The Competitive Environment (Edexcel A-Level Business): Revision Notes
The competitive environment
Introduction
Competition from rival businesses represents one of the most significant external factors affecting how a company operates. Most markets feature competition, with some experiencing particularly intense competitive pressure.
The UK clothing market demonstrates this intensity. Worth approximately $26 billion in 2014, thousands of businesses compete for customers, including:
- Specialist clothing chains – Next, River Island, Dorothy Perkins, Warehouse, Jaeger, Miss Selfridge, Monsoon, Topshop, Prada, Gucci, Wallis
- Department stores – Marks & Spencer, Matalan, Primark, TK Maxx, Debenhams, John Lewis (selling clothing alongside other products)
- Independent retailers – Often specializing in specific niches (e.g., toddler clothing, luxury goods)
- Supermarkets – Tesco, Asda expanding into non-food items including clothing
- Online retailers – Growing rapidly, including established store websites plus pure online players like Amazon and Alibaba
Not all markets experience high competition. Some operate with minimal rivalry. For instance, UK water supply is organized regionally with typically one supplier per area. Wessex Water, owned by Malaysian company YTL Power International, serves as the sole domestic water provider for Dorset, Somerset, Bristol, most of Wiltshire, and parts of Gloucestershire and Hampshire, supplying 2.7 million customers. This monopoly arrangement is typical across UK water supply.
Determinants of competitiveness
Different markets possess different features and characteristics. These market structures largely determine competitive intensity. Six key factors shape how competitive a market becomes:
Number and relative size of businesses
Market structure varies significantly based on the number and size of competing firms:
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Many small competitors – Markets like farming feature numerous businesses with none dominating. Each firm holds a small market share with limited individual market power.
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Few large dominant firms – Some markets are controlled by a handful of major players despite many smaller firms existing. These dominant businesses hold substantial market share and influence.
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Single business monopoly – Certain markets contain just one provider. For example, some UK railway routes operate with only one train company providing services.
The distribution of market share among competitors fundamentally affects competitive dynamics and business behavior.
Barriers to entry
Barriers to entry are factors which make it difficult or impossible for businesses to enter a market and compete with existing producers.
Markets with low barriers to entry make it relatively easy for new businesses to start trading. Many people annually establish small shops selling groceries, clothing, or toys because:
- Start-up costs remain modest
- Limited industry knowledge required
- Few special licenses or legal obstacles exist
Markets with high barriers to entry create significant obstacles for new entrants:
- Government licensing – Rail transport and mobile telephone industries require government licenses limiting the number of operators
- Patent protection – Pharmaceutical companies protect newer drugs through patents, preventing rivals from copying formulations
- High capital requirements – Car manufacturing, aeroplane production, and oil refining demand substantial initial investment
- Marketing costs – The perfume industry sees major companies devoting large proportions of budgets to marketing; new entrants must afford spending millions on product launches
Where barriers to entry are high, competition tends to be lower. Businesses often compete on issues other than price, emphasizing non-price elements of the marketing mix such as promotion and place.
Product differentiation
Markets differ in how easily products can be distinguished from one another:
Homogeneous products are standardized goods that remain identical regardless of producer. Examples include:
- Raw materials (e.g., nine-carat gold maintains consistent quality across producers)
- Basic manufacturing outputs (e.g., steel)
- Commodities meeting specific standards
Where products are homogeneous, competition focuses primarily on price as the key element of the marketing mix.
Differentiated products vary according to which business manufactures them:
- McDonald's meals differ from Burger King meals
- Ford cars differ from Volkswagen cars
- Heineken lager differs from Budweiser lager
Individual products or product ranges can be branded. Stronger perceived differences create stronger brands. Where product differentiation is strong, businesses emphasize non-price elements of the marketing mix, particularly promotion.
Knowledge of buyers and sellers
Market competitiveness depends partly on information availability:
Perfect knowledge exists when buyers and sellers access all information needed for rational decisions:
- Buyers can identify the best price in the market
- Sellers have open access to most efficient production methods
- Price becomes strongly emphasized in the marketing mix
Imperfect knowledge characterizes markets where information isn't universally available:
- One business may not discover rival pricing
- Consumers may struggle to compare products (e.g., which of 20 cars is most environmentally friendly)
- Information gaps create competitive advantages for some businesses over others
Where knowledge is imperfect, businesses place greater importance on non-price marketing mix elements such as product features and promotion.
Degree of interrelationship
Markets vary in how businesses affect one another:
Independent businesses see their actions have no effect on rivals. In farming, one farmer planting carrots doesn't impact a nearby farm's price or production levels.
Interdependent businesses directly affect each other through their actions. In car production, increased sales by one manufacturer mean reduced sales for rivals if overall market size remains constant.
Legal factors
Competition law recognizes that competition generally benefits customers who can shop around for the best deals. This pressure forces businesses to meet customer needs or face closure.
Monopoly is typically viewed as harmful to customers:
- Consumers must buy from one supplier regardless of product quality or price
- The monopolist holds enormous power over customers
- The business acts to maximize its own benefits
A monopolist exists where only one firm operates in a market. However, firms can act monopolistically through collusion – getting together to fix prices and output. When businesses form a cartel, they agree (usually on pricing and output) to restrict competition and increase profits at customer expense.
Example: Cartel Behavior
Vitamin manufacturers might collectively fix high prices then restrict output among themselves to sustain those prices. This coordinated action allows them to maintain artificially high prices while limiting supply, maximizing profits at the expense of consumers who have no alternative suppliers.
Monopolies face government control:
- USA – Monopolies are illegal
- UK and European Union – Monopolies are regulated
Impact on businesses of a competitive environment
Operating in competitive markets creates several significant implications for businesses. Firms face constant challenges requiring them to monitor rival activities to minimize threats. Key impacts include:
Price
In highly competitive markets, businesses have limited control over pricing. Prices face downward pressure as consumers can easily switch between suppliers. Charging significantly higher prices than rivals risks losing sales.
However, effective product differentiation may allow some pricing flexibility. Fashion businesses like Burberry, Prada, and Gucci charge premium prices because consumers perceive their products as superior quality.
Profit
Profit available in highly competitive markets must be shared among more players. Profit margins face squeezing as prices are forced downward.
However, businesses operating more efficiently and reducing costs may enjoy higher profits than rivals with higher cost bases. Operational efficiency becomes a critical competitive advantage.
Communication with customers
Competitive pressure forces businesses to meet customer needs effectively. Those successfully meeting needs are more likely to survive.
This pressure often results in businesses making greater efforts to communicate with customers:
- Increased market research to understand customer preferences
- Social media monitoring to track consumer sentiment
- Responsive customer service addressing complaints and feedback
Example: O2's Twitter Success
O2 used Twitter to address customer complaints with a friendly, personal approach, helping win back customers. This effective customer communication represented an important competitive differentiator. By responding quickly and authentically to customer concerns on social media, O2 transformed potential negative experiences into positive brand interactions.
Customer engagement is increasingly viewed by commentators as overtaking productivity as a key driver of profitable growth.
Innovation
Highly competitive markets encourage innovation. Designing new products attracts consumer interest and provides competitive edge in the market.
Developing a Unique Selling Point (USP) significantly aids survival in competitive markets. Many consumers prefer products differentiated from rivals.
Example: Orsto X3 Smartwatch
Durham-based Orsto Ltd produces the Orsto X3 smartwatch. Despite facing competition from giants like Apple, Google, IBM, and Samsung, the Orsto X3 offers unique British design and specifications, including functionality without smartphone connection. This USP allows a small company to compete in a market dominated by tech giants.
Product range
Competitor actions strongly influence product range decisions. When one business extends its range with new products, rivals face pressure to respond similarly.
Example: Cider Market Response
Following Magners cider success in the early 2000s, beverage producers like Carling (Molson Coors) and Stella Artois (Inbev) launched their own cider brands – Carling British Cider and Stella Artois Cidre respectively. This demonstrates how competitive pressure drives product range expansion.
Failure to match rivals' extensive product ranges may result in losing customers to competitors offering more choice.
Marketing
Marketing quality and investment levels become critical in highly competitive markets. Businesses face heavy influence from rivals' marketing methods. Successful advertising campaigns by one firm pressure competitors to match that success.
Businesses commonly imitate or replicate rival campaigns. For example, many businesses across different markets exploit social media in marketing strategies. One growing trend is viral marketing – short video clips relating to products sent globally across the internet by viewers who enjoyed the content.
Many TV advertisements in the same industry share similar features. Perfume adverts frequently feature celebrities or models wearing expensive clothing and jewelry in glamorous surroundings. Car advertisements often show vehicles driven in stunning scenic locations.
This similarity partly stems from fear that businesses will fall behind if they fail to match rivals' campaigns.
Competition and market size
Market size refers to the number of customers and businesses buying and selling particular products or product groups. Market size is typically measured in value terms and varies considerably.
Global markets
Global markets represent the largest markets where businesses can compete. Globalization has opened increasing numbers of worldwide markets. Even small businesses can access global markets through online marketing.
The global car market demonstrates this scale. In 2010, the market was worth $728.3 billion, with predictions reaching $904 billion by 2015.
National markets
National markets are confined within national borders. In 2012, the UK new car market was valued at approximately $32 billion. The UK new car market remains highly competitive as manufacturers worldwide compete domestically.
Regional markets
Some businesses serve regional markets. For example, Merseyrail provides train services in the Merseyside region, operating between Liverpool and Southport, Liverpool and Chester, and Liverpool and Ormskirk. Merseyrail holds a monopoly on rail transport in this region.
Local markets
Local markets are naturally much smaller, serving limited areas such as villages, small towns, and specific residential areas. Sometimes only one business serves a local market (e.g., many rural villages have just one shop or pub).
However, this doesn't mean they face no competition. Most rural residents have cars and can travel to alternative shops and pubs.
Market size significantly influences business operations. Businesses in small markets are unlikely to undertake large-scale production exploiting economies of scale. Large markets typically experience more competition than small markets. A grocery shop in a Scottish Highland village faces different competitive pressures than a Sainsbury's branch in a large town.
Operating in large markets
National and global markets present greater challenges for businesses. Even in large markets dominated by few producers, competition can remain severe.
The UK grocery industry demonstrates this intensity. Dominated by large supermarket chains including Asda, Morrisons, Sainsbury's, Tesco, Aldi, Lidl, and Waitrose, competition has intensified since 2009. Low-cost operators like Aldi and Lidl have gained market share at other chains' expense.
Example: Tesco's Competitive Response
This intense pressure forced operators like Tesco to review operations. In 2014, Tesco responded by:
- Implementing a loyalty scheme shake-up
- Improving online delivery services
- Refreshing store layouts and designs
These strategic changes demonstrate how businesses in large competitive markets must constantly adapt and evolve to maintain their market position.
In large competitive markets, monitoring rival activities becomes vital. Businesses need awareness of:
- Rivals' pricing strategies
- Changes in product ranges
- Promotional methods
- Production techniques
- Any other market-impacting information
Close monitoring often results in businesses copying rivals – including product designs, packaging, pricing strategies, and promotions. Copying rivals is common practice across many industries.
Exam guidance: Remember that in a minority of large markets, competition may be lacking. For example, UK energy markets are huge, yet proper competition is lacking. Many industry operators have been alleged to exploit consumers.
Operating in small markets
Operating in small markets presents distinct challenges:
Insufficient sales volume
A main problem is whether sales volume will generate desired returns. Small markets may lack competition, making them attractive. However, if the market proves too small, serving it may be a mistake.
Example: Boeing 757 Production Cessation
In 2015, US aircraft manufacturer Boeing announced it would cease producing Boeing 757s as the market wasn't large enough. This demonstrates how even large corporations must evaluate whether small markets justify continued investment.
Similarly, in South Australia, the kangaroo meat market reduced, causing some businesses to exit the industry or extend their product range to include value-added meat products.
Vulnerability to larger competitors
Another problem is fear that larger, stronger rivals will enter and capture all custom. Small independents often struggle competing directly with large corporations.
Large corporations possess much greater resources:
- They can afford higher spending on advertising and promotion
- Their costs are typically lower due to economies of scale
- They can charge lower prices while maintaining profitability
This resource advantage makes direct competition extremely challenging for smaller players in small markets. The threat of larger competitors entering represents a constant strategic concern for businesses operating in small markets.
Remember!
Key Points to Remember:
- Competition from rivals represents one of the most critical external influences on businesses, with most markets experiencing competitive pressure
- Six key determinants shape market competitiveness: number/size of businesses, barriers to entry, product differentiation, buyer/seller knowledge, business interrelationship, and legal factors
- Operating in competitive environments affects pricing power, profit margins, customer communication, innovation needs, product range decisions, and marketing strategies
- Market size varies from global (largest) through national and regional to local (smallest), with larger markets generally experiencing more intense competition
- Large markets offer opportunities but require constant monitoring of rivals and responsive strategies
- Small markets may offer reduced competition but face challenges around sales volume and vulnerability to larger competitors entering
Key Terms:
- Barriers to entry – factors making it difficult or impossible for businesses to enter and compete in a market
- Cartel – businesses joining together to agree on pricing and output to gain higher profits at customer expense
- Colluding – businesses making agreements benefiting themselves at the expense of rivals or customers
- Market structures – market characteristics (barriers to entry, number of businesses, product types) determining business behavior
Critical Concepts:
- Homogeneous vs. differentiated products affect whether competition focuses on price or non-price factors
- Perfect vs. imperfect knowledge influences marketing mix emphasis
- High barriers to entry reduce competition and shift focus to non-price elements
- Product differentiation enables premium pricing and brand building
- Economies of scale provide competitive advantages particularly in large markets