Competitive Environment

Nature of Competition

Direct competition refers to businesses offering similar products or services targeting similar markets.
Indirect competition refers to businesses offering different products or services but targeting the same customers based on fulfilling the same needs.

The level of competition a business faces is determined by the market structure. Market structures vary from “perfect competition”, where many small firms compete against each other, to “monopoly”, where a single business dominates an industry.
In an oligopoly, a small number of large firms have a high level of control over a market.

Price wars can erupt when competitors continuously lower prices to undercut rivals. While potentially beneficial to consumers in the short term, prolonged price wars can threaten the survival of smaller firms.
Innovation is often driven by competition as businesses strive to differentiate their product or service to gain a competitive advantage.
Customer service is another area where businesses often compete, with superior service leading to greater customer loyalty.

Market segmentation is the process of dividing a broad consumer market into subgroups of consumers with shared characteristics. Common bases for segmentation include demographic, geographic, psychographic, and behavioural attributes.
Businesses can target specific market segments that they believe their product or service can best serve.

Competitive advantage refers to a unique advantage that allows a business to outperform its competitors. This can stem from cost advantage, differentiation advantage, or a successful focus strategy.
Maintaining competitive advantage requires constant adaptation, as competitors will typically try to nullify or overcome the advantages.

Porter’s Five Forces is a model for analyzing a business’s competitive environment. The model looks at five specific factors:
- Threat of new entrants
- Threat of substitutes
- Bargaining power of customers
- Bargaining power of suppliers
- Competitive rivalry within the industry
Understanding these forces can help businesses to develop strategies to protect and increase their market share.

Technological change is a significant source of competition as businesses that adapt to new technologies can often gain a competitive edge.
Conversely, businesses that fail to adapt to technological changes may find themselves at a competitive disadvantage.