging them to compete with foreign entities. Such limited competition may stimulate innovation and constant improvement of internal production. Taiwan serves as such an example.

A lack of competition or limited competition determines the life cycle of a product. In the first phase of a product's life we are dealing with a novelty. The manufacturer obtains a novelty bonus and the demand the product is high.

Fig. 2. Diagram of the life cycle of a product under limited competition

 

7. Product life cycle under conditions of sustainable competition.

Competition for sustainable (classic) The chart of product life for sustainable (classic) competition looks like this, as presented by the authors of most economic text books (Griffin, amongst others). As in the case of limited competition, there are large time intervals between phases. Businesses have time for research and development. The competition is not overwhelming. The competitive edge, as a general rule, is not too great. Businesses do not conduct price wars.

There are known cases of competing businesses working in cooperation. The production of Ford Ka cars in the Tychy FIAT plant are an example of this. Samsung buys processors from its competitor Apple. Many television manufacturers acquire matrices from the Korean company LG.

The technological Race that we can see all over the globe, in addition to competition, also requires cooperation. Concerns investing in innovations become the owners of selected technologies, construction and materials. This is not enough to create a complete product. Component manufacturers therefore split from concerns and compete with other components manufacturers. In the past the situation was completely different.

The dominance of large concerns has become the calling card of the 20th century. Will this picture change in the near future?

Fig. 3. Diagram of the life cycle of a product under conditions of sustainable competition

 

8. The life cycle of a product under conditions of ultracompetition

The life of a product under the conditions of stronger competition starts before its "birth". Concerns begin to fight over the market for the new product for a few months before the product becomes available on the market. The reason for this is very strong competition, which results in the product having a shorter life span. Concerns are forced to frequently introduce new products onto the market so that they do not lose clients. Passenger cars are an example of this. Popular cars make up the largest sector. Strong competition has led to the necessity of introducing new car models every year. Promotion begins at auto showrooms in Detroit, Geneva, Paris or Frankfurt. Next the marketing campaign is distributed through all available forms of media. Automotive concerns must encourage customers to buy a car for the short term, due to the fact that in a years time the will to promote a new model.

Such a situation requires the creation of large concerns, which:

1. Will possess adequate capital to finance both production and the marketing campaign

2. Will be able to sell an adequate amount of cars, so that the cost per unit is comparable to that of other concerns

3. Will be competent in designing competitive car models

4. Will possess an adequate brand, which customers will equate with superior quality.

 

Fig. 4. Diagram of the life cycle of a product under conditions of strong competition

 

Summary. Contemporary business management requires the comprehensive treatment of any and all problems arising during any part of the process as a whole. Effective and efficient management means radical change to the traditional approach to management.

The new paradigm of management sciences is forcing a departure from the traditional methods and organisational structures. Business management in practice means "earning more and more money". To earn more is to be more competitive. To be more competitive is to better manage competitiveness.

Strong competition is the most important instrument for the restructuring of companies. It eliminates the weak, and the strong need to become even stronger in order to keep going. Strong competition alters the life cycle of products and significantly reduces its life span.

 

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