Fierce Business Competition

WHY IS THIS IMPORTANT? Increased competition is being driven by many factors,

including the emergence of a global marketplace, the increased number of firms, new
technology that makes it easier for firms to enter new markets, and ever-increasing
pressure from securities markets to raise shareholder value. In particular, the frenetic
atmosphere of mergers and acquisitions, coupled with the increased number of large
institutional investors, has meant that firms that do not cut costs and improve financial
performance face swift action in equity markets. This competition has meant that
companies are less able to insulate workers (e.g., keep wages or the number of
employees higher than the market can allow), or invest in "public goods" such as basic
research or employee training. In 1992, three-fourths of 531 corporations surveyed
identified economic pressures from competitors as one of the primary factors motivating
their restructuring efforts.16

THE TREND: In 1965, IBM faced 2,500 competitors for all its markets. By 1992, it
faced 50,000. And IBM is not alone in feeling outside pressure. Whole industries that
were sheltered from significant competition, such as transportation, utilities,
communications, health care, defense contracting, legal services, and even some
quarters of government, now face growing competition. Stable industries have become
dynamic. For example, insurance was once a stable industry with a distribution system
of local insurance agents. Now it's undergoing significant change, with competition
emerging from foreign companies, banks selling insurance, and agent-less competitors
like USAA (which relies on phone, fax, and the Internet).

Two measures of competition are the total number of enterprises and the total number of
stocks trading in the United States. The total number of enterprises has increased
steadily, from 6 million in 1988 to 6.6 million in 1995, and the number of enterprises
per (adult) consumer has risen steadily since 1991. The number of issues trading on the
New York and American Stock Exchanges and the Nasdaq has almost doubled in the
last two decades. Other measures also suggest a more competitive environment. The
average price mark-up over cost ratio in manufacturing in the United States decreased
from approximately 19 percent in the 1970s to 15 percent between 1980 and 1992-
which was among the lowest of all Organization for Economic Co-operation and
Development (OECD) nations-suggesting that increased competition has held down
prices.17 Accordingly, the share of the U.S. economy subject to foreign competition has
risen from an estimated 18.8 percent in 1985 to 27.7 percent in 1994.18