The 123 rules of competitive markets
Just as living organisms have a standard pattern of growth and development, so do markets have, especially competitive markets. A market as we know is a place where buying and selling takes place. But there are different market structure and dynamics. The nature of goods/services sold and the number of sellers greatly affects the market structure of any industry. Generally, when it comes to competition, there are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly.
A perfect competition describes a market structure, where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market power or brand name that differentiates it so considerably. Its packaging and container don’t matter so much. Also, none of the firms can influence market prices. An example would be the sachet water industry in Nigeria. In this type of structure factors like distribution and accessibility is a more potent weapon for gaining market share and customers don’t mind any option that is mostly available to them. We can also see a very good example among brokers in the stock market.
Imperfect competition otherwise call monopolistic completion is a type of market structure, where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar, but slightly differentiated products. The more the brand differentiation, the more it gives them a certain degree of market power, which allows them to charge higher prices within a certain range. At this stage brand strategy on differentiation is a huge advantage. An example may be competition among consultants, churches, banks, etc.
Oligopoly is the third type of market structure. This results from a state of limited competition. The firms can either compete against each other or collaborate. Most times they form cartels in that industry to fight new entrants and also to set price and other factors favourable to them. By doing so, they can use their collective market power to drive up prices and earn more profit. We see this among the main telecoms firms in Nigeria, shipping companies in maritime, and the Nigerian cement production industry. And as a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms. To give another example of an oligopoly, let’s look at the market for international gaming consoles. If we observe closely, we’d see that three powerful companies dominate the gaming console market; they are Microsoft, Sony, and Nintendo. This leaves all of them with a significant amount of market power. Historically a prime example of an oligopoly has been OPEC where a limited number of countries have dictated oil production and prices to the global economy.
Lastly, monopoly, it refers to a market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as consumers do not have any alternatives. We see this with PHCN today. Monopolistic markets are known for mediocrity, as there is no competition. And competition drives innovation that eventually favours everyone. This is usually missing in monopoly.
Our main focus here will be on the competitive market types. This is because most industries in an economy are made up of that type of market. In line with this, there is an economic research inspired by the BCG (Boston Consulting Group) of the 1960s. It showed a pattern that grouped firms in a market structure into quadrants. In other words, it invented what is today known as the Market Growth/market Share quadrants (it’s a major part of the marketing specialisation syllabus of most MBAS).
BCG once researched into approximately 200 industries in mainly imperfectly competitive and oligopolistic markets and the result revealed that markets evolve in a highly predictable fashion in terms of market share and competition. The Rule of Three governs it. The 123 Rule basically breaks down the market into 3 main competitor types.
There are always three major competitors in any free market within an industry. Knowing your position in the market (alongside your product lifecycle and the BCG Market Share (x axis) - Market Growth (y-axis) quadrant should determine your strategy.
Number 1 firm: it fights for total market domination (they usually engage in Defensive Marketing).
Number 2 firm: it fights for increased market share (they usually engage in Offensive Marketing).
Number 3 firm (rest of them): it fights for profitable survival (they usually engage in Flank and Guerrilla Marketing.
We can relate more to these theories if we put brand names in competition to perspective. Just like GT Bank (let’s call it the number 1 banking firm in terms of number of customers it has). The trend you’d find is that it has the twice the size of the 2nd place (most likely the likes of Firstbank, Access and Zenith). Here’s another example, General Motors in America has almost twice the size of Chrysler and MTN has almost twice the size as Glo (the industry’s 2nd). This trend is very consistent with most players in every industry.
In most industries, the number one which refers to market leader (they are like the title defenders), an example will be Gtbank and MTN; the number 2 brand (the challengers, maybe Firstbank and Globacom) and the third (usually a large number of firms can be in this category at the same time) referred to as “the rest of them”.
The later are usually just trying to just make profit without a lot of immediate aspiration to go head to head or attempt to beat the number 1 and 2s. Usually even if the entire market was given to them, they’d struggle for lack of production and management capacity problems. The truth is, no matter how much you wish, a 2-litre cup cannot contain 10 litres of water. Most of us with our business are probably here.
The number 1 company is usually the least innovative, though it may ironically have the largest Research and Development (R&D) budget. They are usually big enjoying macroeconomic incentives and economies of scale but it is usually very slow to change. But the number 3 usually produce the most innovations, which is most times stolen by the number 1. While number 1 and number 2 battles it out through head to head collisions with the later playing defensive and offensive market strategy respectively; the number 3 guys are advised to concentrate on a niche market. Guerrilla marketing is recommended for the number 3.
Business is like a game of football. It is uninteresting and almost meaningless without an opposing team. In the words of Shiv Nadal, “adaptability and constant innovation is key to the survival of any company operating in a competitive market”. I look forward to driving that innovation with your firm.