Competitive Environment – Definition, Types, Factors and Examples

What is a competitive environment?

A competitive environment is the market space within which companies compete against each other to gain market share. It includes all the elements that make up the market, such as the number of competitors, their relative strengths and weaknesses, the level of differentiation between products and services, and so on.

A competitive environment is a system in which several businesses compete with one another by employing various marketing techniques, promotional tactics, pricing strategies, and so on. This framework has rules that firms must adhere to.

A competitive environment is an important factor to consider when starting a business. There are many ways to measure competition, but some common indicators include the number of competitors, the market share held by each competitor, the profit margins in the industry, and the level of differentiation between products and services.

A competitive environment is a dynamic external system in which a company competes and operates. The more competitors there are in an industry, the greater the competition within it. When a firm offers goods and services that are comparable to those offered by other firms, it establishes a competitive business climate.

Understanding Competitive Environment

In business, the competitive environment is all the external factors that can impact a company’s ability to compete in the market. This includes both direct competitors and indirect competitors.

1. A direct competitor is a company that offers a similar product or service to your own business. For example, if you sell women’s clothing, a direct competitor would be another women’s clothing store.
2. An indirect competitor is a company that sells a different product or service, but that could still be used by your target market. For example, if you sell women’s clothing, an indirect competitor would be a store that sells men’s clothing.

The competitive environment is constantly changing, so companies must continuously monitor and adapt their strategies to stay ahead of the competition.

The competitive environment can be divided into three main categories:

1. The macro-environment

This includes factors such as the overall state of the economy, political and legal changes, and demographic trends.

2. The industry environment

This includes factors such as the competitive landscape, the structure of the industry, and the key success factors.

3. The micro-environment

This includes factors such as the company’s own capabilities, its customers and suppliers, and the local environment.

To succeed in the target or local market, companies need to understand all of these factors and how they can impact their business. They also need to continuously monitor the environment and adapt their strategies as necessary to meet customer expectations.

Importance of Competitive Environments

A company’s competitiveness is affected by the overall competitive environment. The company must carefully monitor and understand the environment in which it operates to make informed decisions that will enable it to gain a Competitive advantage.

Competitive advantages are important because they allow companies to generate higher revenues than their competitors.

There are two main types of competitive advantage

1. Cost advantage

When a company can produce goods or services at a lower cost than its competitors, it has a cost advantage. This can be due to economies of scale, efficient production processes, access to cheaper inputs, and so on.

2. Differentiation advantage

When a company offers goods or services that are perceived as being better than those of its competitors, it has a differentiation advantage. This can be due to superior quality, unique features, better customer service, and so on.

Competitive advantages are important because they help companies to

1. Attract more customers

If a company has a competitive advantage, customers will be more likely to choose its products or services over those of its competitors.

2. Charge higher prices

If a company has a competitive advantage, it can charge higher prices for its products or services and still attract customers. This is because customers perceive the company’s products or services to be better value for money.

3. Generate higher profits

If a company has a competitive advantage, it will be able to generate higher profits than its competitors. This is because the company will be able to attract more customers and charge higher prices.

Types of Competitive Environment

There are four main types of competitive environments

1. Perfect or Pure competition

It is a market structure in which there are many small firms competing against each other. It comprises a little differentiation between products and services, and the market price is determined by the forces of supply and demand.

2. Monopolistic competition

This is a market structure in which there are many small firms competing against each other. There is some differentiation between products and services, and prices are determined by the forces of supply and demand.

3. Oligopoly

This one is a market structure in which there are a few large firms competing against each other. It has a significant differentiation between products and services, and prices are not determined by the forces of supply and demand.

4. Monopoly

This is a market structure in which there is only one firm. It incorporates a significant differentiation between products and services, and forces of supply and demand do not establish the prices.

Factors that affect the Competitive Environment

There are many factors that can affect the competitive environment. Therefore successful firms do a strategic analysis of these factors to beat the significant competition in their defined marketplace. Let us have a look at those-

1. The number of firms in the industry

If there are many small firms, the market structure is likely to be perfect or pure competition. If there are a few large firms, the market structure is likely to be an oligopoly or monopoly.

2. The size of the firms in the industry

If all firms are small, the market structure is likely to be perfect or pure competition. If there are a few large firms and many small firms, the market structure is likely to be monopolistic competition. If all firms are large, the market structure is likely to be an oligopoly or monopoly.

3. The level of differentiation:

If there is little or no differentiation between products and services, the market structure is likely to be perfect or pure competition. If there is some differentiation, the market structure is likely to be monopolistic competition. If there is significant differentiation, the market structure is likely to be an oligopoly or monopoly.

4. The level of entry barriers

If there are high entry barriers, the market structure is likely to be an oligopoly or monopoly. If there are low entry barriers, the market structure is likely to be perfect or pure competition.

5. The level of exit barriers

If there are high exit barriers, the market structure is likely to be an oligopoly or monopoly. If there are low exit barriers, the market structure is likely to be perfect or pure competition.

6. The nature of the product

If the product is a necessity, the market structure is likely to be an oligopoly or monopoly. If the product is a luxury, the market structure is likely to be monopolistic competition.

7. The nature of the customer

If customers are price-sensitive, the market structure is likely to be perfect or pure competition. If customers are not price-sensitive, the market structure is likely to be an oligopoly or monopoly.

8. Government regulation

If the industry is heavily regulated by the government, the market structure is likely to be an oligopoly or monopoly. If the industry is lightly regulated by the government, the market structure is likely to be perfect or pure competition.

9. The nature of the industry

If the industry is capital intensive, the market structure is likely to be an oligopoly or monopoly. If the industry is labor-intensive, the market structure is likely to be perfect or pure competition.

Different Frameworks for Competitive Environment Analysis

To develop a strong marketing plan, you must first understand your rivals and their methods. You’ll need a competitive analysis framework at this stage to combat your rivals in the market. Let’s look at some of the most well-known ones-

1. SWOT analysis

Albert Humphrey is credited with originating SWOT analysis in the 1960s. It’s a simple yet powerful tool for competitive analysis, as it forces you to consider both your internal and external environments.

Strengths and weaknesses are internal factors, whereas opportunities and threats come from the external environment. Competitive analysis using SWOT will help you make the most of your company’s strengths, minimize its weaknesses, and take advantage of opportunities while being aware of potential threats.

SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. It’s a framework that you can use to analyze your company’s internal and external environment.

The internal environment is the environment that is within your control, such as your employees, your products, and your financial resources.

The external environment is the environment that is outside of your control, such as the economy, the political environment, and the competitive environment.

You can use the SWOT framework to help you make strategic decisions about your business, such as what products or services to offer, how to price your products or services, and how to market your business.

2. Competitive forces model- Porter’s Five Forces Model

The competitive forces model was developed by Michael E. Porter in 1979. It’s a part of microeconomic theory that looks at the profitability and attractiveness of an industry or market by analyzing five forces that affect it. The model is also known as Porter’s Five Competitive Forces.

The five forces in the model are

1. Threat of new entrants

This looks at how easy it is for new competitors to enter the market and start taking away market share.

2. Threat of substitutes

This looks at how easy it is for customers to find a substitute for your product or service.

3. Bargaining power of buyers

This looks at how much power buyers have to negotiate the price of your product or service.

4. Bargaining power of suppliers

This looks at how much power suppliers have to negotiate the price of inputs.

5. Competitive rivalry

This looks at how intense competition is in the market.

3. Value chain model

The value chain model was developed by Michael E. Porter in 1985. It’s a part of microeconomic theory that looks at the different activities that a company undertakes to create value for its customers.

The value chain model has two main components-

1. Primary activities

These are the core activities that are necessary to produce and deliver a product or service. They can be divided into four categories-

1. Inbound logistics

This refers to activities such as receiving, storing and handling raw materials.

2. Operations

This refers to activities such as assembling, manufacturing, and packaging a product.

3. Outbound logistics

This refers to activities such as warehousing and distributing a product.

4. Marketing and sales

This refers to activities such as advertising, promotion, and selling a product.

2. Support activities

These are activities that help primary activities but are not necessary to produce and deliver a product or service. They can be divided into four categories-

1. Procurement

This refers to activities such as purchasing raw materials.

2. Human resources management

This refers to activities such as recruiting, training and managing employees.

3. Technology development

This refers to activities such as researching and developing new technologies.

4. Firm infrastructure

This refers to activities such as accounting, finance, and legal compliance.

4. PESTLE analysis

PESTLE is an acronym that stands for Political, Economic, Social, Technological, Legal, and Environmental. It’s a framework that you can use to analyze the macro-environment in which your company operates.

The PESTLE framework can be used to help you understand the external factors that are affecting your business and to make strategic decisions.

The political factors that can affect your business include things such as government regulations and tax policies.

1. The economic factors include things such as interest rates and inflation.
2. The social factors include things such as demographics and trends.
3. The technological factors include things such as new technologies and R&D.
4. The legal factors include things such as intellectual property laws.
5. The environmental factors include things such as climate change and environmental regulations.

You can use the PESTLE framework to help you make strategic decisions about your business, such as where to locate your business, what products or services to offer, and how to price your products or services.

5. Growth-Share Matrix

The growth-share matrix is a framework that was developed by BCG in the 1970s. It’s a tool that you can use to help you make decisions about which products or businesses to invest in.

The growth-share matrix is based on two factors- market growth rate and relative market share.

The market growth rate is the rate of growth of the overall market for a particular product or service.

Relative market share is the percentage of the total market that your company has.

The growth-share matrix has four quadrants

1. Stars

Stars are businesses or products that have a high market share in a high-growth market.

2. Cash Cows

Cash cows are businesses or products that have a high market share in a low-growth market.

3. Question Marks

Question marks are businesses or products that have a low market share in a high-growth market.

4. Dogs

Dogs are businesses or products that have a low market share in a low-growth market.

You can use the growth-share matrix to help you make decisions about which products or businesses to invest in.

For example, you may decide to invest more in stars and question marks, because they have the potential to become cash cows.

You may also decide to divest from dogs because they are unlikely to generate much growth.

Conclusion!

The Competitive Environment is the set of forces that shape an industry and determine the nature of competition within it.

The Competitive Environment can be analyzed using Porter’s Five Forces, PESTLE, and the Growth-Share Matrix. These tools can help you understand the Competitive Environment and make strategic decisions about your business.

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