Understanding the competitive environment
Competitors are other businesses selling similar products to the same customers. Understanding them matters because customers compare — a business is judged not on whether it is good, but on whether it is better than the alternatives.
The specification names five things to judge competitors on:
The useful move is not to judge a competitor good or bad overall, but to find where they are weak. A rival's weakness is the opening: if the nearest competitor has a poor product range, stocking a wider one attracts the customers they are losing. If they are cheap but unreliable, competing on quality gives customers a reason to switch.
- Competitor
- another business selling similar products to the same customers; a business is judged not on whether it is good, but on whether it is better than the alternatives
The impact of competition on business decision making
Competition affects almost every decision a business makes, and the specification expects you to be able to say how.
• Price — a business cannot charge far more than rivals for the same product without losing customers, so competition limits what it can charge and squeezes profit margins. • Product — competition pushes businesses to improve, add features or differentiate, so that customers have a reason to choose them. • Promotion — more advertising and offers are needed to be noticed when customers have alternatives. • Place — location and delivery options may have to match what rivals offer. • Customer service — often the cheapest way to stand out when price and product are similar. • Costs — all of the above cost money, so competition tends to reduce profit per sale.
Competition is not simply bad for a business. It pushes down prices and raises quality, which benefits customers, and it forces businesses to become more efficient. But it makes survival harder, particularly for a new or small business without the resources to match a larger rival.
Worked example
A small independent bookshop finds a large chain has opened nearby, selling the same books more cheaply. Recommend how it should respond.
- Identify where the chain is strong: price, and probably product range, because it buys in bulk.
- Recognise that competing on price directly would be very difficult — the small shop cannot match the chain's buying power and would simply lose money.
- Look for where a large chain is typically weak: personal service, local knowledge, and a distinctive selection.
- Recommend competing on those instead — staff who know customers and can recommend books, events, and titles the chain does not stock.
- Justify the recommendation against the alternative.
Answer: It should compete on customer service and a distinctive product range rather than on price, because it cannot match a large chain's buying power and a price war would be unwinnable. Personal recommendations, local knowledge and stocking books the chain does not give customers a reason to choose it that the chain cannot easily copy.
Common mistake
"Lower the price" is rarely a good answer on its own. A small business usually has higher costs per unit than a large rival, so a price war is the one competition it is least likely to win — say what the business can do that the competitor cannot.
Before you practise
- Judge competitors on price, quality, location, product range and customer service.
- The useful move is to find a competitor's weakness and target it.
- Competition limits the price a business can charge and squeezes profit margins.
- It also pushes businesses to improve products, promote more and serve customers better.
- Competition benefits customers through lower prices and better quality, but makes survival harder for small businesses.
- A small business rarely wins a price war against a larger rival — differentiate instead.