Chapter Summaries - Chapter 2

The main purpose of this chapter has beento provide a context in which to considerthe detailed issues that comprise the substanceof the book. As the title indicates, theprimary concern has been to describe thenature of competition and the role whichmarketing has to play in determining theoutcome of competition between firms,industries and national economies.The chapter opened with recognition ofthe fact that the subject of competition hasbeen central to the formal study ofeconomies for over 200 years. We alsoobserved that, as we move into a millennium,the market economy has emerged asthe principal and preferred mechanism forsolving the basic economic problem ofmaximising satisfaction from the consumptionof scarce resources. In parallel with oursummary of the key factors which industrialeconomists have identified as having amajor influence on the nature and outcomeof competition between firms we warned ofthe dangers of the implied distinctionbetween theory and practice.

Frequently, theory and practice are presentedas if they were polar opposites withlittle or no relationship to one another. Inreality theory (or at least ‘normative’ theory)should reflect our understanding of realworld relationships and so enable us topredict how events will turn out in thefuture, given particular and clearly definedsets of circumstances. Knowledge, fromwhich theory is derived, represents distilledexperience. While knowledge cannever be a complete substitute for experience,its sheer volume predicates that noindividual could ever hope to acquiredirectly the kind of understanding andinsight which can be achieved througheducation as opposed to experiential learning.But, rather than digress into a polemicon the importance of theory per se, we recommendthe pragmatic test adopted by theHarvard Business School in its use of ‘currentlyuseful generalisations’ (CUGs),namely: ‘Does this seem to work?’ If itdoes, then the practitioner would be bestadvised to use the ‘theory’, ‘concept’, ‘paradigm’or whatever to its best advantage,and leave it to the academics to argue overthe niceties of the distinctions between themeaning of these terms.

On the assumption that readers of textbooksare inclined to accept this advice,the remainder of the chapter has reviewedand described some of the more importantideas necessary to an understanding of thenature of competition. First, we exploredthe view that the interaction between supplyand demand (sellers and buyers)resulted in the development of specificmarkets. The structure of these markets willboth influence and be influenced by theactions of suppliers as they compete for thepatronage of customers. Their success inthis competitive activity will be reflected intheir performance, and the performance ofthe industry vis-à-vis other industries thatare seeking to attract consumers’ disposableincome.

Within an industry, competition is governedby five main forces – the threat ofsubstitutes for the industry’s output, thebargaining power of customers and suppliers,the threat of new entrants and the ‘jockeying’for position between currentcompetitors. Each of these factors wasexamined with a view to establishing howthey contributed to the creation of competitiveadvantage. In turn we explored howcompetitive advantage could be seen toinfluence and shape marketing strategy.The analysis of competition was thenbroadened from the single economy to thecase of international trade and exchange.Considerable attention was given to MichaelPorter’s work, The Competitive Advantageof Nations, in which he develops a modernexplanation of the theory of comparativeadvantage as first proposed by Ricardo(1817) in the early nineteenth century. Thisanalysis led to an extended statement of thesources of competitive advantage.Next, the chapter reviewed the questionof the role played by marketing in achievingcompetitive success. From this review itwas apparent that while marketing alone isnot a sufficient guarantee of success it iscertainly an important and, therefore, necessaryfactor contributing to it.

To conclude the chapter we looked atthe work of Hamel and Prahalad who promotea resource-based view of competitionwhich stresses the importance of skills andcompetencies and, particularly, the role ofknowledge as the ultimate source of a sustainablecompetitive advantage. In turn, thisled to a brief consideration of the nature ofthe knowledge-based organisation and thelearning company.

Having established the context withinwhich marketing occurs, we proceed inChapter 3 to define more precisely whatmarketing is, and its relationship to corporatestrategy.