The competitive environment

Learning Objective
Discuss on competitive environment
The competitive environment
• One of the most important external
influences faced by a business is the
threat posed by competitors.
• There are many thousands of businesses
competing to sell a wide range of products
to the population.
 Determinants of competitiveness
• The number and relative size of
businesses in the market: In some
markets, such as farming, a large number of
businesses compete with each other.
• The extent of barriers to entry: In some
markets, it is easy for a new business to set
up. Many people each year set up small
shops selling everything from groceries to
clothes to toys.
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• The extent to which products can be
differentiated: In some markets, products
are homogeneous. This means that they
are the same whichever business
produces them.
• The knowledge that buyers and sellers
possess: In some markets, buyers and
sellers have access to all the information
they need to make rational decisions.
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• Degree of interrelationship: In some
markets, the actions of one business have
no effect on another business. Businesses
are independent of one another.
• Legal factors: Competition between
businesses is generally seen as being in
the best interests of customers. They can
shop around between businesses offering
the same or similar products for the best
deal.
 Impact on businesses of a competitive
environment
• Price: In a highly competitive market,
businesses have less control over the
prices they charge.
• Profit: The profit available in a highly
competitive market has to be shared
between a greater number of players. Profit
margins are likely to be squeezed because
prices will be forced down.
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• Communication with customers: Businesses
will be under pressure to meet customer needs.
Those businesses that meet customer needs
effectively are more likely to survive in the
market.
• Innovation: In highly competitive markets,
innovation will be encouraged. This is because if
a business can design new products, they may
be of more interest to consumers and allow a
business to gain a competitive edge in the
market.
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• Product range: The range of products
sold by a business is likely to be strongly
influenced by competitors.
• Marketing: In highly competitive markets
the quality of marketing, and the amount of
money invested in marketing strategies, is
very important.
Competition and market size
• Market size may be measured in terms of
value, and can vary considerably.
 Global markets
 National markets
 Regional markets
 Local markets
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• Operating in large markets. National and
global markets are likely to be more
challenging for businesses.
• Operating in small markets. One of the
main problems when operating in small
markets is whether the volume of sales will
be suffi cient to generate the desired rate of
return. Small markets might be attractive
because they may lack competition.
Key Words
• Cartel – a group of businesses (or
countries) which join together to agree on
pricing and output in a market in an
attempt to gain higher profi ts at the
expense of customers.
• Colluding – in business, where several
businesses (or countries) make
agreements among themselves which
benefit them at the expense of either rival
businesses or customers.