Assessing Changes in the Business
Environment
The Relationship between Businesses and
the Competitive Environment
No longer can a manufacturer afford to treat a supplier like a vendor from whom every
last ounce of cost saving must be wrung. Nor can a customer be treated simply like a
market for products and services at the best possible price.
Michael Dell
I believe that if you are going to take someone on, you might as well take on the biggest
brand in the world.
Richard Branson
Nothing focuses the mind better than the constant sight of a competitor who wants to
wipe you off the map.
Wayne Calloway
BUSS4.6 Competitive Environment
In this topic you will learn about

Assessing the effects of:
◦ changes in competitive structure

Evaluating responses of businesses to a
changing competitive environment
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
A principal aim of Government policy is to increase competition in the
market place. Here we look at how changes in the structure of
competition affect businesses.
New
competitors
The selling
power of
suppliers
Changes in
Competitive
Structure
The buying
power of
customers
Dominant
businesses
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
MONOPOLY
DUOPOLY
OLIGOPOLY
MONOPOLISTIC
COMPETITION
PERFECT
COMPETITION
The spectrum of competition
The degree of competition in the market refers to the number of firms
that exist within a market:
1. Monopoly – one firm dominates the market
2. Duopoly – two firms dominate the market
3. Oligopoly – a small number of firms are in the industry
4. Monopolistic Competition – many firms compete in the industry selling
differentiated products
5. Perfect competition – many firms in the industry with no influence on
market price
The following 5 slides are an important recap from AS
Business Studies – the number of firms in the market
has a significant impact on the Business Environment
BUSS4.6 Competitive Environment
Monopoly
A monopoly exists where there is only one firm in the market. However,
the Government refer to any company that has at least 25% market
share as having monopoly powers.
Monopolies can exploit consumers by charging high prices. Therefore,
monopolies are regulated in order to protect the customer.
Barriers to entry exist in monopoly markets that stop firms from
entering the market. These include:

high costs to enter the market, especially high capital costs

economies of scale experienced by large firms e.g. bulk buying

legal barriers e.g. only pharmacies can sell prescription drugs
BUSS4.6 Competitive Environment
Duopoly
A duopoly exists where there are only two firms in the market.
Like monopolies, duopolies can also exploit consumers by charging high
prices.
Similar barriers to entry that exist in monopoly markets also affect
duopolies.
Duopolies tend to compete on non-price competition such as
promotion.
Duopolies are often accused of collusion (making agreements between
each other that restrict competition). This is illegal and firms that collude
can be heavily fined.
BUSS4.6 Competitive Environment
Oligopoly
An oligopoly exists where there are only a few firms in the market.
Like monopolies and duopolies, oligopolies can exploit consumers by
charging high prices.
Barriers to entry exist in oligopoly markets, particularly through
advertising.
Oligopolies tend to compete on non-price competition such as promotion
and there may also be an element of collusion.
It is important for oligopolists to take into account the reaction of
competitors when making decisions regarding the marketing mix. For
example, if one firm cuts price, then others are likely to follow suit,
resulting in a lower income for the market as a whole. Therefore,
oligopolists are unlikely to lower price as a long term strategy.
BUSS4.6 Competitive Environment
Monopolistic Competition
Monopolistic Competition exists where there are a large number of firms in the
market selling differentiated products. This leads to a small degree of monopoly
power as each firm offers something different to the others.
In this type of market barriers to entry are very low. Therefore, it is easy for
firms to enter the market. This creates strong competition.
This mix between monopoly power and competition leads to the term
monopolistic competition.
Firms within this market will try to brand their product. This might be through the
building up of a reputation. There are numerous examples of this type of
competition such as hairdressing, restaurants and the health and beauty industry.
BUSS4.6 Competitive Environment
Perfect Competition
Perfect Competition exists where there are a large number of firms in the market
each selling homogenous products (products that are the same). Firms in this
type of market have no influence on price and are therefore price takers.
In this type of market there are no barriers to entry. Therefore, it is easy for
firms to enter the market.
Consumers have perfect knowledge i.e. they are aware of the price of products
sold in these markets.
In this type of market firms will not raise price as consumers will simply go to other
firms. If a firm lowers price then all other firms will have to follow suit.
Some firms in the farming industry show elements of perfect competition.
However, this is more of a theoretical model and is unlikely to be assessed in the
BUSS4 exam.
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
THE COMPETITION COMMISSION
Although not specifically on the AQA specification it is important to
have an understanding of this organisation.
The Competition Commission is an independent body set up by the
Government to ensure healthy competition in the UK.
It investigates:
 Takeovers/mergers
 Markets that lack competition
 Regulated markets e.g. the gas, electricity, water, communications
Once an investigation has been completed the Competition
Commission will ensure that concerned parties implement any
changes that have been recommended.
The Competition Commission will look into cases referred to it by the
Office of Fair Trading (OFT) – OFT looks to promote and protect
consumer interests in the UK.
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
NEW COMPETITORS
When a new firm enters an industry it is a threat to all existing
businesses in that market. In a static market the new firm will look to
gain market share. This will clearly have to come from other firms.
If the new entrant is a large firm this will clearly pose a significant threat.
Big companies entering the market can have a serious impact on
existing companies.
Google v Microsoft – Battle of the Titans.
How should Microsoft respond to the
latest threat to their dominance?
The Chewing Gum Wars
US company Wrigley’s has dominated the gum market in the
UK. That is until the arrival of UK firm Cadbury’s – turning the
competitive structure of the market from monopoly to Duopoly.
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
DOMINANT BUSINESSES
Dominant businesses are those that tend to have some form of
monopoly in their markets. As already seen, Wrigley's and Microsoft
are good examples in their respective markets.
A dominant firm can:
 Reduce choice
 Increase prices
 Be inefficient without competition
 Create barriers to entry to stop new firms entering the market
However, it can:
 Invest heavily in new technology
 Gain economies of scale
Firms can become dominant by growing organically (internal growth)
e.g. opening new stores or through external growth e.g. merger
Often, dominant firms owe their positions to a lack of close
substitutes.
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
CHANGES IN THE BUYING POWER OF CUSTOMERS
Large firms not only supply to other firms and consumers – they are
also major customers in their own right. It is unusual to find a
monopsony (single buyer) in the market – but often large companies
are in a dominant position when buying from suppliers.
As they grow they improve their bargaining power – customers
become increasingly dependent on large firms for their sales revenue.
The supermarkets have caused controversy over their policies –
driving down costs at the expense of UK farmers and poorer suppliers
from developing countries.
It is debateable whether consumers have seen the benefit of this – or
is it simply higher profit margins for the supermarkets?
The Supermarkets have used their
buying power and dominant positions
to influence the market place
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
CHANGES IN THE SELLING POWER OF SUPPLIERS
Some suppliers have little or no competition – often they supply a
product that they have exclusive access to and where there are no
close substitutes.
This makes such suppliers extremely powerful in the market place.
The Organisation of Petroleum Exploring Countries (OPEC) is a good
example of an organisation that controls supply – petrol. Controlled
by Saudi Arabia, they often restrict supply to keep oil prices high.
Companies such as British Gas and Microsoft have faced an outcry
from the public over their anti-competitive practices due to the lack of
competition amongst suppliers in their industries.
Watch these video clips about OPEC
and the oil industry. What do they
suggest about suppliers that produce a
product with little competition and no
close substitutes?
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
PORTER’S FIVE FORCES ANALYSIS
A good way of focusing on the competitive environment is through the
use of Michael Porter’s Five Forces Analysis. In 1979, Porter, a
Professor at Harvard Business School, created a framework to look at
the attractiveness to firms (in terms of profitability) of markets.
Each of the Five Forces will affect the profitability of firms in the
industry. Each firm should use this strategy to analyse their position,
and therefore ‘attractiveness’, in that market.
Bargaining Power
of Customers
Threat of New
Entrants
The Intensity
of Competitive
Rivalry
Threat of
Substitute
Products
Bargaining Power
of Suppliers
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
PORTER’S FIVE FORCES ANALYSIS
Horizontal competition looks at threats from competitors:
 Threat of new entrants – the likelihood of new firms joining the industry
Threat of substitute products – the likelihood of new products being
introduced into the industry. Are there barriers to entry to stop this from
happening?
 The intensity of competitive rivalry – how aggressive is the competition.
This will depend on the concentration of firms in the industry e.g. duopoly
leads to non-price competition
Vertical competition looks at threats from suppliers and customers:
 The bargaining power of suppliers – what power do suppliers have over
firms that they supply to?
 The bargaining power of customers – what power do customers have
over firms that they buy from?
BUSS4.6 Competitive Environment
Changes in the Competitive Environment
PORTER’S FIVE FORCES ANALYSIS
ACTIVITY
This activity requires in depth research and analysis.
Choose a firm in a well known industry.
Use Porter’s Five Forces Analysis to argue whether
that firm is ‘attractive’ in terms of profitability or not.
“ Some people think that Japan’s success is due to cartels and collaboration. It
is not. In the industries in which Japan is internationally successful, it has many
fiercely competitive local rivals.”
Michael Porter
BUSS4.6 Competitive Environment
Essay
Tesco, Sainsbury’s and Asda dominate the
UK food retail market. To what extent
are their stakeholders likely to benefit
from their dominance?
BUSS4.6 Competitive Environment