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Areas of Competition

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Business Studies

Competition occurs in all business environments. When a company or brand has a lot of close competitors it is reasonable, from a business perspective, to think that competition is a threat to the organisation. However, the different areas of competition also brings many benefits to the business and especially consumers. What are these benefits? and how does competition impact businesses overall? Let's take a look.

Importance of Competition in Business

Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers.

Competition is the rivalry between these similar businesses aiming to maximise profitability. It is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc. Competition can be profitable for businesses, as it encourages them to optimize their resources and strategies.

Competition is also important as it boosts innovation in the market. Firms often race to be the first ones to introduce new technology into the marketplace. Innovation in the industry often leads to better products and more efficient production and use of resources. Innovation also leads to operational and process optimization, such as cheaper or quicker production.

Competition can help businesses identify consumer needs and develop new products or services that meet these needs more efficiently than competitors. It can also help businesses analyze the strengths and weaknesses of competitors, which can therefore be compared with the business's strengths and weaknesses. This can help a lot with overall business strategy

Competition and Consumers

Competition is also beneficial for consumers. As we know, competition often results in innovation. This is also beneficial for consumers, as they get newer, better quality products for better prices. Consumers are also more willing to spend on better quality products, which not only benefits the firm but the economy as a whole. Innovation helps drive economic growth, which increases living standards.

Additionally, as competition leads to a more efficient process - lowering the production and operating costs of businesses - consumers also indirectly save money, as lower costs for businesses means lower prices for customers.

Types of Competition in Business

There are three types of competition in business:

  • Direct competition: direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

    Coca-Cola and Pepsi.

    The two companies operate in the same industry, offer very similar products (caffeinated soft drinks), satisfy the same need and target similar customer segments. The two companies even use similar channels of distribution (vending machines, grocery shops, etc.)

  • Indirect competition: indirect competitors are businesses that sell products that are not the same as yours but still operate in the same industry and satisfy the same consumer need.

    McDonald's and KFC.

    The two companies still operate in the same industry (fast food) and satisfy a similar consumer need (people who have busy lifestyles and are looking for a quick meal), however, the two companies are known for two different items - McDonald's for burgers and KFC for chicken.

  • Replacement competition: also known as potential or phantom competitors, are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.

    The introduction of smartphones ultimately replaced digital cameras, even though the function of the product is completely different.

Advantages of knowing your competitors

Some of the advantages of competition and understanding your competitors in business are:

  • Increase in innovation which benefits both businesses and consumers.

  • Helps businesses understand the needs and wants of customers more deeply, which allows for more and better products.

  • Helps businesses understand the specifics of the marketplace.

  • Can boost the efficiency of operations and the production process.

  • Studying competitors helps businesses understand or find their competitive advantage. By studying competitors' strengths and weaknesses the business can more easily identify areas that stand out from competitors and areas that need strategic improvement.

  • The business can learn from the failures of competitors.

Disadvantages of competition in business

Some of the disadvantages of competition in business are:

  • Customers can get confused by the wide range of similar products offered. If the business does not have a strong brand image or is not competitive price or quality-wise, the profitability of the business could be harmed.

  • Businesses could end up accruing a lot of additional costs by investing too much in innovation and R&D to stand out from competitors.

  • Businesses might also end up accumulating extra costs because of their marketing and advertising efforts.

  • An increase in competition could also result in a decrease in market share for the business.

Areas of Competition - Key takeaways

  • Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers.
  • Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.
  • Competition can boost innovation and help businesses identify the needs and wants of customers more precisely.
  • It can also help businesses understand their strengths and weaknesses as well as the strengths and weaknesses of competitors.
  • Competition is also beneficial for consumers as it can lead to economic growth and lower prices (as a result of innovation).
  • There are three types of competition: direct, indirect and replacement.
  • Direct competitors sell the same or very similar products to the business, whereas indirect competitors sell different products to the same customer segment in the same industry.
  • Replacement competitors sell products that are different to yours, potentially in a different industry, but they have the potential to replace current product offerings as a result of new technology.
  • The disadvantages of competition include the business potentially accumulating more costs than budgeted for and consumers getting confused due to all the different product offerings.

¹ FTC Fact Sheet, https://www.consumer.ftc.gov/sites/default/files/games/off-site/youarehere/pages/pdf/FTC-Competition_How-Comp-Works.pdf

² Feedough, https: //www.feedough.com/business-competition/

Areas of Competition

The three types of competition are direct, indirect and replacement competition. Direct competitors sell the same or very similar products to the business, whereas indirect competitors sell different products to the same customer segment in the same industry. Replacement competitors sell products that are different to yours, potentially in a different industry, but they have the potential to replace current product offerings as a result of new technology. 

Competitor companies can either be direct, indirect or replacement competitors. These are usually companies that compete in the same industry or market to attract customers that are also in your target customer segment. Who your competitor companies are exactly, depends on your product offering and the type of industry you operate in. 

The presence of competition in an industry can be good for a business. Usually, competition means that the industry is profitable and innovation is constant. This can boost the efficiency of production and operations within the business. The competition also helps businesses understand the needs and wants of customers more deeply, which allows more and better products.

Competitors can have various different strategies to attract customers. Two of the most significant aspects businesses in the same industry can compete on are price and quality. For example, if a competitor lowers the price of their product, they will likely attract some of your target customer segment. Similarly, if a competitor has a globally well-known brand name and a good reputation, it will be harder to compete in the same market as them. 

Final Areas of Competition Quiz

Question

What is competition?

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Answer

Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers. Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.

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How is competition related to innovation?


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Competition trends to boost innovation.

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How does competition impact consumers?


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Competition is beneficial for consumers as it can lead to economic growth and lower prices (as a result of innovation).

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Competition can help businesses:

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All of the above answers are correct.

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Which of the following statements is correct?


I. Firms often race to be the first ones to introduce new technology into the marketplace.

II. Innovation in the industry often leads to better products and more efficient production and use of resources

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Both statements are correct. 

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What are the three different types of competition? 


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Direct, indirect and replacement competition.

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Describe direct competition. 


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Direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

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Describe indirect competition. 


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Indirect competitors are businesses that sell products that are not the same as yours but they still operate in the same industry and satisfy the same consumer need.

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Describe replacement competition. 


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Replacement competitors are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.

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Question

The rivalry between Pepsi and Coca Cola is an example of: 

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Direct competition

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Which of the following statements is correct?


I. Businesses can learn from the strengths and failures of their competitors.

II. Studying competitors can help a business find its own competitive advantage. 

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Answer

Both statements are correct. 

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Competition can: 

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Answer

All of the above answers are correct. 

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Name two advantages of competition. 


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  • Increased innovation. 

  • Helps businesses gain more insight into the wants and needs of consumers

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Name two disadvantages of competition. 


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  • Customers can get confused by the wide range of similar products.

  • Businesses could end up accruing a lot of extra costs.

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What type of strategy is diversification in business?

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A growth strategy.

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Diversification is when: 

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All of the above.

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What is vertical diversification? 


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Vertical diversification, also known as vertical integration, is when you expand forward or backwards in your supply chain or production process. During vertical integration, the business combines two or more stages of production that are usually operated by other companies.

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What is horizontal diversification?


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Horizontal diversification is when your business expands into products or fields that are somewhat unrelated to current business activities.

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What is concentric diversification? 


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Concentric diversification is when your business starts producing products that are similar in the type of technology or expertise it requires to produce them.

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What is conglomerate diversification?  


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 Conglomerate diversification is when your business develops products that are completely unrelated to its current product offering.

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Name an example of horizontal diversification. 


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For example, if you are a company selling fragrances you might expand into selling other products like hair care or body wash. The new products are not directly related, but if customers enjoy your fragrances they could be interested in buying other cosmetic products that use the same fragrances.

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Name an example of conglomerate diversification. 


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A company that sells laundry detergent starts selling jeans (unrelated products).

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What is the Ansoff matrix? 


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By using the Ansoff matrix, businesses can examine various growth strategies and use their analysis for strategic planning.

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What are the four quadrants of the Ansoff matrix?


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Market penetration, market development, product development and diversification.

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What are the defining characteristics of a market development strategy?


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The business trying to sell its existing products in new markets.

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What are the defining characteristics of a diversification strategy?


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The business trying to sell new products in new markets.

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Which of the following statements is correct? 

  1. Diversification can lead to increased profitability. 

  2. It can be quite costly to diversify. 

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Both statements are correct. 

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Name two advantages of diversification. 


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  • Diversification often leads to increased profitability. 

  • Businesses can tap into industries, markets and segments that have not been reached yet. 

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Name two disadvantages of diversification. 


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  • There could be a lack of expertise in one field if the business is operating in multiple industries, which can reduce the business's competitiveness. 
  • Diversification can also be confusing to customers if the business is known for a signature product.

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Name an example of replacement competition.

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Smartphones replacing digital cameras.

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Expansion into a new industry or segment is called... 

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diversification.

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A common way of examining growth strategies for businesses is by implementing the ___ Matrix.


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Ansoff 

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This is a type of growth strategy where the business focuses on producing its existing products in its existing markets. The goal of market penetration is to increase market share. What is it?

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Market penetration

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This is is a type of growth strategy where the business attempts to sell its existing products in new markets. What is it?

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Market development

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This is a type of growth strategy where the business tries to sell new products in existing markets. What is it?

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Product development

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This is a type of strategy when the business tries to sell new products in new markets. What is it?

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Diversification

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Market development is a type of growth strategy where the business attempts to sell its ___ products in new markets. 


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existing 

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Product development: is a type of growth strategy where the business tries to sell new products in new markets. 


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False

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An online clothing retailer (that does not own any of the production processes) buys and operates the factory where their clothes are produced in. What type of diversification strategy do they use?


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Vertical diversification

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A company selling fragrances expands into selling other products like hair care or body wash. What type of diversification strategy do they use?


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Horizontal diversification

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A business is known for selling soft serve ice cream but it is now considering selling popsicles too. What type of diversification strategy do they use?

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Concentric diversification

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A company that sells laundry detergent starts to sell jeans. What type of diversification strategy do they use?


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Conglomerate diversification

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This type of strategy could lower your costs in the long term, as all your operations are 'in house'. What type of strategy is it?


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Vertical diversification

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___ diversification is when your business develops products that are completely unrelated to its current product offering. 


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Conglomerate 

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___ can be defined as the aggregation of businesses in the same market competing for the attention of consumers.

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Competition

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Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.

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True

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___ competitors are businesses that sell similar (or the same) products to the same customer segments in the same market. 

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Direct

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___ competitors are businesses that sell products that are not the same as yours but still operate in the same industry and satisfy the same consumer need. 

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Indirect

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___ are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. 

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Replacement competitors (also known as potential or phantom competitors)

Show question

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Replacement competitors are also known as...

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potential or phantom competitors

Show question

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