Theme 2 - 2.5.3. - The Competitive Environment

Question 1

What is competition ?

Answer 1

Competition in business iOS where more than one seller seeks to ell goods or services to a customer

In other words - competition is rivalry amongst sellers

Question 2

What does a highly competitive market have ?

Answer 2

A highly competitive market has lots of rivalry and many sellers

However a market with 50 businesses may not be very competitive is one of them has 60% market share - as one of the businesses dominates

Question 3

Businesses don’t like fierce competition so what do they do to keep competition to a minimum ?

Answer 3

They may use predatory pricing, USP and entry barriers to keep competition to a minimum

Question 4

Who are the CMA ?

Answer 4

CMA - Competition Market authority

If a business will try to do something to lower competition - they will come and investigate so that the market becomes more competitive - this benefits to consumer

Question 5

Why is it not enough as a business to just understand what customers value ?

Answer 5

Because very few businesses operate without facing competition therefore they have to be able to deliver customer value better than competition

The ability to do this is heavily influenced by the structure of the market - if the market is more competitive then the harder the task becomes

Question 6

What are the 4 main categories in the market ?

Answer 6

1) Perfect Competition ( rare )
2) Monopolistic Competition
3) Oligopoly
4) Monopoly

Increasing Marketing Concentration as you go from 1 and up

Question 7

What are the key features of Perfect Competition ?

Answer 7

• Many competitors - all offering the same product
• Intense Competition
• Competitors have to accept the same price

Question 8

What are the key features of Monopolistic Competition ?

Answer 8

• Many small firms offering differentiated products
• Each firm has a small market share
• Examples include restaurants + many local service businesses

Question 9

What are the key features of Oligopoly ?

Answer 9

• Market dominated by a small number of firms, each with a large market share
• Tend to compete on non-price factors, including branding
• Potentially anti-competitive - particularly if competitors collude on price
• Examples - retail banking, confectionery, grocery retailing

Question 10

What are the key features of the Monopoly ?

Answer 10

• One supply in the market
• Has control over price and output - potentially bad news for customers
• Tend to be heavily regulated to protect consumers

Question 11

What is a Monopoly ?

Answer 11

A monopoly in its purest form is when one business dominated the whole market - it has 100% concentration. In reality, the CMA describe a Monopoly as any firm with more than 25% of the industry’s sales

Question 12

What is Oligopoly Collusion ?

Answer 12

When a few large firms dominate a market there is always the potential for businesses to seek to reduce uncertainty and engage in some form of collusive behaviour

Question 13

What are the responses of a business to a changing competitive environment ?

Answer 13

Price cutting - may help to maintain market share but at potentially lower profit margins - refer to PED - price elasticity of demand

Increase product differentiation - Increase the extent to which customers perceive your product to be different and insulate the business from having to compete head on with its rivals:
- Design - eye catching design can add value to a product
- USP
- Collusion - work together in order to avoid damaging consequences of fierce competition. This is common - but can lead to significant legal penalties

Question 14

What are barriers of entry ?

Answer 14

It’s how easy it is to break into the market

Question 15

What is competitiveness ?

Answer 15

Competitiveness is the ability of a business to deliver better value to customers than competitors

Question 16

What does it mean if a business is able to be more competitive than the rest of the market/industry over a sustained period of ?

Answer 16

It is said to have a competitive advantage:

MEANING

A situation where a business has an competitive advantage over its competitors by being able to offer better value, quality and/ore service

Question 17

What is the nature of competition in a market determined by ?

Answer 17

It is determined by a lot of factors:

• The extent of current competition
• The potential for a new business to enter the market
• The extent to which a business produces a similar product to the rivals or a differentiated product ( distinct from the rivals - different from the rivals )

Question 18

Why is the threat of new businesses entering a market a particularly important factor influencing the extent of competition rivalry ?

Answer 18

• High profits will tempt newcomers to enter a market and this will drive down prices and profits

• Therefore the maintenance of market power depends upon erecting and maintaining barriers to market entry

Question 19

How will competition change the nature of business ownership ?

Answer 19

• Competition from other businesses will have an impact on the decision to become a Private Limited Company (Ltd) or a Public Limited Company (PLC)

• A business may wish to grow and to expand and to do this it will need a significant injection
of finance and may need to become a Ltd or PLC to sell shares to raise to fund the expansion cash

Question 20

How does competition cause a change in the nature of product or services provided ?

Answer 20

• Competition from other businesses may change the nature of the product or the
services provided

• Competition from Starbucks and Costa has meant that many smaller cafes and coffee shops now serve lattes and cappuccinos rather than just basic tea and coffee

Question 21

How does competition lead to a change in the nature of the product range ?

Answer 21

• Competition from other businesses means that in some industries that whole nature of the product range has had to change

• In response to consumer demand and competition from independent bakeries, the larger bread manufacturers have had to produce a whole “free from” range of new types of bread e.g. sourdough

Question 22

How does competition lead to a change in pricing strategies used ?

Answer 22

• Competition from other businesses means that different pricing strategies have to be used to attract customers and remain competitive

• Instead of skimming a business in a very competitive market would use competitive pricing to make sure that customers have to differentiate on non-price factors e.g. Airlines,
differentiate on routes and customer service rather than enter a price war

Question 23

How does competition lead to a change in marketing methods used ?

Answer 23

• Competition from other businesses means that marketing campaigns need to be exciting, up to date and eye catching

• This is going to have a cost implication, but important where there are many sellers with the same product e.g. car insurance

Question 24

Whats the impact on a business of being in a competitive market ?

Answer 24

• Competition forces prices down resulting in falling profit margins

• In a highly competitive market businesses may needs to design new products to match what rivals are doing

• The business may need to increase spending on advertising an branding to retain their
competitive advantage

Question 25

What do competitive markets encourage ?

Answer 25

Competitive markets encourage innovation

Question 26

What does branding lead to ?

Answer 26

Strong branding can lead to customer loyalty