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Competitive Environment

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Business Studies

One thing almost all businesses have in common is competition. In order to effectively compete with each other businesses need to understand and effectively analyze their competitive environment. So, how can organisations do this? Through various strategic tools such as Porter's Five Forces and SWOT analyses. First, however, we need to understand the significance of the competitive environment. Let's take a look.

Competitive environment meaning

In order to understand the impact rivalry and competition have on businesses, it is essential to understand what we are talking about when mentioning the competitive environment.

The competitive environment is where different businesses compete within a defined marketplace. It relates to how an enterprise is affected by its competition and how it adapts its practices to compete effectively.

Factors of the competitive environment

The competitive environment has various different factors, including the two types of competitors that a business may face.

Direct competitors

Direct competitors are businesses that offer the same or similar products or services.

Ryanair is a direct competitor with Wizz Air, because they offer the same service which is low fare flights.

Indirect competitors

Indirect competitors are businesses that offer different products or services, but they can still compete.

Firms producing cameras and smartphones. Even though they offer different products, they compete with each other because consumers often substitute cameras for smartphones.

Types of Competitive Environment

There are various different types of competitive environments. Let's take a look.

Pure competition

Pure competition, in other words, perfect competition, is a market that has numerous competitors which offer exactly the same products or services. Rival manufacturers have a large number of customers. They are usually small and have little market power which means that they have little ability to influence the price. The price is defined by supply and product demand.

Agriculture. Farmers who provide a local market with grains or milk cannot change the market price of their products and have to agree with the going one.

Monopolistic competition

In this environment, there are many competitors, who offer similar (but not identical) products or services. However, they typically serve the same purpose. In monopolistic competition, the companies are price makers, because they have the power to influence the price of products.

Restaurants. They offer different products (different types of food), but their purpose is the same, they aim to feed people. They can easily raise prices, because even though other restaurants serve dishes as well, they do not serve the exact same ones.

Competitive Environment: Oligopoly

This environment is dominated by a small group of large sellers. The companies are independent in their pricing and production policies. This is a highly concentrated market where merger agreements and cooperations between major players are common.

Social media. There are many social media platforms, but the market is dominated by few channels only.

Competitive Environment: Monopoly

In this environment, there is only one company producing a unique product. A monopolistic company does not face any competition since there is no substitute of its products or services.

Public utilities such as gas, electric and water.

Competitive Environment Analysis

There are two most common ways to analyse the Competitive Environment.

Competitive Environment: Porter’s Five Forces

Porter’s Five Forces is a method that identifies and analyzes five competitive forces that shape the industry. It involves five elements: competitive rivalry, new entrants, power of buyers, power of suppliers and threat of substitutes.

Competitive Environment: SWOT Analysis

SWOT Analysis is a strategic planning tool used by companies to identify both internal and external factors affecting them. It involves four factors: strengths, weaknesses, opportunities and threats.

Competitive environment in marketing

  • Samsung. A competitive environment of Samsung contains numerous direct competitors. There are many companies all over the world offering similar products such as smartphones, cameras, computers etc. These companies are for example Huawei, Apple, Xiaomi and many more. All of these companies continuously compete with one another. In order to succeed, Samsung has to come up with new, innovative ideas and marketing tactics which would attract the customers and convince them to purchase their products.

  • McDonald’s. There are numerous competitors of McDonald’s such as Burger King, KFC, Five Guys and more. However, even though all of these restaurants serve fast food, the food they offer is different. All of them have their unique menus containing dishes with different flavours and recipes. Therefore, fans of McDonald’s are unlikely to switch and go for any of the other restaurants. For all of these reasons, McDonald’s can also be a price maker.

  • American Airlines. In the competitive environment of American Airlines, there are few dominating companies. These are for example Delta Air Lines, Southwest Airlines and United Airlines. Together with American Airlines, they are four main flight providers around the U.S. Therefore, they can cooperate with one another and decide on prices.

  • Railways. There is no competitive environment since there are no other companies producing the product. Railways are public services provided by the government and no new partners or privately held companies are allowed to run them.

Competitive Environment - Key takeaways

  • Competitive Environment is a system where businesses compete with one another.

  • It has an impact on each business, its decisions and strategy they take.

  • There are two main types of competitors: direct and indirect.

  • There are four types of competitive environment: pure competition, monopolistic competition, oligopoly and monopoly.

  • Porter’s Five Forces and SWOT Analysis are the most common ways to analyze the competitive environment of a company.

Competitive Environment

Competitive environment is an environment where businesses compete with one another within a defined market place.

Fast-food chain competitive environment 

Businesses have to come up with innovative ideas in order to stand out from their competitors.

Final Competitive Environment Quiz

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What is competitive environment?

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Competitive environment is an environment where businesses compete with one another within a defined market place.

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How does competitive environment affect a business?


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Businesses can pose a threat to one another, keep an eye on one one another, be forced to lower their prices and be motivated to improved their products or services.

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What are the two types of competitors?


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Direct and indirect competitors.

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Give an example of direct competitors.

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For example, Ryanair and Wizz Air, Samsung and Huawei.

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Which of these are indirect competitors?


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Canon and Apple

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What are the four types of competitive environment?


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Pure competition, monopolistic competition, oligopoly and monopoly.

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What is an example of pure competition?


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Bread producers

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Give an example of monopoly.

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For example, electricity and water providers.

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What are the two ways to analyse the competitive environment?


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Porter’s Five Forces and SWOT Analysis.

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What is Porter’s Five Forces?

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Porter’s Five Forces is a method for analyzing a company's competitive environment.

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What is the purpose of the Porter’s Five Forces?


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The purpose of the Porter’s Five Forces is to determine the profit potential of a market. It helps business people understand the relative attractiveness of an industry and the industry's competitive pressure.

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What are the five forces?


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Competitive rivalry, new entrants, power of buyers, power of suppliers, threat of substitutes.

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What is meant by new entrants?


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New entrants are enterprises entering the market which can pose a potential threat to the already existing businesses.

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What are the limitations of the Porter’s Five Forces?


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It is very general and tends to be subjective.

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What is the competitive rivalry high?

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The competitive rivalry is high when there are numerous competitors because then consumers can easily switch to competitors offering similar products or services.

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What is the power of buyers?

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Power of buyers is an ability that customers have to drive prices lower or higher.

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Give an example of a factor deremining the power of buyers.

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Any of:

  • Number of customers,
  • Order size,
  • Differences between competitors,
  • Buyers' ability to substitute,
  • Price sensitivity,
  • Information availability.

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What is the power of suppliers?

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Power of suppliers is an ability that suppliers have to drive up the cost of inputs.

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Give an example of a factor determining the power of suppliers.

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Any of:

  • Number of suppliers,
  • Size of suppliers,
  • Uniqueness of the product or service,
  • Suppliers' ability to substitute,
  • Switching costs.

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What is meant by the threat of substitutes?

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Most products can be substituted for other offerings, not necessarily in the same category. 

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Give an example of a type of substitution.

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Any of:

  • Product-for-product,
  • Need-based,
  • Generic substitution,
  • Go without.

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What is a need-based substitution?

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The same product, but better, improved. 

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Give two examples of entry barriers for new entrants.

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Any two of:

  • Economies of scale,
  • Capital cost of entry,
  • Expected retaliation,
  • Brand loyalty,
  • Government policies,
  • Specialist knowledge.

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Give two examples of things to know about competitiors.

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Any two of:

  • Number of competitors,
  • Quality differences,
  • Concentration of industry,
  • Brand loyalty,
  • Market growth.

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Define direct competitors.

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Direct competitors are businesses that offer the same or similar products or services. 

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Define indirect competitors.

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Indirect competitors are businesses that offer different products or services, but they can still compete. 

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What is the pure competition?

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Pure competition, in other words, perfect competition, is a market that has numerous competitors which offer exactly the same products or services. 

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Describe the monopolistic competition.

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In this environment, there are many competitors, who offer similar (but not identical) products or services. However, they typically serve the same purpose.

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Describe oligopoly. 

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This environment is dominated by a small group of large sellers.

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Give an example of oligopoly.

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Social media. There are many social media platforms, but the market is dominated by few channels only.

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Describe monopoly.

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In this environment, there is only one company producing a unique product. 

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Porter's Five Forces is a method for analysing a company's...

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competitive environment. 

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Economies of scale, capital cost of entry, expected retaliation, brand loyalty, government policies and specialist knowledge are ___ for new entrants.

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entry barriers

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One of Porter's Five Forces is threat of ___ . 

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substitutes

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Power of buyers is an ability that customers have to drive ___ lower or higher.


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prices

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Number of suppliers, size of suppliers, uniqueness of the product or service, suppliers' ability to substitute and switching costs are factors determining...

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the power of suppliers.

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A camera can be replaced with a smartphone. What type of substitution is it?

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Product-for-product

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Competitive rivalry is high when there are only few competitors.


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False

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An ability that suppliers have to drive up the cost of inputs is called...


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power of suppliers.

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Similar size companies are likely to be more fierce than when there are large and small companies. 


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True

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Most products can be substituted for other offerings, not necessarily in the same category. 


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True

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Imagine that you have decided to buy a holiday. What type of substitution is it?

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Generic substitution

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When there are few suppliers, a product is new or specific, it should be easy and cheap for a company to switch suppliers.

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False

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Some of Porter's Five Forces are Power of Suppliers and Power of ___ .

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Buyers

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In the case of the airline industry, why is the threat of substitutes low?

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Because it is hard to substitute a plane with any other type of transport since many destinations are reachable this way only.

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Ryanair and Wizz Air are indirect competitors.

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False

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Businesses that offer different products or services cannot compete with each other.

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False

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Firms producing cameras and smartphones are indirect competitors.


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True

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Pure competition is a market that has numerous competitors which offer ___ products or services.


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the same

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In this environment, there are many competitors, who offer similar (but not identical) products or services. What type of competitive environment is it?


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Monopolistic competition

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