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.
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