The competitive environment concerns factors stemming from outside a business that affect a business’s ability to gain or win customers

The greater the number of businesses selling a particular type of product or service the more competitive is the environment.

The work of Porter can be used to analyze the competitive environment.
-how the state of competition in an industry is governed by five factors called forces, and how the combined strength of these forces determines an industry’s profit potential.

Porter’s 5 competitive forces:
-threat of new entrants.
-bargaining power of suppliers
-bargaining power of buyers
-threat of substitutes
-level of rivalry

Threat of New Entrants:

Can put pressure on a business to lower prices in order to maintain sales. Alternatively, it could put pressure on a business to improve quality or invest heavily in promotion, all of which increase costs, which reduces profit margins.

Barriers to entry need to be high to deter new entrants.
-barriers to entry are obstacles that a business may face when trying to enter a new market.
They include:
-difficulty in gaining economies of scale to match the unit costs of those already in the market.
-the need to invest heavily in promotion, due to existing high brand identification.
-high start up costs and therefore capital requirements. Eg manufacturing industries.
-difficulty accessing distribution channels.
-restrictive government policy i.e. policy that limits entry into a given market, or pushes up costs, such as licensing requirements and stringent health, safety and environmental legislation.

New entrants diversifying from another market may be a significant threat - as they can use their existing expertise and experience, cash flow, and brand identity to their advantage.

The Bargaining Power of Suppliers:

Powerful suppliers may be able to