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2.5.3 The competitive environment

A) Impact of competition from other businesses:

Nature of ownership – If there is an increase in competition then other businesses may try and change their nature of ownership if they have unlimited liability to either a LTD or a PLC. This is due to the fact that the increase in competition is likely to increase the number of businesses that fail. Furthermore they may do this in order to expand so that they are able to retain their market share.

Product range – Businesses may try and increase their product range as competition increases in order to spread risk. Therefore if one product was to fail then the business is able to rely on others in order for them to remain profitable.

Pricing policies – As competition increases businesses are likely to adopt lower prices in order to remain competitive. This may result in businesses using a competitive or predatory pricing strategy.

Marketing methods – Businesses may try to increase their spending on marketing such as advertising as competition increases in order to maintain their market share.

Market size – This is the number of buyers and sellers in a particular market.

It is important that businesses launching a new product/service to know what its market size is. For example, if it has a large market size then the demand for the product is likely to be higher. However, this may also result in large amounts of competition in the market. This means that although the sales volume may be high, the sales turnover is likely to be relatively low. Successful entrepreneurs need to do their research in order to understand their target markets, identify a customer base and weigh up the competition.

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