C3 - Competitive Environment

Competitive Environment Podcast

It is highly likely that every business will face some form of competition. The intensity of the competitive rivalry and the impact it has on profitability will vary from business to business and the markets they operate in.

In business, a competitor is any entity that sells the same or similar products and services.
It is very important that businesses are aware of the competition that operates in their environment, as they can have a detrimental impact not only on the profitability of a business, but also on its long-term survival.
Businesses need to conduct regular competitor analysis to ensure that competitors do not gain a competitive advantage.

Businesses should consider the following key factors about their competitors:

Teacher PowerPoint - Unit 1 - Exploring Business - LA C3

Product range

Location

Price

Quality

USP (unique selling point)

Levels of Competition

Competition can be considered on a local, national, and international level:

Local

Competing businesses that operate close by and are within short traveling distance for customers (e.g., on the same high street, the same retail park, or in a nearby village).

National

Competing businesses that operate on a nationwide basis, with stores and customers spread across a whole country, or at least a significant area (e.g., businesses that have multiple stores or operate online and can distribute their goods and services across the country).

International

Competing businesses that operate across multiple countries around the world, such as businesses with physical stores in multiple countries (e.g., McDonald's) or online businesses that operate a global distribution network (e.g., Amazon).

Having competitors does not mean that a business will automatically succeed or fail - rather, it forces the business to rely on careful business planning and a consideration of all factors.

For example, if a coffee company decides to open a coffee bar at a small rural railway station which already had an existing coffee shop, it could be viewed as a bad business decision. However, if their reputation preceded them by offering a superior product, better customer satisfaction or improved value for money, then their business might well wipe out their competitor.

Decisions like this cannot be taken lightly. You can probably name several examples where competitors appear to work alongside each other in harmony such as opticians, dental practices, estate agents, chemists, department stores, supermarkets, fast food chains, electrical retailers, etc.

Factors influencing competitive advantage

In order to keep a competitive advantage, it is vital that a business keeps its eye on what its competitors are doing and tries to anticipate what they are planning to do. Factors which influence are outlined below.

Differentiation:

Differentiation is an effective method of gaining a competitive advantage. It happens when a business offers its customers something unique and different from the competition.

Examples of differentiation:

A new product unlike anything on the market
Providing a unique shopping experience
Expanding into new markets

If a business successfully implements a differentiation strategy that meets customers' wants and needs, it will increase the overall value it provides, as well as its competitive advantage.

Pricing policies:

A business' pricing policy can be the deciding factor in whether a customer buys from that business or from a competitor.

If a business prices its products using a premium pricing strategy, customers may choose to shop with competitors that offer similar goods and services at lower prices (e.g., the supermarket chain Aldi uses an economy pricing strategy).
Conversely, a premium pricing strategy can provide businesses with a competitive advantage, as customers might associate higher prices with high-end or luxury goods. Apple in the technology industry and Ferrari in the automotive industry are examples of businesses that use high selling prices to influence brand perception and buying behavior, providing them with a competitive advantage.

Market leadership:

Market leaders often have a competitive advantage because they are the biggest businesses in their respective markets and reach a wider segment of the market. For example, Tesco holds a 27% share of the UK supermarket industry, nearly double that of second-place Sainsbury's (15.3%).

It is important to acknowledge that businesses with dominant market share (e.g., Sainsbury's at 15% and Asda at 14%) also have a competitive advantage over competitors with smaller market shares (e.g., Waitrose at 5% and Iceland at 2%).

Market leaders and businesses with dominant market share often benefit from the following:

More locations and wider distribution, which increases footfall
Economies of scale, which can reduce unit costs and increase profit margins
Shorter sales cycles and increased brand awareness, which can improve sales revenue

Reputation:

Reputation is one of the most important factors in business and a good reputation can provide a significant competitive advantage. A good reputation must be earned over time; it is not something that can be bought. It takes years of consistently meeting the needs of customers and providing excellent customer service to build the necessary trust levels.

Word of mouth is still a powerful way to measure a business' reputation and continues to influence many customers' shopping decisions.
Review sites such as Trustpilot and Google Reviews have made it easier than ever for potential customers to gauge the reputation of a business, with many checking reviews before deciding whether to make a purchase.
Reputation is not only about customer service and the quality of goods. Customers also take into consideration a business' environmental impact and the sourcing of raw materials.

Market share:

The percentage of a given market that a business holds. Holding a market share does not mean that the business is the market leader, however. For example, in 2014 Samsung was reported to hold 26 per cent of the global market share in Smart televisions whereas in 2009 it was market leader with its range of LCD TVS.

Cost control:

Effective cost control processes can give businesses a competitive advantage because they can lower prices to become more competitive, or keep prices in line with the competition while increasing profit margins.

It is important that businesses do not cut essential costs that might negatively impact the customer experience (e.g., reduce product quality or customer service).

Technology:

Effective technology relationships with customers, suppliers, and employees are essential in the modern business world. Customer expectations of technology relationships with businesses have increased as technology has advanced and now include:

Interactions and updates via social media
Customer service via telephone, email, and online chat
Technology used in-store to enhance the shopping experience
Technology is also used to build relationships with suppliers (e.g., order confirmations and electronic payments) and employees (e.g., managing annual leave and electronic payslips).

Benefits of a Competitive Advantage

A competitive advantage enables a business to outperform its competitors in a certain area.

Cost control and economies of scale: can result in higher profit margins.
Differentiation: can attract a wider range of customers and can lead to higher sales if the product is unique.
Market share: can result in the business serving more customers than its competitors and generating more sales revenue.

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