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The Market ยป Responding to Increased Competition

What you'll learn this session

Study time: 30 minutes

  • Understand what increased competition means for businesses
  • Learn different strategies businesses use to respond to competition
  • Explore how price, quality and innovation help businesses compete
  • Examine real-world examples of competitive responses
  • Analyse the advantages and disadvantages of different competitive strategies

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Introduction to Responding to Increased Competition

When more businesses start selling similar products or services, competition increases. This means customers have more choice and businesses must work harder to attract and keep customers. Think about how many different brands of trainers, mobile phones, or chocolate bars you can choose from - that's competition in action!

Businesses that don't respond to increased competition risk losing customers and market share. Those that respond well can actually become stronger and more successful.

Key Definitions:

  • Competition: When two or more businesses try to attract the same customers by offering similar products or services.
  • Market Share: The percentage of total sales in a market that a business has.
  • Competitive Advantage: Something that makes a business better than its competitors in the eyes of customers.
  • Differentiation: Making your product or service different from competitors' offerings.

Signs of Increased Competition

Businesses know competition is increasing when they see new competitors entering their market, existing competitors launching new products, or their own sales starting to fall. Customer complaints about prices being too high compared to competitors are also a warning sign.

Price-Based Competitive Strategies

One of the most common ways businesses respond to competition is by changing their prices. This can involve reducing prices to attract customers or using different pricing strategies to stay competitive.

Price Reduction Strategies

When faced with competition, many businesses choose to lower their prices to attract customers. This can be effective in the short term but has both benefits and drawbacks.

Price Cutting

Directly reducing prices below competitors. Supermarkets often use this strategy, with price wars between Tesco, ASDA and others.

🏷 Special Offers

Using discounts, buy-one-get-one-free deals, or loyalty schemes to provide better value than competitors.

💰 Value Pricing

Offering basic versions of products at very low prices, like budget airlines such as Ryanair or EasyJet.

Case Study Focus: Supermarket Price Wars

In the UK, major supermarkets like Tesco, ASDA, Sainsbury's and Morrisons regularly engage in price competition. When Aldi and Lidl entered the UK market with significantly lower prices, established supermarkets responded by launching their own budget ranges (like Tesco's "Everyday Value" and ASDA's "Smart Price") and price-matching schemes to compete.

Non-Price Competitive Strategies

Smart businesses know that competing only on price can be dangerous - it reduces profit margins and can start price wars. Instead, many choose non-price strategies that add value for customers in different ways.

Quality and Innovation

Improving product quality or innovating new features can help businesses stand out from competitors without having to cut prices.

Quality Improvement

Using better materials, improving durability, or enhancing performance. Apple focuses on premium quality to justify higher prices than competitors.

💡 Innovation

Developing new features or entirely new products. Tesla revolutionised the car industry by focusing on electric vehicles and self-driving technology.

🎨 Design

Creating products that look better or are easier to use. Dyson's distinctive designs help their vacuum cleaners stand out in a crowded market.

Customer Service and Experience Strategies

Many businesses compete by offering superior customer service or creating better shopping experiences. This can be particularly effective because good service is hard for competitors to copy quickly.

👤 Enhanced Customer Service

Training staff better, offering faster response times, or providing more personalised service. John Lewis is famous for its "Never Knowingly Undersold" policy and excellent customer service, which helps it compete with cheaper retailers.

Marketing and Brand Building

Strong marketing and brand building can help businesses compete by making customers more loyal and less likely to switch to competitors.

📢 Advertising

Increasing advertising spend to raise awareness and remind customers why they should choose your brand over competitors.

🤝 Brand Loyalty

Creating emotional connections with customers through consistent branding and values. Nike's "Just Do It" campaign creates strong brand loyalty.

📱 Digital Marketing

Using social media, online advertising and digital platforms to reach customers more effectively than competitors.

Case Study Focus: Netflix vs Traditional TV

When Netflix entered the UK market, traditional broadcasters like BBC, ITV and Sky faced increased competition. They responded by launching their own streaming services (BBC iPlayer, ITV Hub, Sky Go), improving their content quality and investing in original programming to differentiate themselves from Netflix's offerings.

Market Positioning and Targeting

Sometimes the best response to increased competition is to focus on a specific group of customers or position your business differently in the market.

Niche Marketing

Instead of trying to compete with everyone, some businesses focus on serving a specific niche market very well.

🎯 Specialisation Benefits

By focusing on a specific customer group or product type, businesses can become experts in that area and charge premium prices. For example, Lush focuses specifically on handmade, ethical cosmetics rather than trying to compete with all beauty brands.

Advantages and Disadvantages of Competitive Responses

Each competitive strategy has its own benefits and risks. Businesses need to carefully consider which approach will work best for their situation.

Price Competition

Advantages: Can quickly attract customers, easy to implement, customers understand price differences easily.

Disadvantages: Reduces profit margins, can start price wars, competitors can easily copy price cuts, may damage brand image if seen as "cheap".

Quality and Innovation

Advantages: Harder for competitors to copy, can justify higher prices, builds long-term competitive advantage.

Disadvantages: Expensive to implement, takes time to develop, customers may not value improvements enough to pay more.

Customer Service Focus

Advantages: Creates customer loyalty, difficult for competitors to replicate quickly, can justify premium pricing.

Disadvantages: Requires ongoing investment in staff training, hard to measure success, may not attract price-sensitive customers.

Case Study Focus: McDonald's vs Burger King

The rivalry between McDonald's and Burger King shows different competitive strategies in action. McDonald's focuses on speed, consistency and family-friendly marketing, while Burger King emphasises flame-grilled taste and edgier advertising. Both use price promotions, but they've also differentiated themselves through different brand positioning and menu innovations.

Choosing the Right Competitive Strategy

The best competitive response depends on several factors including the business's resources, customer preferences and the nature of the competition.

🤔 Key Considerations

Businesses should consider their financial resources, brand image, customer loyalty and long-term goals when choosing how to respond to competition. A luxury brand like Rolex wouldn't compete on price, while a budget airline like Ryanair focuses heavily on low costs.

Successful businesses often use a combination of strategies rather than relying on just one approach. They might improve quality while also enhancing customer service, or reduce some prices while innovating new premium products.

The key is to understand what customers value most and find ways to deliver that better than competitors, while still maintaining profitability and staying true to the brand's identity.

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