AQA GCSE Business: Competitive environment (8132) – Revision Notes

These notes condense AQA GCSE Business (8132) section 3.2.6 Competitive environment, the last part of 3.2 Influences on business. The specification lists two content points: the impact on businesses of operating in competitive markets, and the uncertainty and risks businesses face. The specification gives no tier labels for this section. Related pages: course hub | printable checklist | free diagnostics | globalisation and legislation revision notes | purpose and nature of businesses revision notes

What the specification asks you to do

You must be able to	Section below
Understand the meaning of a market and of competition	Key terms
Analyse the possible impacts of competition on a business	Impacts of competition
Identify situations where a business faces minimal or no competition	Little or no competition
Understand the risks businesses face, and why every business faces uncertainty	Uncertainty and risk
Understand why entrepreneurs start businesses, and what businesses can do to minimise risk	Why take the risk? and Reducing risk

Key terms

Term	Meaning
Market	Anywhere buyers and sellers come together to exchange goods or services; it can be a physical place or online
Competition	Rivalry between businesses selling similar goods or services to the same group of customers
Competitor	Another business trying to win the same customers
Minimal competition	A situation where a business has few or no close rivals, so customers have little alternative choice
Risk	The chance that something goes wrong, such as a loss or business failure; some risks can be planned for
Uncertainty	Not knowing what will happen in the future, so outcomes cannot be predicted with confidence
Entrepreneur	A person who spots an opportunity, organises resources and takes the risk of starting a business

Impacts of competition

Competition pushes a business to work harder for its customers. Each impact can be good or bad for the business, so analyse both.

Pressure from rivals	What the business may do	Possible effect on the business
Rivals charge less	Cut prices or offer deals	Sales kept, but profit per item falls
Rivals offer better products	Improve quality, design or features	Higher costs now, stronger reputation later
Rivals launch new ideas	Innovate and develop new products	Spending on development; risk the idea fails
Rivals serve customers well	Improve customer service	Training costs; more loyal customers
Rivals advertise heavily	Spend more on promotion	Higher costs; protects awareness
Rivals win customers	Work to cut costs and waste	Greater efficiency, or falling market share and profit

Effects on customers (for context): more choice, lower prices and better quality. A business that does not respond risks losing customers and, in the end, failing.

Competition and the four functional areas

Area	Example link
Business operations	Cutting waste to lower costs; improving quality to match rivals
Human resources	Training staff in customer service; recruiting skilled staff that rivals also want
Marketing	Price changes, promotions, developing a feature rivals lack
Finance	Lower profit margins; finding money for new products or advertising

Little or no competition

A business may face minimal or no competition when:

• it is the only supplier in an area, such as the only shop in a remote village;
• it has a new or unique product that rivals cannot yet copy, for example one protected by a patent;
• starting up in the market is very expensive, so few new firms can enter (for example, building a rail network);
• it serves a small, specialist market that is too small to attract rivals.

With little competition, a business may	But
Charge higher prices and earn higher profit	Customers may resent it, and high profit can attract new rivals
Feel less pressure to cut costs or innovate	It may be caught out when a rival does arrive
Spend less on promotion	Customers may switch quickly once they have a choice

Uncertainty and risk

Why every business faces uncertainty: the future cannot be known, and the business environment keeps changing. Sales, costs and profit can never be forecast with certainty, however good the planning.

Risks a business can face (link each to a change outside its control):

Source of risk	Example
Competitors	A rival opens nearby or cuts its prices
Customers	Tastes or fashions change, so demand falls
Economic climate	Interest rates rise, employment falls, consumer spending drops
Technology	A new technology makes a product or process out of date
Legislation	A new law raises costs, for example a higher minimum wage
Globalisation	Exchange rates move, or overseas rivals enter the market
Suppliers	Late deliveries, poor quality or rising prices
Finance	Running out of cash; the business fails and the owners lose money

Remember the link back to 3.1.1: businesses operate in a constantly changing environment (technology, the economic situation, legislation and environmental expectations), which is why uncertainty never goes away.

Why take the risk?

Entrepreneurs start businesses even though many fail, because the possible rewards seem worth it. The objectives of an entrepreneur in 3.1.1 are the reasons:

• to be their own boss;
• flexible working hours;
• to pursue an interest;
• to earn more money (profit);
• to fill a gap they have identified in the market;
• dissatisfaction with their current job.

The trade off: higher possible reward usually comes with higher risk.

Reducing risk

Activity	How it reduces risk
Market research	Checks there is demand and finds out what rivals offer before money is spent
Business planning	Sets objectives and forecasts, and shows where problems may arise
Cash-flow forecasting	Warns of cash shortages early so finance can be arranged
Starting small or testing first	Limits the money lost if the idea does not work
Insurance	Pays out if certain events occur, such as fire, theft or injury claims
Limited liability	Owners can lose only the money they put in, not their personal assets
Selling a range of products or in several markets	A fall in one does not sink the whole business
Keeping cash in reserve	Helps the business survive a bad period
Watching competitors and customers	Allows a quicker response when the market changes

No activity removes risk completely; it only makes it smaller or easier to manage.

Must-know distinctions

• A market is where buyers and sellers meet; competition is the rivalry between the sellers.
• Risk can often be planned for (insurance, research); uncertainty is the wider fact that the future is unknown.
• Competition is good for customers but can be good or bad for a business: it can improve efficiency and quality, or squeeze profit.
• Little competition is not automatically good for a business in the long run: high profits can attract new entrants.
• Reducing risk is not the same as removing it.

Small worked reminders

Responding to a new rival. A café sells 400 coffees a day at £2.50, so revenue is 400 × £2.50 = £1,000 a day. A rival opens nearby.

• Option A: cut the price to £2.20 and keep 400 sales: 400 × £2.20 = £880 a day (£120 less).
• Option B: keep £2.50 and sales fall to 340: 340 × £2.50 = £850 a day (£150 less). On revenue alone, Option A loses less. A full answer also weighs costs and whether better service could keep customers without a price cut.

Insurance as risk reduction. A shop pays £1,200 a year to insure £30,000 of stock against fire and theft. The premium is 1,200 ÷ 30,000 × 100 = 4% of the stock value: a small, certain cost in exchange for protection from a large, uncertain loss.

Judgement phrases that work

• “The impact of the new rival depends on how loyal the business’s customers are.”
• “Cutting prices protects sales in the short run, but only works if the business’s costs are low enough.”
• “With little competition the business can charge more now, but it risks attracting new entrants.”
• “Market research reduces the risk but cannot remove it, because customer tastes can still change.”

Quick self-test

1. What is meant by a market?
2. Define competition.
3. State two ways a business may respond to a new competitor.
4. Give two situations in which a business faces little or no competition.
5. Explain why all businesses face uncertainty.
6. State three objectives that lead entrepreneurs to start a business.
7. State three activities a business can undertake to minimise risk.
8. A shop sells 500 items a week at £8. A rival opens and the shop’s sales fall by 20%. Calculate the weekly revenue lost.
9. Explain one benefit to a business of facing little competition, and one drawback.
10. Explain how limited liability reduces the risk to an owner.

Answers

1. Anywhere buyers and sellers come together to exchange goods or services, physical or online.
2. Rivalry between businesses selling similar goods or services to the same customers.
3. Any two of: cut prices, improve quality, innovate, improve customer service, increase promotion, cut costs.
4. Any two of: the only supplier in an area, a new or unique (patented) product, very high start-up costs in the market, a small specialist market.
5. The future cannot be known and the environment keeps changing (rivals, tastes, the economy, technology, laws), so sales, costs and profit cannot be predicted with certainty.
6. Any three of: be their own boss, flexible working hours, pursue an interest, earn more money, fill a gap in the market, dissatisfaction with their current job.
7. Any three of: market research, business planning, cash-flow forecasting, starting small, insurance, limited liability, selling a range of products, keeping cash reserves.
8. Original revenue 500 × £8 = £4,000. Sales fall by 20% of 500 = 100, so 400 × £8 = £3,200. Revenue lost = £800 a week.
9. Benefit: it can charge higher prices and earn more profit. Drawback: less pressure to innovate, so it may lose out when a rival arrives; or high profit attracts new entrants.
10. The owner can lose only the money invested in the business, so personal assets such as a house are protected if it fails.

Where marks are usually lost

• Saying competition is “bad for business” with no chain of effects (price, sales, profit).
• Listing only customer benefits of competition when the question asks about the business.
• Defining a market only as a physical place.
• Claiming that market research or a business plan removes risk.
• Giving reasons for starting a business that are not linked to the case.
• Naming a risk without saying how it would affect sales, costs or profit.
• Forgetting the functional area when the question names one.

Frequently asked questions

What is the difference between a market and competition? A market is anywhere buyers and sellers come together to exchange goods or services, physical or online. Competition is the rivalry between businesses selling similar goods or services to the same customers.

Can a business remove risk completely? No. Activities such as market research, business planning, insurance and cash-flow forecasting make risk smaller or easier to manage, but none of them removes it.

Why do entrepreneurs start businesses despite the risk? Reasons include being their own boss, flexible working hours, pursuing an interest, earning more money, filling a gap in the market and dissatisfaction with their current job. Higher possible rewards usually come with higher risk.

Is having little competition always good for a business? Not in the long run. It can charge higher prices and earn more profit, but high profit attracts new rivals and the lack of pressure can leave the business unprepared when one arrives.

Official syllabus

AQA GCSE Business (8132) specification, Version 1.0 (19 August 2016), for first teaching from September 2017, published by AQA. Section 3.2.6.