the impact of competitors on business and business decisions

6.1 External Influences – Competitors and Suppliers

Objective

To understand how the external environment – especially competitors and suppliers – influences business performance and the decisions managers must make.

1. The External Environment (PEST)

PEST analysis provides a framework for identifying macro‑environmental forces that affect both competitors and suppliers. For each factor we consider the direct impact on rival firms and on the firms that supply inputs.

1.1 Political & Legal influences on competitors & suppliers

• Competition law (e.g., EU/UK Competition Act) – prevents abuse of dominant market position; can force a large supplier to divest assets, reducing its bargaining power.
• Health & safety regulations – raise production costs for rivals; suppliers must meet stricter standards, influencing price and reliability.
• Employment legislation (minimum wage, working‑time directives) – increase labour costs for both manufacturers and key suppliers.
• Tax policy (corporate tax rates, VAT, customs duties) – affect profitability and can give price‑advantage to overseas competitors.
• Environmental legislation (e.g., EU Emissions Trading Scheme) – may require suppliers to invest in cleaner processes, altering cost structures.

Case example: In 2018 the European Commission fined a dominant semiconductor supplier €1.2 billion for abusing its market position, forcing it to change pricing terms and opening the market for smaller rivals.

1.2 Economic influences on competitors & suppliers

Macro‑economic shifts change the cost base of rivals and the pricing power of suppliers.

• Inflation – raises input costs for suppliers, which may be passed on as higher prices to competitors.
• Exchange‑rate movements – affect import‑dependent suppliers; a weaker pound makes foreign raw materials more expensive, giving domestic rivals a cost advantage.
• Fiscal & monetary policy – interest‑rate changes influence investment decisions of both competitors (e.g., new plant) and suppliers (e.g., capacity expansion).
• Government intervention (subsidies, price controls) – can create an uneven playing field, favouring firms that receive support.

Example: After Brexit the GBP fell 15 % against the euro, raising the cost of imported aluminium for UK car manufacturers and giving European rivals a temporary price edge.

1.3 Social & Demographic influences on competitors & suppliers

1.4 Technological influences on competitors & suppliers

• Digital procurement platforms lower switching costs, giving buyers more leverage over suppliers.
• Automation and AI reduce production costs for tech‑savvy rivals, increasing competitive pressure.
• E‑commerce and data analytics enable new digital‑native entrants that can bypass traditional distribution channels.
• Advanced manufacturing (e.g., 3‑D printing) can allow firms to become partial suppliers of their own components, threatening existing suppliers.

2. What is a Competitor?

A competitor is any organisation that offers a product or service which satisfies the same need or want as the business under study.

2.1 Types of Competition

• Direct competitors – similar product, same target market (e.g., Coca‑Cola vs Pepsi).
• Indirect competitors – different product satisfying the same need (e.g., coffee shops vs soft‑drink manufacturers).
• Potential competitors – firms that could enter the market in the future (e.g., a start‑up launching a new smartphone).
• Substitutes – alternative solutions that can replace the original product (e.g., streaming services for DVD rentals).

3. Suppliers – Their Role and Influence

Suppliers provide the inputs (raw materials, components, services) required for production. Their power can shape cost, quality, and innovation.

3.1 Key Supplier Factors

• Supplier concentration – few large suppliers increase bargaining power.
• Switching costs – high technical or contractual costs reduce a firm’s ability to change suppliers.
• Forward‑integration risk – suppliers may start producing the final product themselves.
• Reliability & quality – affect product consistency and brand reputation.
• Location & logistics – influence transport costs and lead‑times.

3.2 Supplier‑Related Decisions

• Choosing single vs multiple sources.
• Negotiating long‑term contracts or just‑in‑time deliveries.
• Developing strategic partnerships or vertical integration.
• Implementing supplier‑quality audits and sustainability standards.

4. How Competitors Influence Business Decisions

1. Pricing strategy – price cuts to gain market share; premium pricing when differentiation is strong.
2. Product development – innovation, quality improvements, new features driven by rival offerings.
3. Marketing & promotion – advertising spend, branding, sales promotions adjusted to counter rivals.
4. Location & distribution – store placement, online channels, logistics shaped by competitor presence.
5. Capacity & scale – expansion or contraction of production in response to rivals’ output.
6. Strategic positioning – choice of cost‑leadership, differentiation, or focus based on the competitive environment.

5. Competitive Strategies (Porter’s Generic Strategies)

• Cost leadership – become the lowest‑cost producer; attracts price‑sensitive customers.
• Differentiation – offer unique attributes valued by customers; allows premium pricing.
• Focus (niche) – target a specific market segment with either cost focus or differentiation focus.

6. Analytical Tools

6.1 Porter’s Five Forces (applied to competitors & suppliers)

• Threat of new entrants
• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products
• Rivalry among existing competitors

6.2 Competitor Analysis Matrix

6.3 SWOT Analysis (linking external forces to internal capabilities)

• Strengths – internal advantages (e.g., strong R&D, brand equity).
• Weaknesses – internal limitations (e.g., high cost base, limited distribution).
• Opportunities – external factors such as emerging markets, new technologies, regulatory changes favouring the firm.
• Threats – external pressures such as intense rivalry, supplier price hikes, substitute products.

7. International Influences

• Trade agreements, tariffs, and quotas affect import‑export costs and competitive positioning.
• Exchange‑rate fluctuations can make overseas competitors cheaper or more expensive.
• Multinational rivals may benefit from economies of scale and global brand recognition.
• Global supply chains expose firms to geopolitical risk and differing regulatory standards.

8. Environmental Influences

• Legislation on emissions, waste, and resource use can increase supplier costs.
• Consumer demand for “green” products creates opportunities for differentiation.
• Supply‑chain sustainability requirements may limit choice of suppliers.
• Adopting eco‑efficient processes can become a competitive advantage (e.g., carbon‑neutral branding).

9. Impact on Stakeholders & Business Objectives

• Shareholders – profit margins are affected by pricing pressure and supplier costs.
• Employees – competitive pressures may lead to restructuring, training, or productivity initiatives.
• Customers – benefit from lower prices, improved quality, or innovative features.
• Suppliers – may gain long‑term contracts or face reduced orders depending on firm strategy.
• Community & Society – expectations for ethical sourcing, CSR, and environmental stewardship influence brand reputation.

10. Decision‑Making Examples

1. Price war – Rival cuts price by 10 %:
   • Temporarily match the price to retain market share, or
   • Introduce a value‑added bundle that maintains price but increases perceived value.
2. New product launch – Competitor releases a tech‑advanced model:
   • Accelerate own R&D timetable, or
   • Focus marketing on features where the existing product remains superior (e.g., reliability).
3. Entry of a low‑cost competitor – Possible responses:
   • Implement lean manufacturing to reduce costs,
   • Shift to a differentiation strategy emphasising quality, brand heritage, or after‑sales service.
4. Supplier price increase – Raw‑material cost rises 8 %:
   • Negotiate longer‑term contracts or seek alternative suppliers,
   • Pass a portion of the cost to customers through a modest price rise,
   • Invest in process innovation to reduce material waste.

11. Summary

Competitors and suppliers are key external influences that shape every major business decision—from pricing and product development to location, capacity, and strategic positioning. A thorough understanding of the macro‑environment (PEST), the competitive forces (Porter’s Five Forces), and internal capabilities (SWOT) enables managers to choose an appropriate generic strategy, respond effectively to rival actions, manage supplier relationships, and align decisions with stakeholder expectations and overall business objectives. Continuous monitoring is essential for sustaining a competitive advantage.