43. The competitive environment

Question 1

Numbers:

Answer 1

• Price (in a highly competitive market with large numbers of competitors, businesses have less control over the prices they charge, prices are likely to be forced down)
• Profit (profit margins are likely to be squeezed because prices will be forced down)
• Communication with customers (this competitive pressure may mean that business make more of an effort to communicate with their customers
• Innovation (in highly competitive markets innovation will be encouraged, this is because if a business can design new products, they may be of more interest to consumers and allow to gaina competitive edge in the market)

Question 2

Size:

Answer 2

• Price (smaller business have little control over price)
• Profit (Larger firms will tend to enjoy both higher levels of profits and higher profits margins as smaller businesses aren’t able to exploit economies of scale)
• Communication with customers (smaller firms can communicate more effectively than their larger rivals)
• Innovation (large businesses pose a threat to their smaller rivals in the development of new products and technology as they have more resources. However small firms can still be innovative because they can respond to changes in customer demands quickers due to their size)

Question 3

Behaviour:

Answer 3

• Pricing (business will be affected by th behaviour of a competitor when they change prices)
• Marketing (businesses sually monitor the marketing activities of rivals, if a rival introduces a new and effective promotional strategy, businesses will adapt or copy the succesful marketing campaigns of rivals)
• Product differentiation (if possible many businesses will try to differentiate their products from those of rivals)
• Product development (if competitors develop improved versions of their produducts businesses can be negatively affected)
• Collusion (in a minority of industries a number of firms might work together and behave like a monopoly)
• Barriers to entry (in some industries setting up as a new competitor is very difficult as there are difficult barriers to overcome)

Question 4

Ways for a small firm to compete in a competitive market:

Answer 4

• Develop a market niche (small firms can often survive in competitive market by supplying a niche and they may also avoid competition and it is a lot easier to focus on the needs of the customer in a niche market)
• Flexibility (small firms can adapt to change more quickly because the owners who tend to be the main decision makers are actively involved in the business and can reaact to change)
• Personal service (As firms get bigger it often becomes difficult to offer customers and individual personal service)
• Lower wages (many workers in small firms do not belong to trade unions as a result their negotiating power is weaker and owners are often able to restrict to the legal minimum wage)
• Better communication (since small firms have fewer emplotees, communication tends to be informal and more rapid than in larger organisations)
• Innovation (small firms face competitive pressure to innovate and they still suprisingly innovate even though they often lack of resources)