Dynamic Markets (Edexcel A-Level Business): Revision Notes
Dynamic markets
Markets rarely stay the same – they are constantly evolving. Understanding how markets change and how businesses must respond is crucial for success in competitive environments.
What are dynamic markets?
Dynamic markets are markets that experience continuous change over time. These changes can take several forms: markets may expand, contract, fragment, emerge completely new, or disappear entirely.
A clear example is the UK cassette market, which has essentially vanished. Consumers now purchase DVDs or download music directly from the internet, making cassettes obsolete. This type of market transformation can have severe consequences for businesses that fail to adapt.
The Kodak Warning
The story of Kodak illustrates the risks of not adapting to dynamic markets. When digital photography emerged in the 1980s, Kodak continued to focus on film camera sales. As the market for film cameras collapsed, so did Kodak – the company eventually went into liquidation.
In contrast, businesses that successfully adapt to market changes improve their chances of long-term survival.
Online retailing
One of the most significant developments in modern marketing has been the growth of online retailing (also called e-tailing). This form of e-commerce allows shoppers to order products online and receive delivery at home. The sector includes specialist online giants like Amazon and Alibaba, which offer extensive product ranges, as well as traditional retailers who have added online services. Growth in this sector has been rapid and continues to accelerate.
Benefits of online retailing
Businesses gain several important advantages from offering online retail services:
Reaching new customer segments: Online retailers can serve people who prefer shopping from home, those too busy for traditional shopping trips, and customers with disabilities or conditions that make physical shopping challenging.
Customer data collection: Gathering personal information from online shoppers is straightforward, enabling businesses to target customers with relevant products and offers in the future.
Lower selling costs: Online retailers avoid significant expenses such as sales staff wages, shop rent, and other store overheads. These savings can be substantial, allowing online retailers to offer more competitive prices.
Reduced marketing expenses: Digital marketing is considerably cheaper than traditional methods. Sending an email marketing message to 1,000 customers costs far less than posting 1,000 printed newsletters.
Wider customer reach: A single high street store attracts only a limited local customer base. However, a website displaying thousands of products can reach a global audience.
24/7 availability: Online stores operate around the clock – very few traditional shops can match this level of service.
Greater flexibility: Online stores can be updated instantly and as frequently as needed. For example, promoting a 'deal of the day' on the homepage requires no expensive printed display materials.
No distance barriers: Customers can purchase products from anywhere in the world.
Online grocery retailing and click & collect
Online grocery retailing has grown more slowly than other online retail sectors, but it is expanding. Industry estimates suggested that online grocery sales would rise from 4.4% to 8.3% between 2014 and 2019. This growth reflects busier lifestyles and increased integration of mobile technology into daily life as consumers become more comfortable with on-the-go shopping. Online grocery shopping offers convenience and saves both time and fuel costs. By 2014, research showed that 27% of people shopped online for groceries, with 10% purchasing the majority of their groceries via the internet.
Click & Collect Growth Trend
Click & collect services represent another growing trend in online retailing. By 2014, approximately a quarter of online shoppers used click & collect, and this figure was increasing as more services became available. Major supermarkets including Tesco and ASDA invested heavily to roll out click & collect services to most of their stores and convenient locations such as London travel hubs. Some London Underground stations gained click & collect facilities, with retailers planning to expand to additional travel hubs and workplaces as they continue experimenting with innovative service delivery.
How markets change
Changes in market size
Market size does not remain constant. Some markets maintain relative stability – for example, the UK milk market has probably remained fairly consistent for many years because milk consumption is relatively constant.
However, most markets experience growth. The global packaging market demonstrates this trend: it stood at $799 billion in 2012 (a 1% increase over 2011), with sales projected to increase by 3% and forecasts suggesting 4% annual growth to 2018, reaching over $1 trillion. Several factors drive packaging market growth, including increasing urbanisation, investment in construction and housing, development of retail chains, and expanding cosmetics and healthcare sectors in emerging economies.
Conversely, some markets decline. The UK coal market has fallen sharply since 1970. Markets often decline when the need for a product ceases to exist. In coal's case, alternative fuels such as oil, gas, nuclear energy, and renewable sources are now preferred by both households and industry.
Changes in market nature
Many markets exist in a state of constant flux, meaning their structure and characteristics are subject to continuous change. Products are constantly updated, modified, and re-launched, with available choice expanding enormously over time. This results from new market entrants and existing firms widening their product ranges and extending their lines.
Example: UK Restaurant Market Transformation
The UK restaurant market provides an excellent example of market nature changing dramatically. Worth approximately $40 billion in 2014, the sector has transformed completely:
1960s: The industry was dominated by fish and chip shops, occasional Chinese restaurants, cafés, independent establishments, and hotel restaurants.
Today: The sector is large and diverse, ranging from high-end fine-dining establishments to quick-service takeaway outlets. UK high streets are now dominated by:
- Chain restaurants such as Nando's, Prezzo, and Domino's Pizza
- Café chains like Costa Coffee and Caffè Nero
- 'Upmarket' restaurants built around famous chefs like Jamie Oliver, Marcus Wareing, and Gordon Ramsay
- A huge range of ethnic restaurants serving Indian, Thai, Chinese, Vietnamese, Malaysian, Japanese, and many other cuisines
New markets
While some markets can completely disappear, new markets are constantly developing. One major source of new markets comes from emerging economies. These include the BRIC countries (Brazil, Russia, India, and China) and other developing nations such as Mexico, Thailand, Indonesia, and several South American countries.
New markets also appear when completely new products are launched. In the 1970s, no one owned a mobile phone. In the 1980s, smartphones didn't exist. In the 1990s, flat-screen televisions weren't available. In the 2000s, few people had e-books. These are all examples of entirely new markets created by innovation.
Innovation and market growth
Markets can grow at varying rates – some rapidly, others more gradually. Growth in existing markets and new markets occurs for several key reasons:
Economic growth
Global living standards tend to rise over time, meaning the world's population has more disposable income. This allows businesses to supply more output to growing global markets. As people become wealthier, they demand different types of goods. Markets for holidays, electronic goods, cars, air travel, cosmetics, furniture, and luxury goods all expand as affluence increases.
Innovation
Businesses can grow their markets through innovation by creating new wants and needs and meeting them with new products. Much innovation emerges through technological research and development. The arrival of smartphones, tablets, the internet, 3D printing, driverless cars, wearable technology, and space travel have all created entirely new markets that didn't exist before these technological breakthroughs.
However, innovation takes other forms beyond technology. Businesses can use clever marketing techniques to develop new wants. They can supply products in new locations – for instance, supermarkets offering click & collect services at London Underground stations. New businesses can exploit the inadequacies of established companies. For example, since the 2008 credit crunch, new businesses have emerged to compete with banks. Crowdfunding and peer-to-peer websites have started providing unsecured loans. Although their market shares are currently relatively small, if they prove successful, established banks will need to match these innovations.
Social changes
Changes in society can significantly impact markets. For example, the decline in the number of marriages, an increase in the proportion of working women, and growth in the number of one-parent families have all increased market size for childcare and housing.
Changes in legislation
New laws can affect markets substantially. Environmental legislation has helped foster growth in renewable energies and 'green goods'. Tighter laws relating to payday lending resulted in many firms exiting the market. A ban on tobacco advertising in the UK may have reduced the market size for cigarettes.
Demographic changes
Changes in population structure affect market sizes. In most countries, the population is aging. This increases many markets simply because populations grow larger. However, it also specifically increases markets for specialist holidays for the elderly, healthcare services, care homes, and mobility aids.
Five Key Drivers of Market Growth
Remember that markets grow primarily due to:
- Economic growth – Rising living standards and disposable income
- Innovation – New technologies and products creating new wants
- Social changes – Shifts in family structures and working patterns
- Legislation changes – New laws creating or restricting markets
- Demographic changes – Population aging and growth
Adapting to change
The Cost of Failing to Adapt
Businesses that fail to adapt to market changes risk losing market share or, in worst cases, collapsing entirely. In 2014, reports indicated that Tesco was losing market share to other supermarkets. While several factors contributed to this, many reports suggested they were failing to meet customer needs, losing ground particularly to discount retailers such as Aldi and Lidl. This situation highlighted Tesco's need to adapt quickly to avoid losing further market share.
Several strategies help businesses adapt to market changes:
Flexibility
Businesses need to prepare for change by developing a culture of flexibility within their organisation. This requires flexible working practices, machinery and equipment, pricing strategies, and staff. Staff may need training in various skills and must be prepared to change the tasks they undertake in the workplace. This flexibility helps businesses serve customers more effectively when changes occur. For example, if customers want access to the business during evening hours, staff might need to work shifts. When businesses have flexible operations, adapting to market changes becomes significantly easier.
Market research
Businesses must maintain regular contact with market developments. Regular market research, aimed at current customers or potential customers, achieves this goal. Firms need awareness of any changes in customer needs or tastes. Communication with customers and potential customers should be an ongoing process to keep completely up to date with market conditions.
Investment
Businesses that invest in new product development are more likely to survive longer in the market. Although research and development expenditure is expensive, failure to innovate can prove even more costly. A unique new product version or brand-new model could rejuvenate sales and help win a larger market share.
Example: BMW Mini Range Extension
In the car industry, firms spend very large sums on product development. BMW has enjoyed a larger slice of the small car market by extending the range of its Minis. This investment in product development helped them capture more customers and grow their market share in a competitive segment.
Investment might also be needed in training and flexible machinery.
Continuous improvement
Businesses need to make continual improvements in all aspects of their operations. If they can improve efficiency, costs will be lower and prices can be held steady or reduced. When customer service is flawless, customers are more likely to return. If new product ideas are encouraged, businesses may gain a competitive edge. A culture of continuous improvement helps businesses become more adaptable in the market.
Develop a niche
If a market is in decline and a business cannot diversify, it may survive by serving a niche. A niche strategy is appropriate when groups of loyal customers can be served profitably.
Example: Harley-Davidson's Niche Strategy
Harley-Davidson survived by leaving most of the motorcycle market to Japanese competitors. They focused on selling high-horsepower 'hogs' to a small segment of motorcycle enthusiasts. As a result, they became quite profitable and survived.
This demonstrates that firms which cannot adapt quickly to changing customer needs will lose out to rivals that do adapt, but a well-chosen niche can provide a survival path.
How competition affects the market
Competition refers to the rivalry that exists between businesses in a market. It would be rare for a business to operate in a market with absolutely no competition. The existence of competition impacts both businesses and consumers.
Impact on businesses
Competition puts businesses under considerable pressure, forcing them to encourage customers to buy their products in preference to those of rivals. They use various methods to attract customers:
- Lowering prices
- Making their products appear different from those of rivals
- Offering better quality products
- Using more powerful or attractive advertising and promotions
- Offering 'extras' such as high-quality customer service
All these methods cost money and generally reduce the amount of profit a business can make. However, businesses must use such methods to survive in the market.
Because competition makes running a business more challenging and reduces profit potential, owners and managers might try to reduce competition. One approach is taking over rivals by purchasing competing businesses. Alternatively, they might create obstacles making it difficult for others to enter the market – for example, spending huge amounts on advertising that potential entrants might struggle to match. Generally, larger businesses in the market are more able to reduce competition this way. However, legislation exists to prevent businesses from restricting competition using practices considered unfair.
Impact on consumers
Consumers generally benefit from competition in markets. Where many businesses compete with each other, there is more choice. Most people enjoy having extensive choice because it makes life more interesting. For example, when buying a car, people can choose from a huge range of different models, styles, colours, and endless specification variations. Consumers may also enjoy better quality products and lower prices.
The Danger of No Competition
Without competition, consumers might be exploited. A business with little or no competition might:
- Raise prices significantly
- Restrict consumer choice
- Lack incentive to innovate
- Fail to invest in developing new products
Consequently, one government role is to ensure that competition exists in markets to protect consumer interests.
The difference between risk and uncertainty
One challenge of running a business is dealing with both risk and uncertainty. Although both pose potential threats, they are not the same.
Risk
Owners take risks when running a business, meaning they take actions where outcomes are unknown. More specifically, they commit resources that could be lost. Initially, they take a risk when setting up a business by investing their own money to get the business operational, with a chance that the business will not succeed. If the worst happens and the business collapses, all the money invested by the owner could be lost.
UK Business Failure Statistics
In the UK, around 23,000 businesses fail each year. It is estimated that approximately 90% of all new businesses do not survive beyond five years.
These statistics highlight just how significant the risk is when starting a new business.
Even when businesses are established, they continue taking risks by spending money on ventures that may not yield positive results. For example, they may invest in a new product that subsequently fails in the market. If the product is withdrawn, most money spent on development and launch will be lost.
Example: Amazon Fire Phone Failure
In 2014, Amazon launched a mobile phone called the Amazon Fire Phone. It failed in the market and the price was reduced very quickly from $199 to just 99 cents. Amazon reportedly lost $170 million as a result.
This demonstrates that even large, successful companies take significant risks that can result in substantial losses.
Uncertainty
The markets in which businesses operate are often subject to external influences. This means events completely beyond business control can impact the market with financial consequences. Examples include:
- A new competitor entering the market with a superior product
- Consumer tastes changing due to a new social trend
- The government introducing a new policy or piece of legislation
- New technology being invented
- Natural disasters such as floods
- The economy entering recession
Unfortunately, such influences are very difficult to predict, meaning businesses must constantly operate in an environment of uncertainty.
Uncertainty Isn't Always Negative
However, uncertainty's consequences are not always negative. New technologies can provide new opportunities. The introduction of the internet resulted in an enormous range of new business opportunities.
Generally though, businesses dislike uncertainty because it makes decision-making more difficult – particularly when making investments for the future.
Remember!
Key Concepts:
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Dynamic markets constantly change – they can grow, shrink, fragment, emerge, or disappear. Businesses must adapt or risk failure (like Kodak).
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Online retailing offers major advantages including lower costs, wider reach, 24/7 availability, and flexibility. Growth areas include online grocery and click & collect services.
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Markets grow due to five main factors: economic growth, innovation, social changes, legislation changes, and demographic changes.
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Businesses adapt through: flexibility, market research, investment in R&D, continuous improvement, and developing niche strategies when markets decline.
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Competition benefits consumers through more choice, better quality, and lower prices, but puts pressure on businesses to differentiate and invest in customer attraction methods.
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Risk involves knowingly committing resources that could be lost (e.g., new product development). Uncertainty involves external factors beyond business control that can impact the market unpredictably.
Key Terms:
- Dynamic market: A market that changes over time
- Online retailing (e-tailing): Retailing goods online with home delivery
- E-commerce: Conducting business transactions online
- BRIC countries: Brazil, Russia, India, China – major emerging economies
- Competition: Rivalry between businesses in a market
- Niche strategy: Serving a small, specific market segment profitably