Competitive risk

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. 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:

• 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:

• risk identification,
• risk assessment,
• risk monitoring,
• risk response.

Example of Competitive risk

Competitive risk can be illustrated through an example. For example, a company that manufactures and sells a product may face competitive risk when a new competitor enters the market with a product that is similar in quality and price but is more widely available. In this situation, the company’s existing product may become less attractive to customers, resulting in a decrease in sales and profits. To mitigate this risk, the company may need to adjust its pricing strategy, reassess its distribution channels, or invest in research and development to create a more attractive product.

Overall, competitive risk is an ever-present aspect of doing business and must be managed carefully in order to remain competitive and successful in the market. Companies must identify potential risks, understand the competitive landscape, and take proactive steps to mitigate them. By doing so, they can position themselves for long-term success and minimize their risk of loss.

Types of Competitive risk

Competitive risk can be divided into two broad categories:

• Strategic risk: This is the risk of loss due to a company’s failure to make the right strategic decisions. It can be caused by a lack of understanding of the competitive landscape, an inability to respond to customer needs and preferences, or a failure to anticipate changes in the market.
• Operational risk: This is the risk of loss due to a company’s failure to effectively execute its strategy. It can be caused by a lack of resources or capabilities, inefficient processes, or a lack of knowledge or expertise.

Overall, companies need to be aware of both strategic and operational risks in order to effectively manage their competitive risk. By understanding the competitive landscape and customer needs, developing efficient processes and leveraging technology, companies can mitigate both types of risk and position themselves to remain competitive.

Steps of Competitive risk

1. Identify the risk: Companies must first identify the competitive risk they face and the external factors that could be contributing to it. 2. Analyze the risk: Once the risk is identified, companies must analyze it to better understand its impact and identify the potential solutions. 3. Develop a strategy: By understanding the competitive landscape and customer needs, companies can develop a strategy for responding to competitive pressures and minimizing their risk of loss. 4. Monitor and review: Companies must monitor their competitive risk and review their strategies regularly to ensure they remain effective.

Identification and assessment of competitive risk

The system of competitive risks consists of 3 levels :

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:

• 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.

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:

• 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. 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.

Advantages of Competitive risk

The advantages of competitive risk include the opportunity to:

• Identify and capitalize on market opportunities. By understanding the competitive landscape and customer needs, companies can develop strategies to capitalize on market opportunities that may arise.
• Create competitive advantages. By leveraging technology and data-driven decision making, companies can create competitive advantages that set them apart from the competition.
• Foster customer loyalty. Developing a customer-focused culture that is responsive to customer feedback can help foster customer loyalty, leading to increased revenue.

Overall, competitive risk can be an opportunity for businesses to create competitive advantages and capitalize on market opportunities. By understanding customer needs and leveraging data-driven decision making and technology, companies can create strategies to mitigate competitive risk and position themselves for success.

Limitations of Competitive risk

The limitations of competitive risk are that it is difficult to predict or anticipate changes in the competitive landscape, technological advancements, and customer needs and preferences. Additionally, there may be a risk of over-investing in strategies that fail to provide competitive advantages, or of investing too heavily in a particular technology that may not be profitable in the long-term.

Companies must also be aware of the potential ethical and legal implications of their strategies, as some strategies may not be in compliance with laws and regulations. Additionally, companies must ensure that their strategies do not violate the rights of customers or other stakeholders.

Overall, competitive risk is a complex and ever-changing aspect of doing business, and companies must be aware of the potential limitations in order to minimize their risk of loss. By carefully researching and monitoring the competitive landscape, as well as investing in strategies that are in compliance with ethical and legal requirements, companies can ensure their strategies are successful and profitable.

Methods for minimization of competitive risks

Possible methods for minimizing competitive risks :

• 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.

Other approaches related to Competitive risk

In addition to the strategies mentioned above, there are some other approaches related to competitive risk. These include:

• Creating a culture of innovation and experimentation that encourages the development of new ideas and products.
• Investing in employee training and development to ensure teams are up-to-date on the latest technologies and best practices.
• Establishing partnerships with other organizations to gain access to new markets and technologies.
• Building an effective brand and marketing strategy to help differentiate the company from competitors.

By taking these additional steps, companies can further reduce their risk of experiencing losses due to competitive pressures. Through a combination of market research, data-driven decision making, technology utilization, customer-focused culture, innovation, and strategic partnerships, companies can develop a comprehensive strategy for mitigating competitive risk and staying ahead of the competition.

Footnotes

Competitive risk — recommended articles

Competitive disadvantage — Strategic issues — Threat of new entrants — Dynamic risk — Crisis in the enterprise — Strategic decision — Competitive environment — Benefits of strategic management — Technological risk

References

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• Lednev M., (2015) PhD in Economics, Associate Professor Assessment and management of competitive risks and risks of competitive positioning in current conditions, Journal of Modern Competition, 2015, vol. 9, no. 1 (49), pp. 54-65 (in Russian)
• Naciri A., (2010) Internal and External Aspects of Corporate Governance First published 2010 by Routledge 270 Madison Ave, New York, NY 10016, Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
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• Youngberg J. B., (2011) Principles of Risk Management and Patient Safety, Sudbury, MA: Jones and Bartlett Publishers

Author: Andrii Didukh