The competitive environment

Competition happens when two or more businesses try to sell similar products or services to the same customers or market segment. A competitor is another business that offers a similar product or service to those customers. The competitive environment is the set of rival businesses and conditions that affect how well a business can attract and keep customers.

To understand your competitive environment, identify your main competitors and compare their strengths and weaknesses with your own. A competitor's strength is a factor that helps that rival attract customers; a competitor's weakness is a factor that may make customers choose another business. Compare rivals on price, quality, location, product range and customer service, looking at what they charge and how well they treat customers. A small bike repair business, for instance, might find a rival charges less per repair, but many customers complain that repairs take over a week and gears come back badly adjusted. That comparison shows where the rival is strong and where you could compete.

Opportunities and threats

Analysing competitors helps you spot opportunities, such as a gap in the market for a service rivals do not offer, and threats, such as a rival offering better value. How much this matters depends on how many rivals there are, how strong they are and your own resources. More competition can reduce your market share and profit if customers switch to rivals, while customers benefit from lower prices, greater choice and better quality as businesses work harder to attract them.

Responding and monitoring

When deciding how to respond, consider what it will cost and whether you can afford it. Cutting prices may attract customers but reduce the money made on each sale, and a small business may not be able to match a larger rival's spending.

Competitors' actions and customer preferences change, so monitor rivals regularly. A rival might launch a new product or improve its service, and customers' tastes can shift. Regular checking helps you adapt before you lose sales.

Location is the place a business trades from and how easy it is for customers to reach it. It can be a strength or a weakness for the business, especially when customers must visit in person.

A convenient, accessible location is a strength. If customers can reach you easily by bus, train, car or on foot, more of them are able to visit. For example, a day nursery on a main road beside a train station and a car park with space for drop-off is easier for parents to use than one on an industrial estate with a single bus an hour.

A poor location is a weakness. A site that is hard to find, or that has no parking or poor transport links, can put customers off, so fewer people can or will visit. The same nursery would struggle down a back street with no signs, because parents in a hurry may drive past and go to a different one instead.

When location matters most

Location is particularly important for businesses that rely on customers visiting, such as a soft play centre or a garden centre. Online selling can reduce the importance of a physical location: an online-only bike shop can trade from a warehouse because customers order from home and have products delivered.

Competition and location

Competition can affect location decisions. A business may choose a site that is convenient for customers, near transport links or parking, to make visiting easier than going to a rival. It may also avoid being too close to a stronger competitor, because customers may compare the two directly and choose the better-known business. For example, a new nursery might open on the opposite side of town from a large chain nursery, close to a station, rather than in cheaper premises next door.