3.7.7 The Competitive Enviroment

Question 1

What does the competitive environment refer to

Answer 1

Refers to the factors within a market that determines how businesses operate and compete in that market

Question 2

What are porters five competitive forces?

Answer 2

• competitive rivalry
• bargaining of suppliers
• bargaining power of buyers
• threat of substitutes
• threat of new entrants

Question 3

What other theories can porters five forces be used alongside with and how

Answer 3

Can be used alongside SWOT and PEST-C in order to analyse key issues facing a business and how that business might respond to competitive forces

Question 4

Competition is fierce if …… and what may be a key problem?

Answer 4

• easy entry to market
• easy for customers to switch
• little differentiation of products
• little growth or decline in the market

Key problem :
-profit margins are squeezed

Question 5

Options for business to consider if competition is fierce?

Answer 5

• lower costs of production and prices to compete
• develop a basis for differentiation
• takeover, merger or strategic alliance

Question 6

When is supplier power high and what may be a key problem for this>?

Answer 6

• few suppliers
• suppliers product is essential for production
• supplier is able to integrate vertically forward and sell directly to business customers
• low avaliability of viable substitutes

Key problems :
High production costs and unfavourable supply terms

Question 7

Options for businesses to consider if supply power is high

Answer 7

Build strong relationships with suppliers
Agree long term contract of supply with favourable conditions
Backward vertical integration

Question 8

What is buyer power

Answer 8

Power buyers have to negotiate terms and prices

Question 9

When is buy power high and what may be a key problem

Answer 9

• little difference between products offered by competitors
• products are price sensitive
• customers can buy large quantities on a regular basis
• It is easy for buyers to switch between competitors

Key problem:
Prices forced low and credit terms demand so there is pressure on cash flow

Question 10

Options for businesses to consider if buy power is high

Answer 10

• Develop a USP
• build switching costs into agreement
• lower prices to attract customers
• forward vertical integration (if buyer is another business)

Question 11

What is a substitute product

Answer 11

An alternative product that may deliver same benefits to consumer

Question 12

When are threat of substitutes high at what may be a key problem

Answer 12

• alternative products exist
• alternative Prices fall
• customers can easily switch substitute

Key problem:
Buyers have high bargaining power. Competition exists outside of a market

Question 13

Options for businesses to consider if threat of substitutes is high

Answer 13

• develop a USP
• build switching costs into agreement
• Lower prices to attract/keep customers
• promote benefits in comparison to substitute products

Question 14

What is a barrier to entry

Answer 14

A barrier to entry is a physical, technological and intellectual factor that makes it difficult for rival businesses to enter the market

Question 15

When do barriers to entry exist and what may be a key problem?

Answer 15

Capital investment to enter market is very high

• customers are brand loyal to existing businesses
• levels of specialist knowledge and expertise in the industry are very high

Key problem:
If few barriers to entry exist it is easy for new competitors to enter the market and increase competitive rivalry

Question 16

Options for businesses to consider if barriers to entry exist

Answer 16

• innovation: continuous development of new products keeps the business ahead of any new competition
• build strong relationship with buyers making it difficult for new entrants
• growth - economies of scale can economies of scale keep prices low and make it difficult for small businesses to enter the market