External Influences On Business Activity: Competitors And Suppliers (Copy)
6.1 External Influences On Business Activity
6.1.5 Competitors And Suppliers
The Impact Of Competitors On Business And Business Decisions
- Definition of competitors
- Competitors are other businesses that offer similar products or services within the same market.
- They compete for the same customers, market share, and resources.
- Price competition
- Businesses must decide whether to lower prices to remain competitive.
- Lower prices may increase sales volume but reduce profit margins.
- Example: Supermarkets like Tesco and Carrefour often cut prices to compete with discount retailers such as Aldi or Lidl.
- Non-price competition
- Businesses may focus on differentiation, quality, branding, customer service, or unique selling points (USPs).
- Example: Apple competes not on price but on brand image, innovation, and user experience.
- Innovation and product development
- Presence of strong competitors forces businesses to innovate to maintain or increase market share.
- Example: Rivalry between Samsung and Apple drives constant innovation in smartphone features.
- Marketing strategies
- Competitor actions influence promotional campaigns, advertising budgets, and branding.
- Example: Coca-Cola and Pepsi continuously adapt their campaigns in response to each other’s moves.
- Market entry and exit decisions
- High competition may discourage new firms from entering.
- Existing firms may consider mergers or alliances to strengthen their position.
- Operational efficiency
- To remain competitive, firms may adopt lean production, reduce waste, or use automation to cut costs.
- Impact on customer loyalty
- Strong competitors offering better deals can cause businesses to lose customers.
- Businesses respond with loyalty programmes, discounts, or enhanced services.
- Risk of price wars
- Aggressive price cuts by competitors can force businesses to lower their own prices.
- While customers benefit temporarily, firms may suffer from reduced profitability.
The Impact Of Suppliers On Business And Business Decisions
- Definition of suppliers
- Suppliers provide the raw materials, components, or services businesses need to operate.
- They influence cost, quality, reliability, and efficiency of production.
- Dependence on suppliers
- If a business relies heavily on one supplier, it may face risks such as supply disruption or higher prices.
- Example: A car manufacturer depending on a single microchip supplier may face production delays if that supplier has shortages.
- Bargaining power of suppliers
- Suppliers with few competitors hold greater bargaining power, leading to higher prices for businesses.
- Example: Oil companies can influence global fuel prices, affecting airlines and logistics firms.
- Supply chain reliability
- Consistent supply of inputs is crucial for smooth operations.
- Delays or disruptions can halt production, cause stockouts, and reduce customer satisfaction.
- Example: During the COVID-19 pandemic, many retailers faced shortages due to supply chain disruptions.
- Quality of supplies
- Poor quality inputs can reduce the final product’s quality, harm reputation, and increase waste.
- Example: Fast food companies rely on suppliers for fresh ingredients — poor quality leads to loss of customer trust.
- Credit terms and payment conditions
- Suppliers offering longer credit terms improve business cash flow.
- Businesses may prefer suppliers who allow payment after delivery, giving time to generate revenue before settling bills.
- Flexibility and responsiveness
- Some suppliers can quickly respond to changes in demand, allowing businesses to avoid overstocking or understocking.
- Example: Fashion retailers like Zara rely on quick-response supply chains to adapt to changing trends.
- Geopolitical and economic risks
- International suppliers may be affected by tariffs, trade restrictions, or currency fluctuations.
- Businesses must decide whether to source locally (more expensive but reliable) or internationally (cheaper but riskier).
- Vertical integration as a response
- Businesses may acquire or merge with suppliers to gain more control over supply and reduce dependency.
- Example: Starbucks often secures direct relationships with coffee bean farmers to guarantee supply and quality.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course
Combined Impact Of Competitors And Suppliers On Business Strategy
- Strategic planning
- Businesses must constantly scan the external environment for changes in competition and supply conditions.
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) is often used to evaluate risks and opportunities.
- Cost management decisions
- Rising supplier prices may force businesses to increase selling prices or find cost-cutting measures.
- In highly competitive markets, passing costs to consumers may be difficult, pushing firms to absorb costs or find alternative suppliers.
- Product differentiation as a survival tool
- To deal with intense competition, businesses may invest in branding, unique features, and after-sales services.
- Example: Airlines like Emirates differentiate with luxury services, while budget airlines like Ryanair compete on low prices.
- Innovation and R&D spending
- Firms may allocate more resources to research to stay ahead of competitors.
- Example: Pharmaceutical companies invest heavily in R&D to maintain competitive advantage when patents expire.
- Partnerships and alliances
- Businesses may collaborate with suppliers or even competitors to reduce risks and share costs.
- Example: Automotive companies sharing research on electric vehicle batteries.
- Supplier diversification
- Businesses may source materials from multiple suppliers to avoid dependency and reduce risk of disruption.
- Example: Electronics firms sourcing components from multiple countries to avoid reliance on a single supplier.
- Impact on profitability
- Increased competition reduces margins due to price pressure.
- Rising supplier costs may cut into profits unless businesses can pass costs to customers.
Case Study Examples
- Airline industry competition
- Low-cost carriers (e.g., Ryanair, EasyJet) compete aggressively on price, forcing traditional airlines (e.g., British Airways, Lufthansa) to adjust pricing strategies.
- Technology sector
- Microsoft, Apple, and Google compete in software and devices, leading to rapid innovation.
- Competitor actions often force immediate product launches or pricing adjustments.
- Automobile industry
- Car manufacturers depend heavily on parts suppliers.
- The global microchip shortage (2020–2022) disrupted production, forcing companies like Toyota and Ford to halt assembly lines and delay product launches.
- Fast food industry
- McDonald’s and Burger King compete on product variety, pricing, and promotions.
- Supply chain issues such as increases in beef prices affect menu pricing decisions.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course
Evaluating The Importance Of Competitors And Suppliers
- Competitors
- Keep businesses alert and innovative.
- Can lead to improved products and services, benefiting consumers.
- Excessive competition can reduce profitability and cause instability in markets.
- Suppliers
- Directly affect cost, quality, and reliability of inputs.
- Strong supplier relationships create trust, better terms, and higher efficiency.
- Over-dependence on one supplier increases risks.
- Balancing both forces
- Businesses must manage competition while building sustainable supply chain partnerships.
- Strategic decisions such as pricing, promotion, and sourcing must consider both competitor actions and supplier power.
Strategic Responses Businesses Can Take
- For competitors
- Market research to anticipate competitor strategies.
- Developing brand loyalty through customer relationship management.
- Using technology to improve efficiency and lower costs.
- Expanding into niche markets to avoid direct competition.
- For suppliers
- Negotiate better contracts for prices and credit terms.
- Develop long-term partnerships to ensure quality and reliability.
- Backward integration: acquiring suppliers to reduce dependency.
- Building flexibility with multiple supply sources.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course