1-2-4-The-Competitive-Environment

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Understanding the competitive environment

Competition occurs when at least two businesses are providing goods/services to the same target market
- The more businesses in the market, the more intense the competition
Competition can be direct or indirect
- Direct competition occurs when the business is targeting customers with exactly the same product as a competitor
- Indirect competition occurs when firms sell different products but compete with each other for the customers disposable income e.g. cinema’s and theatre companies are in indirect competition
Competition results in many benefits for the customer, such as
- Businesses offer lower prices
- Businesses produce better quality products
- Businesses provide better customer service

However, the absence of competition reduces incentives for businesses to innovate, be efficient or offer consumers lower prices

When judging the strength and weaknesses of competitors, businesses often assess their price, quality, location, product range and customer service

Assessing the competition

Factor	Strengths	Weaknesses
Price	Competitors who offer lower prices than their rivals can gain a competitive advantage by attracting price-sensitive customers who are looking for the best deal They can also gain economies of scale by producing and selling their products at a lower cost, which can lead to higher profits	Competitors who rely solely on lower prices may struggle to maintain their profitability if customers do not perceive the quality of their products to be adequate They may also struggle to differentiate themselves from other low-priced competitors in the market
Quality	Competitors who offer high-quality products can differentiate themselves from rivals and establish a strong brand They can also command higher prices which can lead to greater profitability	Competitors who focus solely on quality may struggle to compete with lower-priced rivals if customers do not focus on the higher quality
Location	Competitors who have easily accessible locations can gain a competitive advantage over rivals who are located further away from customers	Competitors who rely solely on their location may struggle to compete with other businesses in the same location
Product range	Competitors who offer a wide range of products can attract a broader customer base and increase customer loyalty by meeting a variety of customer needs	Competitors who have a large product range may struggle to manage the complexity of their business and maintain consistent quality across all their products
Customer service	Competitors who provide excellent customer service can differentiate themselves from rivals and establish a loyal customer base They can also generate positive word-of-mouth recommendations	Competitors who rely solely on customer service may struggle to compete with lower-priced rivals if customers do not recognise the additional costs of offering good customer service

How competition impacts business decision making

In a competitive market, businesses must constantly evaluate their strategies and make decisions that will enable them to stay ahead of their competitors

Business decisions and competition

Diagram showing competition's impact on business decisions: pricing, product development, operational factors, and marketing strategies. — **Competition can impact decision making across all areas of the business**

Pricing decisions

In a competitive market, pricing is a critical factor in determining a business’s success. Businesses must consider their competitors’ prices when setting their own prices, as they need to remain competitive while also ensuring they are profitable

Product development decisions

Competitors’ products and services can influence a business’s product development decisions. It may increase the speed of development of new features – or entirely new products

Marketing decisions

Businesses must develop effective marketing strategies that will differentiate them from their competitors. Making decisions about advertising, promotions, and other marketing activities has to include an analysis of their competitors actions

Operational decisions

Competitors can also impact a business’s operational decisions e.g. deciding on the best method of production (job, batch or flow production)

Examiner Tips and Tricks

It’s important to recognise that the competitive environment is changing all the time but change is unpredictable in many cases.

Competitive businesses can never stand still – they need to be constantly investigating and responding to changes in the market or risk losing their competitive advantage.

When you’re weighing up choices for a business, try to include a ‘maybe’ – for example, that further change is likely to happen or even that a change in the competitive environment could be short-lived.

Including ‘ifs’ and ‘buts’, especially in your judgements, demonstrates deeper understanding of how the competitive environment works.

Business GCES EDEXCEL