2.6.1 Impact of competition on businesses

What a market and competition mean

1. A market can be a physical place such as a high street or a covered market, or entirely online like Amazon; what matters is that buyers and sellers meet there.
2. Businesses in the same market chase the same customers, so a customer won by one of them is usually a customer lost by another.
3. Competition is an external influence, because no business decides how many rivals it has, what they charge or when a new one opens nearby.
4. The more rivals there are, and the more alike their products, the stronger the competition, which is why UK groceries and clothing are fiercely competitive while a village post office is not.

The effects of competition on a business

1. Pressure on price: a business cannot charge much more than its rivals for a similar product, because customers compare prices in seconds online.
2. Thinner profit margins: prices are held down while the cost of competing goes up, so the profit made on each sale shrinks.
3. Pressure to improve quality and service: faster delivery, easier returns, longer opening hours and better trained staff all become necessary rather than optional once a rival offers them.
4. Spending on promotion: advertising, loyalty cards and sponsorship have to be paid for whether or not they lift sales, and a rival that spends more can take customers anyway.
5. The risk of losing sales, or the business itself: a firm that stops keeping up loses customers, as HMV did when buyers moved to cheaper online sellers and then to streaming.
6. Customers gain: competition hands them lower prices, better quality and more choice, which is why the same pressure that squeezes a business is good for the people buying from it.

Competing on price or standing out

1. A business meets a rival in one of two broad ways: it competes on price, or it differentiates itself so that price matters less to its customers.
2. Cut or match the rival's prices. This keeps price-sensitive customers from switching, but it takes profit off every unit sold, and a bigger rival can cut deeper for longer.
3. Improve quality. Better quality justifies a higher price and builds a reputation, though better materials and more checks push costs up.
4. Improve customer service. Loyalty built on service is hard for a rival to copy quickly, but it needs more staff, more training and more time spent on each customer.
5. Launch new or improved products. Something a rival does not offer gives customers a reason to choose this business first, although development ties up cash with no guarantee that the sales follow.
6. Build the brand through promotion. Customers who trust a brand buy for that reason rather than on price, but advertising is a large cost that may never pay back.
7. A small firm facing a much larger rival usually looks for a difference to compete on rather than a discount, which is how Gymshark grew against far bigger sportswear brands, on design and social media rather than on being cheapest.

When a business faces little or no competition

1. Some businesses have minimal or no competition, because customers who want what they sell have nowhere realistic to go instead.
2. Where this happens: the only shop in a village, the only petrol station for miles, a cafe inside a hospital or at a motorway service area, and a train operator on a route with no alternative.
   1. It also happens when a product is genuinely new or protected by a patent, so for a time nobody else is allowed to copy it.
3. Higher prices and wider margins: with no rival to undercut it, the business can charge more and keep a larger profit on each sale.
4. Less pressure to improve: quality, range, opening hours and service can all slip, because customers cannot easily take their money elsewhere, and there is little reason to spend on new products.
   1. Customers lose out through higher prices, less choice and slower improvement.
5. The comfort rarely lasts. High profits attract new entrants, and technology can open the market up, since online delivery now reaches customers a village shop once had to itself.

2.6.2 Uncertainty and risk

Risk and uncertainty

1. Because a risk can be estimated, a business can weigh the possible loss against the possible reward and decide whether the decision is worth taking.
2. Uncertainty cannot be estimated in that way, and a pandemic, a war that sends fuel prices up or a sudden change in the law arrives without warning.
3. Every business faces uncertainty, because each decision is taken now and pays off later, and nobody can see or control what happens in between.
   1. The distinction matters in practice: a risk is planned for with figures, while uncertainty is prepared for by staying flexible and keeping money in reserve.

The risks and uncertainties a business faces

1. Changing tastes: what customers want can move quickly, so a fashion retailer that misreads a trend is left discounting stock nobody wants.
2. New competitors: a rival can open nearby, or an online seller can reach the same customers from anywhere, and neither event is in the firm's control.
3. Economic change: a recession, higher interest rates or rising inflation cut what customers can afford, while the firm's own energy and materials cost more.
4. Supplier failure: a supplier can raise its prices, deliver late or go out of business, and a firm relying on one supplier for a key part has to stop production.
5. New technology: technology can make a product or a whole way of selling out of date, as streaming did to DVD rental and to the shops that sold discs.
6. New legislation: a rise in the legal minimum hourly rate or a new safety requirement raises costs at short notice, and the business has no choice about meeting it.

Why entrepreneurs take the risk

1. Profit: the reward for accepting the risk is the profit the owner keeps, and a successful business can pay far more than any wage.
2. Independence: being your own boss means deciding what to sell, who to work with and which hours to work, with nobody above you to overrule it.
3. A gap in the market: an entrepreneur who spots something customers want but cannot get takes the risk to reach them first, as Monzo did by offering banking through a phone app.
4. Turning an interest into a living: Ben Francis started Gymshark making gym clothing at home while at university, because it was what he cared about.
5. Building something of their own: some want the satisfaction and recognition of creating a business, and some want to provide a service their area lacks.

How a business can minimise risk

1. Market research: finding out whether customers want the product, and what they will pay, before spending money on it means fewer launches fail.
2. A business plan and a cash flow forecast: setting out costs, expected sales and the finance needed shows problems early, so a month that is forecast to run short of cash can be covered by arranging an overdraft in advance.
3. Testing on a small scale first: a market stall before a shop, or a launch in a handful of stores before a national one, keeps the possible loss small enough to survive.
4. Keeping cash reserves: spare cash absorbs a sudden fall in sales or an unexpected bill, which is how many firms rode out the jump in energy costs that closed others.
5. Insurance: a premium cannot stop a fire, a theft or a customer claim, but it turns a large unpredictable loss into a small predictable cost.
6. Spreading the product range: selling several products means a fall in demand for one does not sink the business, which is why Warburtons sells wraps, crumpets and thins alongside sliced bread.
7. Choosing reliable suppliers, and more than one: checking a supplier's record for quality and delivery, then using two suppliers for a key material, means one late delivery cannot halt production.