2.6 The Competitive Environment

What is meant by a "market"?

A market can refer to:

A geographical area where buyers and sellers come together to trade goods and services for payment (e.g., a high street)
Competition to sell a certain type of product (e.g., the housing market)
A type of customer demographic (e.g., the 18 – 21 age range)

Competition refers to more than one business trying to sell to the same customers. This can include:

Local competition — covers a small geographic area, e.g., two ice cream vans outside the same school
National competition — covering most of a country, e.g., Sainsbury’s and Tesco
Global competition — the whole world, e.g. Apple and Samsung selling smartphones

A business with no, or very few, competitors is called a monopoly. Reasons for this include:

Having a unique product — no other business can make a particular product due to technical reasons or patents
Limited market — a specialised market which is not big enough to support multiple vendors
Difficult to start rival businesses — high start-up costs mean other businesses cannot set up in competition

Without competition, prices may rise and quality may fall. This is bad for consumers!

The game of Monopoly is based on the concept of a single person dominating the housing market…

…and is also the cause of many family arguments!

A business must compete with its competitors to make sales and profits, and secure its future. Typical ways to compete include:

Promotions and sales — short-term price reductions and entice customers.

Disadvantage — reduced profit.

Advertising — raising awareness of your product and trying to convince potential customers that you have a better product / price / service.

Disadvantage — cost

New products — identifying gaps in the market which competitors are not fulfilling and introducing new products to fill them.

Disadvantage — cost

Quality — introduce a better quality product.

Disadvantage — increased cost of manufacture / development may lower your sales and/or costs.

Price — pemanently reduce the price to less than your rivals are charging.

Disadvantage — reduced profits, competitors may also reduce their prices.

Service — improved customer service (e.g. extra staff, faster delivery).

Disadvantage — increased costs.

Uncertainty is when a business cannot fully predict the outcome of a scenario

There are lots of things a business cannot be sure about.

These factors, and others, create risks to the company's sales, profitability, and existence.

Uncertainties include:

The economy. Changing interest rates, unemployment levels, exchange rates, can all affect sales
Social changes affecting consumer attitudes, and changing markets
The actions of competitors, such as new products, reduced prices, sales, and promotions

Risk can be reduced by effective research and planning.

Market research — what do customers want, where do they want it, and how much they are willing to pay for it?
Competitors — who are they, how much are they charging, what do they offer?
Legislation — what laws affect your business?
Economy — what is the general state of the economy, how is it likely to change?
Experts — use experts to provide specialist advice in areas outside the company’s expertise

Creating a business plan — how will your business operate, what are its sales projections, how will it achieve them. Remember: a business plan is not just for new businesses!
Mitigation — what will the business do if things do not go to plan? Example: sales are lower than expected or there are problems with a supplier. This should form part of your business plan