Competitive risk

Competitive risk
Primary topic
Related topics
Methods and techniques

Competitive risk is the risk associated with the fact that there are often competing companies on the market, each of which seeks to obtain the highest position and consumer ratings on it in order to gain maximum benefits for themselves[1]. Indicators of successful overcoming of competitive risk are the increase in market share, sales, the degree of penetration of the company into international markets, etc.

The reasons for competitive risk are as follows[2]:

  • level of technological, technical development of the company relatively to its competitors,
  • changing consumer preferences and expectations,
  • vendor problems,
  • management misunderstandings,
  • exit barriers,
  • lack of company's management experience etc.

The management system for any kind of risk includes the following components[3]:

Identification and assessment of competitive risk[edit]

The system of competitive risks consists of 3 levels [4]:

  1. Competitive risks of the direction (industry) of entrepreneurship.
  2. Competitive risks of a business entity.
  3. Competitive risks of the product line of the business entity.

Ad. 1. Competitive risks of the direction of entrepreneurship can be assessed on the basis of such a competitive category as limiters of competitive positions. Limiters of competitive positions are[5]:

  • supplier dependency,
  • customer dependency,
  • threat of substitute goods (elasticity of demand),
  • the threat of new competitors,
  • rivalry of existing competitors,
  • state action.

Ad. 2. Competitive risks of the business entity need to be investigated functionally, depending on the characteristics of its work in the market and the main functional areas of activity. Usually among the main activities of the company there are IT and internal operational processes, risk management, etc. Specific set of basic functions of the business entity is determined by the specifics of its activities. Competitive risks of the business sector are assessed based on the analysis of the industry, its indicators, trends and development prospects, problems and difficulties. For these purposes, it can be used the model of "5 forces of competition" by M. Porter or its extended modifications[6].

Ad. 3. The competitive risks of a product usually depend on the complexity of the product. Product risk associated with changes in the product at the stages of its creation, promotion and maintenance. All emerging competitive risks of a new product can be divided according to the stages of their occurrence[7]:

  • creating product ideas,
  • compliance check,
  • product development,
  • sale and promotion of the product,
  • product service,
  • product development.

All competitive risks can be divided into 2 groups: internal and external[8]. External risks depend on the macroenvironment, and business entities cannot have a direct impact on them, but can only try to minimize negative consequences in the event of their occurrence. Internal risks are caused by microeconomic factors, and therefore they can be managed at the level of a business entity.

Methods for minimization of competitive risks[edit]

Possible methods for minimizing competitive risks [9]:

  • a three-level risk management system for competitive actions,
  • multi-level decision making system,
  • application of scoring or scoring system for evaluating competitive actions and competitive positions.

Footnotes[edit]

  1. Naciri A., (2010) p. 137
  2. Sherer S., Alter S., (2004) p. 32-33
  3. Gantz S. D., Philpott D. R., (2013) p. 72-73
  4. Lednev M. (2015), p. 55
  5. Lednev M. (2015), p. 56
  6. Lednev M. (2015), p. 57
  7. Lednev M. (2015), p. 57
  8. Lednev M. (2015), p. 59
  9. Lednev M. (2015), p. 61-62

References[edit]

Author: Andrii Didukh