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 BUSS4.6 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. Changes in Competitive Structure New competitors The buying power of customers Dominant businesses The selling power of suppliers

BUSS4.6 Competitive Environment MONOPOLYDUOPOLYOLIGOPOLY 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 Changes in the Competitive Environment 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.

Changes in the Competitive Environment BUSS4.6 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.Competition Commission 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. Office of Fair Trading

Changes in the Competitive Environment BUSS4.6 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. 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. Google v Microsoft – Battle of the Titans. How should Microsoft respond to the latest threat to their dominance?

Changes in the Competitive Environment BUSS4.6 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.

Changes in the Competitive Environment BUSS4.6 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

Changes in the Competitive Environment BUSS4.6 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?

Changes in the Competitive Environment BUSS4.6 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. The Intensity of Competitive Rivalry Bargaining Power of Customers Threat of Substitute Products Bargaining Power of Suppliers Threat of New Entrants

Changes in the Competitive Environment BUSS4.6 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?

Changes in the Competitive Environment BUSS4.6 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

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