Most organizations compete to survive. For-profit companies struggle to provide returns to their shareholders, nonprofit organizations compete for donations, and government organizations must justify their existence to avoid budget cuts.
Organizations survive by exploiting economic niches. These are like environmental niches in biology. In economics, successful enterprises are able to convert less valuable resources into more valuable supplies. In for-profit business, this is called earning an economic profit. An economic profit can be earned when an organization applies resources to their highest and best use.
Among firms there is fierce competition. Some firms compete directly, selling similar or identical products to the same customer base. Other firms compete indirectly, selling substitute products in the same market. A frequent example of direct competition is seen between McDonald’s and Burger King, which both sell burgers and fries to the same customers often across the street from each other. Indirect competition in this example would be Kentucky Fried Chicken, which can sell chicken as a substitute product for McDonald’s hamburgers.
Businesses are so competitive that new entrants are often seen entering a market. After Blackberry developed a popular smartphone, Apple launched its iPhone series of smartphones. Blackberry has since been unable to provide as high of a return to its shareholders amid higher competition. The story did not end there: Apple’s high sales and earnings growth from the iPhone attracted even more competition. Suddenly other companies such as Samsung and Nokia have introduced smartphones and are thought to have saturated the smartphone market. Other companies that are outside of the smartphone market are even jumping in. For example, Amazon has stated its intentions to sell its own model of smartphone.
Worse yet, new competitors can be created to attack the markets of profitable companies. These newly created ventures are called startups. These new organizations are not innocent babies but are tough and ready to compete. Many startups are launched specifically to compete and take sales away from established companies.