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.
Example 6.9 Rivalry among Nonprofits
Nonprofits face competition just like any other business. The first step in combating this is for executives to really get to know their nonprofit and pay attention to their social return on investment. Another way nonprofits can avoid competition is to engage in partnerships and join together to improve their overall mission.
Source: Nonprofit Hub, Understanding Competition and Partnerships in the Nonprofit Sector | Ft. Derrick Feldmann, 2018Fa
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.
Type 1 Rivalry: Competing for Potential Customers
Example 6.10 Type 1 Rivalry
T-Mobile is rebranding its prepaid carrier Metro-PCS to Metro by T-Mobile. This is a way to draw in new customers to the prepaid market that have shunned it in the past as being inferior to postpaid service despite operating on the same T-Mobile Network as its flagship brand.
Source: Fortune, Why T-Mobile Is Rebranding MetroPCS to “Metro by T-Mobile”, 2018Fa
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.
Type 2 Rivalry: Competing for Rivals’ Customers
Example 6.11 Type 2 Rivalry
Verizon and T-Mobile compete to steal away each other’s existing customers. They employ different strategies in order to try and do this, with Verizon offering the best choice for network and coverage and T-Mobile offering the best in price and customer service. The switching rates in this industry are generally quite low which means the companies have stiff competition between one another.
Source: Whistle Out, Verizon vs. T-Mobile: Which Carrier is Better?, 2018Fa
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.
Example 6.12 Reluctance to Switching
In 2019, there are still a lot of companies that have managed to retain their customer brand-loyalty. Starbucks, finished in the top 5 of Fortune’s report thanks to the cult-like coffee drinkers that would never switch to other brands. And yet, the company still endorses innovation, improving the in-store experience, and the use of technology such as a mobile-payment system to help cut down on queue times. Similarly Costco, famously known for low prices by bulk-buying, and item selection that makes the customer always have a reason to become a return customer. Costco finished in 12th place while gaining respect from workers and industry analysts by treating employees with better wages, better health care coverage, and pension plans. Both companies are examples of keeping their customers reluctant to change.
Source: Risnews, The 10 Most Admired Retailers for 2019, James Mandala Tirtawijoyo, 2019Wi
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.
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.
Example 6.13 Type 3 Rivalry
During the time of Covid-19, many restaurants were restricted to take-out only service. Doordash, the biggest food delivery app in the U.S, recently started delivering toilet paper and groceries from 7-eleven. The company used to only deliver food, but now have non-food groceries on its platform, enabling it to compete with major stores such as Amazon and Instacart. This implementation increases its offerings and gives Doordash customers reason to call them more often instead of one of its many competitors.
Source: Bloomberg, Candy Cheng, DoorDash Starts Delivering Toilet Paper and Other Groceries, Siyuan Wang, 2020Sp
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.