A competitive environment is a system where different businesses compete with each other by using various marketing channels, promotional strategies, pricing methods, etc. Companies should follow the regulations within this system.
How Does a Competitive Environment Affect Business?
Competitors directly affect your business and the decisions you make. Let’s imagine two online clothing stores that pose a threat to each other in terms of business development and profit. One of them decides to conduct a flash sale before Christmas and provide customers with 40% off sitewide. The other store may also need to come up with a great offer to attract leads and customers, raise sales, sell unpopular products and, as a result, gain revenue.
Similarly, if one coffee company brings out a new product to the market, its competitor will need to consider growth hacking. Thus, competition can be beneficial as companies can get better and improve their products.
A competitive environment also has a positive effect on customers. To win the attention of consumers, businesses offer high-quality goods at an affordable price. Besides, companies have to bring out their products through innovations. Yet, competition can complicate the existence of a business. Let’s take companies within one location, for example. One of them can set low prices and discounts making the second company unable to compete.
Now that you know how a competitive environment influences your business and customers, it’s time to proceed to the types of competitive environment that define the relations between sellers and customers, sellers to each other, etc.
Types of Competitive Environment
To assess the economic environment in business, it’s important to understand what types of competitive environments exist. You should know how businesses and markets function so that in the future you can analyze industry and market news, policy changes, and legislation. We distinguish four main types of the competitive environment. Let’s review each of them in more detail.
- Pure competition. In a perfectly competitive environment, many small companies produce similar products, and many consumers buy them. These manufacturers are small so they can’t influence the price. The price is defined by supply and product demand. For example, when a farmer brings dairy products to the local market, this person can’t change the market price and agrees with the going one.
- Monopolistic competition. In this environment, there are many manufacturers but they produce different products although they might serve the same purpose. Customers can distinguish the products because of the differences in quality, features, etc. Businesses actively use advertising to promote their products and convince consumers that their products differ and have better quality. Companies in monopolistic competition are price makers (have the power to influence the price of products), however, to justify the price increase of their products they should differentiate them from other businesses, for example, by improving the quality of the company's goods.
- Oligopoly. In this market model, there’s a small number of businesses, usually two or more. It’s considered stable as companies don't compete but collude to obtain high market returns. Firms set and keep prices high together or under the leadership of one particular company. In an oligopoly, profit margins are higher than in a more competitive environment. However, the main problem of this market structure is that businesses often face a prisoner's dilemma, an incentive to cheat and act in their interests at the expense of other companies.
- Monopoly. There’s one company that produces a unique product. This manufacturer doesn’t face any competition and the product doesn’t have any substitutes. Also, a monopolist decides on the price of the product and sets barriers for new companies to enter.
Perfect competition, monopolistic competition, oligopoly, and monopoly are the four main market structures you should be aware of when entering the market. Now it’s time to move to the competitive environment analysis.
Competitive Environment Analysis
To develop a great marketing strategy, you need to understand your competitors and their tactics. At this point, you need a competitive analysis framework. Consider using it to reach your business competitors. Let’s discuss several most popular frameworks.
- SWOT Analysis. You can assess the external and internal factors that influence your company. This framework helps you identify competitive advantages and compare your competitors' strong and weak sides on different marketing channels and define your further marketing steps.
- Strategic Group Analysis. It allows you to identify the positions of your competitors in the competitive environment and factors that bring your business a profit. This framework characterizes the strategies of all strong competitors in various strategic dimensions. It enables you to identify the key factors of success and assess your position among competitors.
- Porter’s Five Forces. This framework explores the competitive market forces in the industry and helps define the industry’s strengths and weaknesses. It involves five elements: new entrants, buyers, suppliers, substitutes, and competitive rivalry. These five influence the level of competition in your industry.
- Growth Share Matrix. By using this framework, you can decide which products to invest in according to their competitiveness and attractiveness within the market. It’s particularly useful for large companies since it helps them define their product portfolios and which products are worth continuing to invest in and which are no longer worth it.
- Perceptual Mapping. This framework allows you to see the position of your product against the alternatives of your competitors. It enables you to understand how your customers perceive your product in comparison to competitors’ and whether your positioning strategy matches your target audience. It can also help you find the gaps you need to resolve.
To fully understand different market structures, let’s walk you through some examples.
Examples of Competitive Environment
Every business plan of even a small firm contains a section about competitive environment analysis. As you already know from the information above, it includes all the external factors that influence your business and the product or service you offer.
Let’s take electronics, for example. This industry is filled with direct competitors — companies that are in the same business. Samsung is a company founded in South Korea that specializes in electronic and smart appliance technology. Its competitors include Apple, Sony, Huawei, Intel, and more. The brand has many competitors in this industry, so Samsung’s team tries to create a product that is better than competitors’ alternative using innovations that can attract prospects.
Changes in technology or the way customers buy products can influence the types of the competitive environment. Let’s take Amazon, for instance. The company changed products’ distribution and customer expectations. Introduced innovations influenced the number of consumer goods companies and opened markets for small firms that previously had no opportunity to compete with bigger companies.
Your business can find itself in different types of competitive environments. That’s why it’s critical to understand the difference between them and be ready to assess industry and market news, policy changes, and legislation.
- The article “What Is the Meaning of Competitive Environment?” on Small Business defines the term and explains the five elements of a competitive environment.
- The article “5 Competitive Analysis Frameworks Explained with Visuals” on the Alexa blog provides readers with 5 competitive analysis frameworks.
Last Updated: 02.04.2021