Is Competition Good ? For consumers? For businesses?

Have a go at the following grid: Differences Hairdressing Petrol Retailing Number of firms in the industry Product differentiation Price differences Ease of entry into the market

Competitive structure Impacts the amount of choice for consumers Changes the level of competition in terms of price, promotion, new product developments Determines the profitability of businesses in the industry Increases likelihood of collusion

To determine how a firm might cope with its competitors: apply… PORTERS 5 FORCES

RECAP: Market Structures

British Airways: Read through the article and answer the questions below What has happened to the airline industry? Why has this occurred? Who has the power now? What impact has this had on BA? What have BA done in response? Why did it not work? How has the merger with Iberia helped? Why does Porter think that the airline industry is less profitable than the soft drinks market?

https://www.youtube.com/watch?v=mYF2_FBCvXw

Michael Porter’s Five Forces Model High industry profits Low industry profits Weak suppliers Weak customers High entry barriers Few opportunities for substitutes Little rivalry Strong suppliers Strong customers Low entry barriers Many opportunities for substitutes Intense rivalry

Why do airlines make so little profit (and such big losses) Why do airlines make so little profit (and such big losses)? There are several factors, including: Very intensive competitor rivalry – mainly on price Low barriers to entry – lots of new airlines who want to set up Suppliers of aircraft & equipment are powerful – can charge high margins Customers have lots of substitute options – e.g. rail, car High fixed costs – airline losses rise significantly if revenues fall only slightly since it costs roughly the same to fly half-empty planes as full ones By contrast, why are profits so high in the soft drinks market? The answer is mainly that: Customers and suppliers have little power – Pepsi has many millions of individual consumers, and thousands of retail distributors none of whom has much influence over the business There is high brand awareness & loyalty = less consumer desire for substitutes High barriers to entry – how do you enter a market dominated by Coca-Cola and Pepsi?

http://www.tutor2u.net/business/quiz/porterfiveforces/quiz.html

Example: Car manufacturing Huge capital investment costs Compliance with safety rules and regulations Access to parts suppliers Development of car dealerships Huge marketing campaign High barriers to entry

http://www.tutor2u.net/business/blog/lack-of-bargaining-power-is- squeezing-small-business-suppliers

How do businesses respond to changes in the competitive environment? http://www.telegraph.co.uk/finance/2915574/Cadbury-gobbles-up-Green-and-Blacks.html http://www.bbc.co.uk/news/business-34957525 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11987810/Profits-fall-at-Sainsburys-amid-stiff-competition.html What are the different strategies that firms have adopted above in response to changing environments? Which one do you think is the best? Can you evaluate any of the strategies – what is the issue with them?