AQA GCSE Business: Competitive environment (8132)

The competitive environment is the set of rival businesses a firm faces in its market, together with the uncertainty and risk that come with trading. AQA GCSE Business (8132) section 3.2.6 asks you to understand what a market and competition are, analyse how competition affects a business, spot situations with little or no competition, explain why every business faces uncertainty and risk, and explain why entrepreneurs still start businesses and how they can reduce risk.

This guide covers section 3.2.6 Competitive environment, the last part of 3.2 Influences on business, in the AQA GCSE Business specification (Version 1.0, 19 August 2016) for first teaching from September 2017. Influences on business is assessed on both papers (Paper 1 and Paper 2, each 1 hour 45 minutes and 90 marks), so questions on competition can be linked to operations, human resources, marketing or finance. The specification gives no tier labels for this section.

Related pages: revision notes | practice questions | globalisation and legislation study guide | purpose and nature of businesses study guide | course hub | printable checklist

What the specification asks for

Content (3.2.6)	Students should be able to
Impact on businesses of operating in competitive markets	Understand the meaning of a market and competition
	Analyse potential impacts of competition on businesses, and identify situations when businesses face minimal or no competition
Uncertainty and risks businesses face	Understand the risks businesses face and the reasons why all businesses face uncertainty
	Understand why entrepreneurs embark on running businesses and the activities businesses can undertake to minimise risks

What is a market, and what is competition?

A market is anywhere buyers and sellers come together to exchange goods or services. It can be a physical place, such as a high street, or online. Competition is the rivalry between businesses that sell similar goods or services to the same customers. A business’s competitors are those rival firms.

Markets differ in how competitive they are. A town centre with six coffee shops is highly competitive; a remote island with one ferry operator has almost no competition. The more competitive a market, the more choice customers have, and the harder each business must work to win and keep them.

How does competition affect a business?

In an “analyse” question you need a chain of reasoning: what the rival does, how the business responds, and what that does to sales, costs or profit.

What rivals do	Likely response	Possible effect on the business
Charge lower prices	Cut prices, run promotions	Sales protected, but profit per item falls
Offer better quality	Improve quality or design	Higher costs in the short term; stronger reputation
Launch new products	Innovate	Development spending; risk that the new product fails
Give better service	Train staff, improve service	Training costs; more loyal customers
Advertise heavily	Spend more on promotion	Higher costs; protects brand awareness
Win customers away	Cut costs and waste	Greater efficiency, or falling market share and profit

Competition is good for customers (more choice, lower prices, better quality). For the business it can be good or bad: it pushes the firm to become efficient and innovative, but it can squeeze profit and, if the firm fails to respond, lead to closure.

How does competition link to the functional areas?

The specification says you must be aware of how influences affect the four functional areas.

Functional area	Example of the impact of competition
Business operations	Reduce waste to lower unit costs; raise quality to match rivals
Human resources	Train staff in customer service; offer better pay to keep skilled staff that rivals want
Marketing	Change prices, run promotions, develop features rivals lack
Finance	Lower profit margins; find money for new products or advertising

When do businesses face 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 small village;
• it has a new or unique product that rivals cannot yet copy, for example one protected by a patent;
• it is very expensive to start up in the market, so few firms can enter (for example running a railway);
• it serves a small, specialist market that is not big enough to attract rivals.

With little competition a business can usually charge higher prices and earn higher profits, and it may spend less on promotion. The drawbacks are that it has less pressure to keep costs down or to innovate, and high profits can attract new competitors, who may catch it unprepared.

Why does every business face uncertainty and risk?

Uncertainty means the future cannot be known. Risk is the chance that something goes wrong, such as making a loss or the business failing. Section 3.1.1 explains why uncertainty never disappears: businesses face a constantly changing business environment because of changes in technology, the economic situation, legislation and environmental expectations.

Source of risk	Example	Possible effect
Competitors	A rival opens nearby or cuts its prices	Lower sales or a forced price cut
Customers	Tastes or fashions change	Demand falls; unsold stock
Economic climate	Interest rates rise or unemployment increases	Customers spend less; loan repayments rise
Technology	A new technology makes a product out of date	Sales collapse unless the firm adapts
Legislation	A new law raises costs, such as a higher minimum wage	Higher costs; lower profit
Globalisation	Exchange rates change, or overseas rivals enter	Import costs rise or prices are undercut
Suppliers	Late deliveries or rising prices	Production delayed; costs rise

Why do entrepreneurs take the risk?

An entrepreneur spots an opportunity, organises resources and takes the risk of starting a business. Section 3.1.1 lists the objectives of an entrepreneur, which explain why people start businesses despite the risk:

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

Entrepreneurs judge that the possible rewards outweigh the risk. Higher potential reward usually comes with higher risk.

How can businesses minimise risk?

Activity	How it reduces risk
Market research	Checks demand and what rivals offer before money is committed
Business planning	Sets objectives and forecasts, and highlights problems in advance
Cash-flow forecasting	Warns of cash shortages so finance can be arranged in time
Starting small or testing the idea	Limits the amount lost if the idea fails
Insurance	Pays out after events such as fire, theft or injury claims
Limited liability	Owners can lose only what they invested, not personal assets
A range of products or markets	A fall in one does not sink the whole business
Keeping cash reserves	Helps the business survive a difficult period
Monitoring competitors and customers	Allows a fast response to change

No activity removes risk completely. A strong evaluation says which activity matters most for the business in the case study, and why.

Worked example: responding to a new competitor

Hartley’s Bakery sells 600 loaves a week at £3.00, so weekly revenue is 600 x £3.00 = £1,800. A supermarket opens nearby selling loaves at £1.50.

• Option A: cut the price to £2.50 and keep 600 sales: 600 x £2.50 = £1,500 (£300 less a week).
• Option B: keep £3.00 and sales fall by 15%: 15% of 600 = 90, so 510 x £3.00 = £1,530 (£270 less a week).

On revenue alone, Option B loses slightly less. A good answer adds that Option B keeps the bakery’s quality image and fewer loaves means lower ingredient costs, so profit may hold up better; but if sales keep falling, the bakery may need to compete on quality and service rather than price, because it cannot match the supermarket’s costs.

How should you answer competition questions?

• Explain (usually 2 to 4 marks): make a point and develop it with a consequence (“so… which means…”).
• Analyse (usually 6 marks): build two or three chains linked to the case.
• Evaluate (usually 9 or 12 marks): weigh both sides and reach a justified judgement, often “it depends on…” followed by the most important factor in the case.

Use the figures and details in the case study; generic answers score lower.

Frequently asked questions

Is competition always bad for a business? No. It can squeeze profit, but it also pushes a business to improve quality, cut waste and innovate, which can make it stronger in the long run.

What is the difference between risk and uncertainty? Uncertainty is the general fact that the future cannot be known. Risk is the chance of a particular bad outcome, such as a loss, which can often be reduced by planning, research or insurance.

Why might a business with no competitors still fail? It may become inefficient or stop innovating, so when a rival enters, or customer tastes change, it is unprepared and loses sales quickly.

Can market research remove risk? No. It reduces risk by giving better information, but tastes, the economy and rivals can still change after the research is done.

Common errors

• Saying competition is “bad” without explaining its effect on price, sales or profit.
• Writing about benefits to customers when the question asks about the business.
• Defining a market only as a physical place.
• Claiming that planning or research removes risk entirely.
• Giving reasons for starting a business that are not linked to the case study.
• Listing points in an evaluation without reaching a judgement.

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 Competitive environment, with links to section 3.1.1 The purpose and nature of businesses.