The competitive environment, also known as the market structure, is the dynamic system in which your business competes. The state of the system as a whole limits the flexibility of your business. World economic conditions, for example, might increase the prices of raw materials, forcing companies that supply your industry to charge more, raising your overhead costs. At the other end of the scale, local events, such as regional labor shortages or natural disasters, also affect the competitive environment.
Your direct competitors provide products or services similar to yours. For example, a small computer repair business competes with other local computer repair businesses, as well as large retail stores that offer computer repair services. Small retail shops compete with warehouse clubs and big-box retail stores that use their huge buying power to lower overhead costs, enabling them to offer steep discounts that small stores can’t afford.
In addition to direct competitors, some businesses also face competition from providers of dissimilar products or services. For example, a fine dining restaurant competes with other local restaurants, but it also competes with nearby supermarkets that offer ready-to-eat meals. And a pottery studio that relies heavily on children’s birthday parties must compete with other family-friendly establishments that offer children’s activities, such as roller rinks, theme restaurants and children’s museums.
Differentiating your product or service in a competitive environment entails developing an element of your business that competitors can’t imitate. For example, if an Italian restaurant's pizza tastes the same as those of its competitors, customers have no reason to go out of their way to frequent the restaurant. But if the pizza is different -- perhaps larger, better tasting or stylistically distinct -- customers wanting that type of pizza must visit the only restaurant that provides it.
Technological innovation also affects the competitive environment, hindering those who don’t adapt. For example, the Internet has enabled restaurants to offer online take-out ordering through their websites, which some consumers find more convenient than phone ordering. Restaurants that don’t adjust to this new competitive environment might be at a disadvantage.
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