What is the competitive landscape?
As the level of competition and regulation in any sector increases, the fortune of that sector gets impacted.
Type of competition
Several large buyers and sellers provide similar products and services. For example, for oil marketing companies, HPCL or BPCL, it is hard to differentiate the product offered by these players.
There is only one player. For example, Power grid, a government-owned company is a monopoly in India’s power transmission space.
In this, a small number of players collude. For example, Pepsi and Coke’s pricing strategy now arrives through collusion rather than a price war.
This is between Perfect Competition and Monopoly. Here, many sellers offer products/ services that are similar but not perfect substitutes of each other i.e., differentiated. A company may earn an above-normal return on capital for some time, but competition soon catches up to drive down returns to the sector average. For example, Crompton Greaves Consumer Electricals Limited is one of the leading FMEG companies in India and enjoys a very high return on capital for now.
An investor must look at the intensity of competitive rivalry, just the number of players may not be indicative of the return.
Role of Regulation
This is a very critical factor to look at. There are sectors such as the power sector, airline, pharma, etc that are heavily regulated. But the IT sector is not heavily regulated. IT firms have more freedom in terms of how they operate. Although in the recent past big IT giants such as Google and Facebook have also come under the regulatory gamut. The cost of compliance increases and the freedom to operate reduces. These things have a negative impact on the return of the company.