A competitive environment is a system where different businesses compete with each other by using various marketing channels, promotional strategies, pricing methods, etc. This system has regulations within it that companies should follow.
How does a competitive environment affect businesses?
Your competitors can directly affect your business and the decisions you make. Let's imagine two online clothing stores that pose a threat to each other in terms of business development and profit. One of them decides to conduct a flash sale before Christmas and provide their customers with 40% off sitewide. The other store will also need to come up with a great offer to attract leads and customers, raise sales, sell unpopular products and, as a result, gain revenue.
Similarly, if one coffee company brings out a new product to the market, their competitor will need to consider growth hacking. Thus, competition can be beneficial as it motivates companies to get better and improve their products.
A competitive environment also has a positive effect on customers. Businesses often offer high-quality goods at an affordable price to win the attention of consumers. Besides, companies have to bring out their products through innovations. However, competition can sometimes complicate the existence of a business. Let's take two companies within one location, for example. If one of them sets low prices and discounts, it will be difficult for the second company to compete.
Now that you know how a competitive environment influences your business and customers, it's time to proceed to the types of competition that define the relations between and among sellers and customers.
Types of Competitive Environment
It's essential to understand what types of competitive environments there are to assess the economic environment in business. You should know how companies and markets function so that you can analyze industry and market news, policy changes, and legislation in the future. Let's distinguish the main types of competitive environments and review each of them in detail.
- Pure competition. In a perfectly competitive environment, many small companies produce similar products, and many consumers buy them. These manufacturers are small, and thus they can't influence the price, defined by supply and product demand. For example, when a farmer brings dairy products to the local market, this person can't change the market price and agrees with the going one.
- Monopolistic competition. In this environment, many manufacturers produce different products, although they might serve the same purpose. Customers can distinguish the products because of the differences in quality, features, etc. Businesses actively use advertising to promote their products and convince consumers that they are not like other products and have better quality. Companies in monopolistic competition are price makers, which means that they can influence the product price. However, to justify the price increase of their products, they should offer something exclusive to be unlike other businesses, for example, improve the quality of their goods.
- Oligopoly. In this market model, there's a small number of businesses, usually two or more. It's considered stable as companies don't compete but collude to obtain high market returns. Firms set and keep prices high together or under the leadership of one particular company. In an oligopoly, profit margins are higher than in a more competitive environment. However, the main problem of this market structure is that businesses often face a prisoner's dilemma, an incentive to cheat and act in their interests at the expense of other companies.
- Monopoly. There's one company that produces a unique product. This manufacturer doesn't face any competition, and the product doesn't have any substitutes. Also, a monopolist decides on the product's price and sets barriers for new companies to enter the market.
Perfect competition, monopolistic competition, oligopoly, and monopoly are the four main market structures you should be aware of when entering the market. Now it's time to move to the competitive environment analysis.
Competitive Environment Analysis
To develop a great marketing strategy, you need to understand your competitors and their tactics. At this point, you need a competitive analysis framework to reach your business opponents. Let's discuss several most popular frameworks.
- SWOT Analysis. You can assess the external and internal factors that influence your company. This framework helps you identify competitive advantages, compare your opponents' strong and weak sides on different marketing channels, and define your further marketing steps.
- Strategic Group Analysis. This framework characterizes the strategies of all strong competitors in various strategic dimensions. It allows you to identify your competitors' positions in the competitive environment and the factors that bring your business a profit. It also enables you to identify the key aspects of success and assess your position among competitors.
- Porter's Five Forces. The basis of this framework lies in exploring the competitive market forces in the industry and helping define the industry's strengths and weaknesses. It involves five elements: new entrants, buyers, suppliers, substitutes, and competitive rivalry. These five influence the level of competition in your industry.
- Growth-Share Matrix. By using this framework, you can decide which products are worth investing in according to their competitiveness and attractiveness within the market. It's particularly useful for large companies since it helps them define their product portfolios and decide which products are worth continuing to invest in and which are no longer worth it.
- Perceptual Mapping. This framework allows you to see the position of your product against the alternatives of your competitors. It enables you to understand how your customers perceive your product compared to competitors' and whether your positioning strategy matches your target audience. It can also help you find the gaps you need to resolve.
To fully understand different market structures, let's walk you through some examples.
Examples of Competitive Environment
Every business plan of even a small firm contains a section about competitive environment analysis. As you already know from the information above, it includes all the external factors that influence your business and the product or service you offer.
Let's take electronics, for example. Samsung is a company founded in South Korea that specializes in electronic and smart appliance technology. Their competitors include Apple, Sony, Huawei, Intel, and many more, which is why Samsung's team tries to create a product that is better than competitors' alternatives using innovations that can attract prospects.
Changes in technology or the way customers buy products can influence the types of competitive environments. For example, Amazon changed products' distribution and customer expectations. Introduced innovations influenced the number of consumer goods companies and opened markets for small firms that previously had no opportunity to compete with more prominent companies.
Your business can find itself in different types of competitive environments. That's why it's critical to understand the difference between them and be ready to assess industry and market news, policy changes, and legislation.
- The article "What Is the Meaning of Competitive Environment?" on Small Business defines the term and explains the five elements of a competitive environment.
- The article "5 Competitive Analysis Frameworks Explained with Visuals" on the Alexa blog provides readers with five competitive analysis frameworks.
Last Updated: 22.03.2023
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