Welcome to the World of Competition!
Hi there! Welcome to your study notes on Competition. This is a vital part of the External Influences section of your OCR A Level Business course. We are looking at the "outside world"—the factors that a business cannot control but must definitely react to if it wants to survive.
Think of competition like a sports league. If you're the only team playing, you can be as slow as you like. But the moment another team joins, you have to run faster, train harder, and play smarter. In business, competition is what keeps companies "on their toes," leading to better prices and cooler products for us as customers. Don't worry if some of the economic terms seem a bit heavy at first; we'll break them down step-by-step!
1. The Basics: Markets, Size, and Growth
Before we look at the rivals, we need to understand the "pitch" they are playing on: the market.
What is a Market?
A market is simply any place where buyers and sellers come together to trade goods or services. It could be a physical place (like a high street) or a non-physical market (like Amazon or an app store).
Measuring the Market
To understand competition, businesses look at three key numbers:
- Market Size: The total value or volume of sales in the whole industry. For example, the total amount of money spent on smartphones worldwide in a year.
- Market Growth: The percentage increase in the size of the market over time. If people bought 5% more coffee this year than last year, the market is growing.
- Market Share: The percentage of the total market held by one specific business.
The Pizza Analogy:
Imagine a giant pizza.
- The Market Size is how big the whole pizza is.
- Market Growth is the pizza getting bigger (maybe more people are getting hungry!).
- Market Share is the size of the specific slice that your business gets to eat.
Quick Review: Why does Market Size matter? It tells a business if the "prize" is big enough to be worth the effort. A tiny market might not have enough customers to support a large company.
Key Takeaway:
Businesses want to operate in growing markets where they can grab a larger market share than their rivals.
2. Market Structures: Who’s in Charge?
Not all markets are created equal. The number of competitors determines how much "power" a business has over its customers. The syllabus identifies three main types you need to know:
Monopoly
A monopoly exists when there is only one dominant seller in the market.
Example: In many areas, the company that owns the water pipes is a monopoly—you can’t exactly choose a different provider for your tap water!
Decision Power: Very high. They can often set high prices because customers have no other choice.
Oligopoly
An oligopoly is a market dominated by a few large firms.
Example: The UK supermarket industry (Tesco, Sainsbury’s, ASDA, Morrisons) or the mobile network industry (EE, O2, Vodafone, Three).
Decision Power: High, but they are "interdependent." This means they watch each other constantly. If one drops their price, the others usually have to follow.
Monopolistic Competition
This sounds like a contradiction, but it's very common! It happens when there are many buyers and sellers, but the products are slightly different (differentiated).
Example: Hairdressers, coffee shops, or local restaurants.
Decision Power: Medium. Because their product is unique (your favorite barber knows exactly how you like your hair), they have some control over price, but if they charge too much, you’ll just go to a different one down the road.
Did you know? In the UK, the government monitors Market Dominance. If a firm has more than 25% market share, they are legally considered to have a "monopoly position," and the authorities might step in to make sure they aren't treating customers unfairly.
Key Takeaway:
The fewer the competitors, the more decision-making power a business has over its prices.
3. The Strength of Competition
How hard is the fight? The strength of competition changes based on several factors. If competition is strong, businesses have to work much harder.
How Competition Affects a Business:
- Price: High competition usually forces prices down. Businesses become "price takers" (they have to accept the market price).
- Quality: To win customers, businesses must improve their quality or offer better customer service.
- Innovation: Businesses spend more on Research & Development (R&D) to create new, "must-have" features.
- Profit Margins: Intense competition often leads to lower profits because costs (like advertising) go up while prices go down.
Barriers to Entry and Exit
Competition is often determined by how easy it is to join or leave the "race."
Barriers to Entry: Things that stop new rivals from joining the market.
Examples: High start-up costs (building a car factory), strong brand loyalty (people only wanting to buy iPhones), or legal patents.
Barriers to Exit: Things that make it hard for a business to stop operating.
Examples: Long-term leases on buildings or expensive equipment that is hard to sell (sunk costs).
Common Mistake to Avoid: Don't assume competition is always bad for a business. While it makes life harder, it can drive a business to become much more efficient and productive!
Key Takeaway:
High barriers to entry keep competition low, allowing existing firms to keep more profit.
4. Competitive Advantage
How does a business win? They need a Competitive Advantage. This is a feature of a business that allows it to perform better than its rivals.
Porter’s Generic Strategies
Michael Porter suggested two main ways to get an edge:
- Cost Leadership: Being the cheapest producer in the industry. Example: Ryanair or Aldi. They win by having the lowest costs and offering the lowest prices.
- Differentiation: Making your product so unique or "cool" that customers are willing to pay more for it. Example: Apple or Dyson. They win by being better, not cheaper.
Memory Aid: "Pick a Side"
Don't get "stuck in the middle." Porter argued that if you try to be a bit cheap AND a bit high-quality, you end up being neither, and customers will go elsewhere.
Key Takeaway:
To survive competition, a business must either be the cheapest or the most unique.
5. Impact on Stakeholders
Competition doesn't just affect the business; it affects everyone involved (the stakeholders).
1. Customers: Usually "winners." They get lower prices, more choice, and better quality.
2. Employees: Mixed. Competition can mean more pressure to work hard, but it can also mean better job security if the business wins the "race."
3. Shareholders: Might see lower dividends if the business is spending all its money on a "price war" with rivals.
4. Suppliers: Might be pressured to lower their own prices so the business can stay competitive.
Quick Review Box:
- High Competition: Low prices, high innovation, low profit margins.
- Low Competition: High prices, less choice, high profit margins.
- Market Share: Your slice of the total sales pizza.
Key Takeaway:
While competition is usually great for customers, it creates significant pressure for suppliers and employees.
6. Local, National, and Global Contexts
Finally, remember that competition happens at different levels:
- Local: A small bakery competing with the shop next door.
- National: A UK bank competing with other banks across the country.
- Global: Coca-Cola competing with Pepsi in almost every country on Earth.
As a business moves from local to global, the number of competitors usually increases, and the dynamic nature of the market (how fast things change) becomes much more intense. Changes in exchange rates or international trade laws can suddenly make a global competitor much stronger or weaker.
Final Summary:
Competition is a powerful external influence. A business must analyze the market structure (Monopoly vs. Oligopoly), identify barriers to entry, and develop a competitive advantage (Cost or Differentiation) to satisfy its stakeholders and protect its market share.