Wednesday, August 13, 2008



Competition is essential in any business. It encourages the business people to come out from their comfort zones thus entering into effective zones. If there is no competition then the business activity becomes lethargic. There will be monotony and monopoly. The business people take the customers for granted and will have huge profits and there will not be any improvement in their business lines. There will be lack of dynamism and energy. In few cases, business people develop arrogance. Therefore, it is essential to have healthy competition in any business. When there are too many players in the similar business the profits tend to decrease and the business people try to woo the customers with various schemes and freebies. As a result, customer gets more respect.


When there is stiff competition in the business the business people tend to think out of the box and try to resort to innovative thinking to develop the existing products with lesser price thereby passing on the benefits to the customers. It is for this reason, companies spend considerable amount of their profits on Research and Development (R & D) towards innovation. It helps them to have competitive edge over their competitors. All sectors focus on R&D and especially Pharmaceutical sector spends heavily on the same as they can have Patents on the drugs. The meaning of patent is that the company alone has the right to manufacture and market the products as it has taken pains to innovate. For instance, many Pharmaceutical companies are trying to find out right vaccine for AIDS and if invented with the right vaccine then the company can have huge profits because of no competition. In a nutshell, competition is the soul of innovation.


Business people constantly innovate because innovation is the key to success. If they find that the competition is heating up then they gradually shift their focus to other areas by either related diversification or unrelated diversification. In related diversification the new products or services that are entered have relevance to the existing activities. While in the unrelated diversification the new products that have been ventured have no link to the existing products or services. During competition it is always advisable to go for the related diversification as the risk is limited. On the contrary, the risk is higher in unrelated diversification. Anyhow diversification is the key to innovation. In few cases, business people will have combination of both related and unrelated diversification.


During the initial process of innovation there is a possibility of charging exorbitant profits as there will not be much competition. Because the competitors take time to understand the techniques of innovation to imitate. And until then the business people would have handsome profits on their services and products. By the time the competitors come into the field to ape then the business people start decreasing the profits so as to deny any major profits to the competitors and also he starts innovating further in the similar where they can have huge profits. On the existing products or services they would intentionally decrease their profits because they had already enjoyed huge profits during the initial stages of innovation. It is the case of all manufactures whether they belong to automobile, cell phones, FMCG, pharmaceuticals sector etc., Of course, in the case of pharmaceutical sector there is much competition because of the provision for patents.


Michel was a small trader who set up a small retail cloth shop. He set up a shop in a commercial area where there is no shop of such kind. He worked hard and established business through thick and thin. The business looked up steadily and he began prospering. Sensing the same another trader started similar cloth shop near and began competing with Michel. Michel started feeling the heat of competition. Until then he was having handsome margins as there was no competition. With the entry of new retail cloth shop his business volume began coming down. Subsequently Michel began selling at lower margins to survive in the business. And the new trader also followed the strategy of selling at very thin margins.

Having seen that price reduction did not work out as it dented his profits adversely he changed his strategy. Michel concentrated on cash purchase instead of purchasing in credit where he was buying at higher price and selling. This has improved his profit margins as well as outsmarting with his competitor. Gradually he also began searching for more wholesalers who can offer his at competitive rates. This has further improved his competitive edge. This step resulted in selling the stocks at the rate where his competitor is buying. This is nothing but innovation in his purchasing style.


For any entrepreneur every problem is an opportunity. He always looks for opportunities from every problem rather looking for problems from each opportunity. It is this optimistic attitude that drives him towards success. Competition is also a boon in disguise for entrepreneurs.


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