The intensity of competition among rival firms within an industry will affect the profitability of the industry as a whole. Within the past decade, the Ghanaian telecommunication industry has witnessed intense competition, taking several forms. You are a strategic management consultant and have been invited as guest lecturer in one private university to discuss the intensity of competition among rival firms in the telecommunication industry.
Required:
Discuss FOUR factors that could be responsible for the intensity of competition among rival firms within the telecommunication industry in Ghana. (8 marks)
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- Market growth. Rivalry is intensified when firms are competing for a greater market share in a total market where growth is slow or stagnant. In a matured or declining market rivals would have to battle for the customers of one another if they want to increase market share. Thus, rivals firms resort to a lot of competitive actions such as advertising battles, sales promotion campaigns, price competition, etc. The telecommunication industry in Ghana, for instance, is currently experiencing intensified competition among rival firms due to the slow growth in the market coupled with the increase in participating firms in the industry.
- Cost structure. In an industry which is characterised by high fixed costs, firms will have to sell more of their products in order to breakeven and start making profits. Such high fixed costs are a temptation to rival firms to compete on price, since in the short run any contribution from sales is better than none at all. This seems to be true in the Ghanaian telecommunication industry. Rivals firms have invested heavily in terms of the telecommunication infrastructure such as masts, fibre cable networking, and office spaces across the regions, etc. These are very huge fixed costs that must be catered for. The result is the fierce promotional campaigns and advertising battles in the industry.
- Switching costs. Switching costs come in three different ways – money costs, time costs and inconvenience costs – that customers of a product face when they switch their preference from one product to that of a rival. Higher switching costs tend to lock-in customers to particular products. In an industry which is characterised by lower switching costs of customers – i.e. they can switch easily without incurring significant costs – suppliers will compete intensely in order to win over the customers of rival firms. For instance, the porting system that was introduced into the telecommunication industry by the NCA has significantly reduced the switching costs of customers. This further intensified competitive rivalry among rival firms in the industry.
- Capacity. A supplier might need to achieve a substantial increase in output capacity, in order to obtain reductions in unit costs or enjoy economies of scale.
In an industry where achieving economies of scale is a strategic objective, competitive rivalry is intensified since each firm focuses on increasing its capacity and to sell more. - Degree of uncertainty. In an industry where rival firms are unsure what one another is up to, there is a tendency for firms to respond to the uncertainty by formulating a more competitive strategy. Competitive rivalry is intensified if the degree of uncertainty is high as is the case in the telecommunication industry in Ghana. There is high degree of innovation in the industry and thus rival firms are always on the look out to see what competing firms are bringing on board next. This uncertainty spurs firms on to innovate at shorter intervals to appeal more to customers.
- Exit barriers. Exist barriers make it difficult for an existing supplier to leave the industry. Exit barriers come in many forms such as low break-up values of non-current assets, cost of redundancy payments to employees, effect of withdrawal on the other operations within the group, reluctance of managers to admit defeat, their loyalty to employees and their fear for their own jobs and government pressures on major employers not to shut down operations. In an industry where exit barriers are high, competitive rivalry is intensified since competing firms will do everything possible to stay in operation and avoid the difficulties associated with exiting the industry. (Any 4 point