Ensuring the competitive advantages of business within the framework of the functioning of modern economic systems

UDC 339.137.22
Publication date: 28.12.2022
International Journal of Professional Science №11-2-2022

Ensuring the competitive advantages of business within the framework of the functioning of modern economic systems

Popov Yuri Alexandrovich,
senior lecturer of the Department of Economic Theory,
Saint Petersburg State University
of Industrial Technologies and Design
Abstract: In this scientific work, competition is considered as an integral part of the functioning of modern market elements. The origin of the term in the works of economists, in particular A. Smith, is given. The classification of economic systems and the features of each type are reflected. The problems of their sustainable functioning are revealed. The concept of M. Porter's competitive advantages is considered in detail, as well as typical innovations that give them. The essence of competition in industries expressed by the five forces and the ways of creating a competitive strategy based on their analysis are analyzed.
Keywords: competition, competitive advantages, economic system, business, competitiveness, strategy, market, industry, M. Porter.

Competition is an integral part of any market. This means that economic entities or market participants are fighting among themselves for more efficient use of factors of production. This rivalry arises due to the fact that several firms offering similar products enter a certain market of goods or services. In other words, there is competition. It should be noted that this term was widely used in their works by scientists-economists of the XVIII century, such as A. Smith and D. Ricardo, however, its meaning has been preserved to this day. The purpose of competition is also to obtain a larger market share by an enterprise or firm, certain advantages within the existing economic system, and, as a result, an increase in profits.

From the point of view of macroeconomic studies, researchers distinguish such types of economic systems as: traditional, centrally managed, market and mixed. In the traditional market system, the basis is subsistence farming, observance of traditions and customs. In such a system, it is difficult to introduce innovations and therefore competition is quite weak. In a centrally managed economic system, the main economic issues are controlled and solved by the state (for example, it manages the distribution and production of goods). The market system presupposes the principle of free enterprise; limited state intervention in economic activity. In this system, competition encourages producers to use limited resources rationally and increases production efficiency. A mixed economy is based on private ownership; control over limited resources is exercised by both the market and the State [4].

To date, the current economic system in the Russian Federation is a mixed one. Such a conclusion can be made for the following reasons: private property exists on a par with state property, entrepreneurs have the right to decide for themselves what to produce and for whom, the state supports the market, but also intervenes in it.

Historiographical analysis of the development and transformation of world economic systems shows that their sustainable functioning is possible today in the existing conditions. However, there are some problems that make it difficult, and sometimes do not allow this process to be fully implemented. Among such problems can be distinguished:

—   The problem of modern production is that there are many necessary goods, but, unfortunately, not all of them are of high quality. The consumer is lost in such a variety and as a result, there is a production crisis.

—   The problem of consumption — buyers may have insufficient income to purchase a particular product and as a result, there is a crisis of overproduction. It can also occur with insufficient consumption, if consumer incomes have increased and the product has lost its value in the market.

—   The problem of distribution and exchange process arises due to inefficient management. In production, important management functions are poorly performed, such as: organization, planning, management and control [1].

The development and improvement of competition contributes to the solution of these problems, since the efficiency and sustainable development of production involves the manufacture of goods at the lowest cost, but at the same time with greater profit for business. Competition can help an entrepreneur improve his company and find new solutions.

In order to move on to the essence of the law of competition, we will touch on the question of the origin of the concept itself. It is believed that this term was introduced into the English scientist Adam Smith. He viewed the competition from two points of view. On the one hand, it is the freedom of economic activity, that is, the freedom to invest capital where it brings the greatest benefit, but also the freedom to withdraw capital where it brings the least profit. On the other hand, competition is a lack of “real” (in Smith’s terms) demand or supply of a product on the market. At the same time, the English economist argued that all this is a temporary phenomenon.

Thus, since the time of A. Smith, the unambiguity of competition has been asserted: it acts as an “invisible hand” that returns the market to the equilibrium point through the mechanism of interaction between supply and demand, and also coordinates the activities of market participants [8].

Currently, the term «competition» (from Lat. concurrere — to collide) means rivalry; the struggle to achieve greater benefits, advantages. The main signs of competition are:

—   the presence of a special category of persons – economic entities that carry out income-generating activities and are able to influence the conditions of circulation of goods on the commodity market;

—   The independent nature of their actions;

—   Rivalry between them in order to obtain the greatest profit [4].

There are three types of competition according to its form:

—   Functional – arises due to the fact that any need can be met in various ways. Based on this, the benefits aimed at meeting the same needs are called functional competitors.

—   Specific is the result of the fact that there are goods that serve the same need, but differ from each other in some essential characteristics.

—   Subject – arises because manufacturers create almost identical products that differ only in quality, and often the same in quality [11].

Along with the designated classification, economists divide competition by its methods into price and non-price.

Price competition is a form of rivalry between manufacturers, where the tool for achieving goals is the price, which in this case serves as a way to limit the capabilities of rivals (the seller seeks to improve the conditions of sale of his goods by setting a lower price than that of rivals). Price competition is divided into direct price competition and hidden price competition. Direct price competition implies the fact that firms report a decrease in prices for manufactured goods and information about this spreads quite quickly. In turn, hidden price competition means that the product is released to the market with improved consumer properties, higher quality, but the price increase is relatively small.

Non–price competition is a type of struggle between sellers based on minimizing the influence of price as a factor of competition and maximizing other factors by giving products distinctive properties:

—   Special design, including product packaging;

—   Operational characteristics;

—   Availability;

—   Warranty service, etc. [3]

There are so-called illegal methods of non-price competition. These include:

—   Poaching of specialists who have any secret production information;

—   Production of goods that are practically indistinguishable from the original goods, but worse in quality [3].

As noted earlier, the markets for goods and services are getting bigger every year. There are new production technologies, new customer needs, one or another sphere becomes more in demand, and this leads to the entry of even more participants into the market. In order to make a big profit and win the fight, the company must have competitive advantages, in other words, be competitive.

  1. Kotler defined competitiveness as the ability of an organization to withstand competition in comparison with similar objects in a given market. Later, he supplemented and developed the definition of this concept, considering not only from the standpoint of the organization, but also specific products. M. Porter concretized the definition of competitiveness: «… this is the property of a product, service, subject of market relations to act on a par with similar goods, services or competing subjects of market relations present there» [7].

The subject under consideration remains relevant today. In all areas of the market, with a market type of economy, firms have to fight, and therefore analyze and manage competitiveness, which entails, first of all, a targeted impact on the factors that form certain advantages. These factors may be partially identical, and the other part of them depends on the conditions in which the company has to compete. The market, the sphere and other conditions influence the factors of ensuring competitive advantages, and the analysis of the conditions, the position of the company in the market can help it determine the factors of competitive advantage and contribute to the fight against the leaders of a particular market.

Speaking about the essence of the issue of competitive advantages, it should be noted that one of the most popular in this field is the concept developed by M. Porter, an American economist, professor at Harvard Business School, a specialist in the study of competition, who developed the theory of competitive advantages. This concept described the forces that determine competition in the industry. She gave market participants an understanding of the fact of the impact of environmental factors that require any response or reaction to this impact. In turn, the company has the opportunity to realize competitive advantages, which allows it to achieve results and success in the market.

At the same time, three levels of competitive advantages were proposed. Competitive advantages of the lowest rank (scale of production, quality of raw materials) cannot allow an organization to win the competition in full due to their availability to all participants in the struggle. The advantages of a higher rank allow you to hold high positions in the market for a long time. These are advantages such as investment attractiveness, reputation of the company, etc. It is worth noting that there are also advantages gained due to the region where the company is located (home base). In this way, firms can gain competitive advantages by operating in those countries that have certain resources or experience needed in the market. The highest level includes the professionalism of workers, patents, etc. [2]. It follows from this that the most important thing for the organization is constant innovation and the qualification of workers.

Thus, it becomes clear that within the framework of the functioning of modern economic systems, competitive strategy actually plays a key role in achieving the result of the enterprise. It, in turn, is determined by several points. One of them is the choice of an industry, since the probability of obtaining a long-term profit varies in different industries. The second criterion for choosing a strategy is the position that the firm occupies in the industry. But even these moments are not enough to draw up a strategy. Even in a very profitable industry, a market entity can make a small profit if he chooses a position incorrectly, because both the structure and the position of the industry are changeable. Changes in the position of market leaders can lead to changes in the industry as a whole, which contributes to the formation of new advantages.

A competitive strategy should be created after analyzing the entire industry and the processes of its possible changes. In industries, the essence of competition, according to M. Porter, is expressed by five forces:

  1. The threat of the emergence of new services and goods (substitutes);
  2. The threat of new competitors;
  3. The ability of buyers to bargain;
  4. The ability of suppliers to bargain;
  5. The struggle between existing competitors in the market [9].

Industries in which the actions of all five forces are developing successfully allow many market participants to maintain superiority for a long time. In the case where several forces act unfavorably, only a small number of organizations manage to hold high positions for a long time.

Much depends on the position of the economic entity in the market. A firm can not only react in response to a change in the structure of the market, but it is capable and must itself make attempts to change it in its favor [5]. For example, market entities should not only organize the work of their employees, but also give them the opportunity to introduce innovations into their activities. After all, only the totality of the organization’s activities can provide the possibility of a competitive advantage. For example, engineers may try to apply new technologies in production, operators may negotiate with customers, etc.

Through these actions, which means increasing the level of products or the quality of service, the organization creates value for its customers. After all, one of the main values of any organization in the market is how much their client is willing to pay for the product or service offered. A company can be called profitable if this amount exceeds the cost of creating a product or service. In order to win a competitive struggle or gain a competitive advantage, the company’s product must match what competitors have produced, but be cheaper to produce (a strategy of lower costs), or offer a product with more value to the buyer, which means getting more money (a strategy of differentiation) [6].

Firms manage to achieve competitive advantages by applying certain innovations in their activities that may appear in all types of company activities. Improved and new technologies, an updated approach to advertising campaigns, etc. they can lead to a change of the market leader if competitors do not take retaliatory actions.

  1. Porter in his writings describes typical innovations that give competitive advantages:
  2. Introduction of new technologies. It is this very innovation that often precedes important innovations. New technologies can enable a firm to gain a competitive advantage in many areas. New ways of marketing, new production technology, etc. they can help a market entity win a competitive struggle.
  3. The emergence of a new segment of the industry. This is another opportunity to gain an advantage among competitors. The emergence of a new segment or the regrouping of an old one not only makes it possible to reach a new group of customers, but also to find a way to produce new types of products more efficiently.
  4. New or changed customer requests. Sometimes consumers’ attitudes towards a particular product may change. Completely new requests may appear. Thanks to this, market participants can build a new value chain and respond to the desire of buyers and win the competition.
  5. Changes in production components or their cost. Often, in market conditions, leadership passes from one entity to another due to the instability of prices for production components: raw materials, labor, etc. An organization that can adapt to these changes will be able to achieve a competitive advantage.
  6. Changing government regulation. There are certain standards, «rules of the game» set by the state. When they are changed or supplemented, industry leaders cannot always respond to these innovations, thereby firms that were able to adapt to the changes gain an advantage.
  7. Cost leadership. When using this innovation, the firm sets the lowest price by minimizing costs in distribution and production. Low prices provide a large market share.
  8. Differentiation. The company differentiates its products from competitors’ products in such aspects that are important to the consumer. For example, reliability, durability, product quality, etc. [10].

In conclusion, it should be noted that in modern realities, the markets of goods and services are changing very rapidly. At the same time, new companies appear, and, as a result, competition between them increases. Absolutely every company is trying to take and hold leadership positions, which means to win this fight. A well-chosen strategy can help to win in this confrontation, which, in turn, requires a detailed analysis of the current market situation. It is necessary to evaluate the chosen industry as a whole, the position that the firm occupies in it, etc. Based on this, the firm can respond to changes in the market structure by introducing innovations into its own activities, which just give competitive advantages.


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