The competitive environment
The competitive environment refers to the other businesses that compete for the same customers, and the effect this competition has on how a business must operate.
Before you start
No specific prerequisites - this is a good place to start.
Method
- Identify how many competitors or rivals the business in the case has, and how similar their products are, to judge how competitive the market is.
- Identify the effect competition has on the business's pricing power: many close competitors means less power to raise prices without losing customers to a rival.
- Identify the effect competition has on quality or service: strong competition usually forces businesses to maintain or improve quality and customer service to retain customers.
- For questions about market share, remember it is the business's sales as a proportion of total market sales, and that a rising market share means the business is growing faster than the market or its rivals, while a falling market share can occur even while sales are rising, if rivals are growing faster.
- For explain questions on the effect of a new competitor entering the market, link the entry to increased choice for customers, then to the pressure this puts on the existing business's price, market share or profit.
- For evaluate questions on how a business should respond to competition, weigh the different responses available, e.g. cutting price, improving quality, increasing promotion, or differentiating the product, against their cost and likely effectiveness, using detail from the case.
- Where the question specifically concerns how a business makes itself different from competitors, apply the deeper detail in business responses to competition: differentiation strategies.
Worked example
Oakhill Gym has been the only gym in a small town for ten years, charging 45 pounds a month. A new budget gym chain has just opened nearby, offering similar equipment for 20 pounds a month. Explain one way this is likely to affect Oakhill Gym.
- Identify the change in the competitive environment: Oakhill has gone from having no direct competitor to facing a new rival offering a similar product at a much lower price.
- Identify Oakhill's previous position: as the only gym, it had strong pricing power and could charge 45 pounds without losing customers to a local rival.
- Identify the effect of the new competitor: customers now have a cheaper, similar alternative, so some are likely to switch, particularly price-sensitive customers.
- Link this to Oakhill's business outcome: Oakhill is likely to lose some members, meaning falling market share and revenue, and comes under pressure to either lower its price or justify its higher price with better facilities or service.
- Write the explained answer: the new budget gym gives customers a similar service at under half Oakhill's price, so Oakhill is likely to lose price-sensitive members and market share, putting pressure on it to either cut its price or clearly differentiate its offer to justify remaining more expensive.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define market share.Show answer
Answer: A business's sales as a proportion of the total sales in its market.
Q2State one effect of strong competition on the prices a business can charge.Show answer
Answer: It limits how high a business can price its product, since customers can switch to a similar competitor.
Q3Give one way a business can find out about its competitors.Show answer
Answer: For example, visiting their stores or websites, comparing prices, or reading customer reviews of them.
Q4Explain why a monopoly business can often charge higher prices.Show answer
Answer: Because customers have no close alternative to switch to, so demand is less sensitive to price.
Q5State one way a business could respond to a new competitor entering the market.Show answer
Answer: For example, lowering its price, increasing promotion, or improving product quality or service.
Q6Give one benefit to consumers of a highly competitive market.Show answer
Answer: For example, lower prices, or higher quality and better service, as businesses compete to attract customers.
Q7Explain why a business's market share could fall even if its own sales revenue is rising.Show answer
Answer: If the total market is growing faster, or rivals' sales are growing faster than the business's own, its share of total market sales falls even though its own revenue has increased.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Explain two ways increased competition could affect a business's profit.
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Vantage Print has been the main printing supplier to local businesses for 15 years, with an estimated 60% share of the local market. Two new online printing services have recently launched, offering faster delivery and lower prices, and Vantage's market share has started to fall. Evaluate how Vantage Print should respond to this increase in competition.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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