Today I introduce you to an idea I learnt in my MBA strategy course about the different levels of competitions - the 5 Cs Model of Competition.
It is easy to take competition for granted and not to recognise the subtle different forms that exist but in my How To Survive A Price War blog I showed that you could influence your competitors for better or worse.
The five Cs of Competition are:
- Collusion
- Co-operation
- Coexistence
- Competition
- Conflict
Collusion
This is when competitors work together to control the market supply and price by forming cartels or coming to an arrangement to fix prices.
Collusion is illegal in many countries including the UK, European Union and USA. Don't go there. If found guilty of price fixing, penalties are harsh. The airline industry has been found guilty in a number of cases (see Office of Fair Trade - £121.5 million penalty for price fixing on fuel charges as one example.)
Co-opetition
In co-opetition, competitors cooperate and work together in alliances and joint ventures but not in ways that distort the price customers pay.
The motor industry has seen companies to work together to develop new engines which none of the participants could do on their own.
There is a famous book Co-opetition that looks at the issue from a game theory perspective.
Co-existence
In coexistence, competitors don't have a formal agreement but recognise each other's space and don't look to compete.
A simple example may be two chains of discount shoe stores that compete in the same general area and will open in towns with a population of 20,000 or more but won't open a competing store unless the population is over 100,000.
This recognises that competition can be a zero sum game where if one wins, the other loses.
It is one of the reasons why the idea of finding a special niche can work. Once you establish "ownership", any competitor recognises that you are established and has a choice - to ignore the niche or to challenge you in the niche.
No formal agreement is required for co-existence to exist between competitors. Just common sense based around plentiful opportunities for making money.
The danger happens if profit opportunities dry up and one or more competitors are committed to further growth.
Competition
This is the normal situation as businesses compete head to head for customers.
Prices are kept in check by the other competitors but everyone behaves sensibly, recognising that a price war is bad for profit.
Conflict
In conflict, competitors fight toe to toe and slug it out for any and all customers.
The aim has moved to making short terms profits to hurting the competition and potentially either permanent weakening them or even driving them out of business.
Price is often the common weapon but mass marketing campaigns, product bonuses and higher levels of service can all be used to slug it out.
But just like collusion, conflict can be illegal.
While customers benefit from lower prices, predatory pricing is deemed anti-competitive. While legal definitions of just what predatory pricing vary - and can be difficult to prove - think of it as selling at a price below the variable cost of production.
Five Levels of Competition Model
So there we have the five levels of competition - collusion, co-opetition, coexistence, competition and conflict.
Can you use these ideas and make money by thinking more about your competition?
It is a mistake I see too often.
Businesses plan for growth but don't take their competition and how they are likely to react into account.
What Do You Think About The Five Levels of Competition?
As always I am eager to read what you think about the different levels of competition.
Do you have stories about how you have co-operated with a competitor in an alliance to create value for customers that you couldn't on your own?
Have you been caught in a conflict? I have and I've seen profits fall at an alarming rate as prices plummeted - each of us convinced that the other person started it and we were just defending our turf.
If you are looking for more information about competitive strategy I have written
Best Business Strategy books
on my Business Books blog
http://businesscoaching.typepad.com/business_books/2009/08/best-business-strategy-books-but-do-you-agree.html
Posted by: Paul Simister | 01 August 2009 at 11:11 AM