Areas of Competition

Q: What are the three types of competition in business?

The three types of competition in business are:Direct, indirect, and replacement competition.

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Competition occurs in all business environments. When a company or brand has a lot of close competitors it is reasonable, from a business perspective, to think that competition is a threat to the organisation. However, the different areas of competition also brings many benefits to the business and especially consumers. What are these benefits? and how does competition impact businesses overall? Let's take a look.

Importance of Competition in Business

Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers.

Competition is the rivalry between these similar businesses aiming to maximise profitability. It is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc. Competition can be profitable for businesses, as it encourages them to optimize their resources and strategies.

Competition is also important as it boosts innovation in the market. Firms often race to be the first ones to introduce new technology into the marketplace. Innovation in the industry often leads to better products and more efficient production and use of resources. Innovation also leads to operational and process optimization, such as cheaper or quicker production.

Competition can help businesses identify consumer needs and develop new products or services that meet these needs more efficiently than competitors. It can also help businesses analyze the strengths and weaknesses of competitors, which can therefore be compared with the business's strengths and weaknesses. This can help a lot with overall business strategy

Competition and Consumers

Competition is also beneficial for consumers. As we know, competition often results in innovation. This is also beneficial for consumers, as they get newer, better quality products for better prices. Consumers are also more willing to spend on better quality products, which not only benefits the firm but the economy as a whole. Innovation helps drive economic growth, which increases living standards.

Additionally, as competition leads to a more efficient process - lowering the production and operating costs of businesses - consumers also indirectly save money, as lower costs for businesses means lower prices for customers.

Types of Competition in Business

There are three types of competition in business:

Direct competition: direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.
Coca-Cola and Pepsi.
The two companies operate in the same industry, offer very similar products (caffeinated soft drinks), satisfy the same need and target similar customer segments. The two companies even use similar channels of distribution (vending machines, grocery shops, etc.)

Indirect competition: indirect competitors are businesses that sell products that are not the same as yours but still operate in the same industry and satisfy the same consumer need.
McDonald's and KFC.
The two companies still operate in the same industry (fast food) and satisfy a similar consumer need (people who have busy lifestyles and are looking for a quick meal), however, the two companies are known for two different items - McDonald's for burgers and KFC for chicken.

Replacement competition: also known as potential or phantom competitors, are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.
The introduction of smartphones ultimately replaced digital cameras, even though the function of the product is completely different.

Areas of Competition Competition Types StudySmarter Fig. 1 - Business competition types

Advantages of knowing your competitors

Some of the advantages of competition and understanding your competitors in business are:

Increase in innovation which benefits both businesses and consumers.
Helps businesses understand the needs and wants of customers more deeply, which allows for more and better products.
Helps businesses understand the specifics of the marketplace.
Can boost the efficiency of operations and the production process.
Studying competitors helps businesses understand or find their competitive advantage. By studying competitors' strengths and weaknesses the business can more easily identify areas that stand out from competitors and areas that need strategic improvement.
The business can learn from the failures of competitors.

Disadvantages of competition in business

Some of the disadvantages of competition in business are:

Customers can get confused by the wide range of similar products offered. If the business does not have a strong brand image or is not competitive price or quality-wise, the profitability of the business could be harmed.
Businesses could end up accruing a lot of additional costs by investing too much in innovation and R&D to stand out from competitors.
Businesses might also end up accumulating extra costs because of their marketing and advertising efforts.
An increase in competition could also result in a decrease in market share for the business.

Areas of Competition - Key takeaways

Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers.
Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.
Competition can boost innovation and help businesses identify the needs and wants of customers more precisely.
It can also help businesses understand their strengths and weaknesses as well as the strengths and weaknesses of competitors.
Competition is also beneficial for consumers as it can lead to economic growth and lower prices (as a result of innovation).
There are three types of competition: direct, indirect and replacement.
Direct competitors sell the same or very similar products to the business, whereas indirect competitors sell different products to the same customer segment in the same industry.
Replacement competitors sell products that are different to yours, potentially in a different industry, but they have the potential to replace current product offerings as a result of new technology.
The disadvantages of competition include the business potentially accumulating more costs than budgeted for and consumers getting confused due to all the different product offerings.

¹ FTC Fact Sheet, https://www.consumer.ftc.gov/sites/default/files/games/off-site/youarehere/pages/pdf/FTC-Competition_How-Comp-Works.pdf

² Feedough, https: //www.feedough.com/business-competition/

Frequently Asked Questions about Areas of Competition

The three types of competition in business are:
Direct, indirect, and replacement competition.

Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers.

Competitor companies are vying for the same position in the market by attracting the same customers.

Competitors affect a business because a business needs to optimize resources to gain more profitability, it needs to innovate to gain a competitive advantage, and it must analyse its strengths and weaknesses.

Competitors attract customers by offering them quality products for better prices

Final Areas of Competition Quiz

Areas of Competition Quiz - Teste dein Wissen

Question

What is competition?

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Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers. Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.

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How is competition related to innovation?

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Competition trends to boost innovation.

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How does competition impact consumers?

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Competition is beneficial for consumers as it can lead to economic growth and lower prices (as a result of innovation).

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Competition can help businesses:

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All of the above answers are correct.

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Which of the following statements is correct?

I. Firms often race to be the first ones to introduce new technology into the marketplace.

II. Innovation in the industry often leads to better products and more efficient production and use of resources

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Both statements are correct.

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What are the three different types of competition?

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Direct, indirect and replacement competition.

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Describe direct competition.

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Direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

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Describe indirect competition.

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Indirect competitors are businesses that sell products that are not the same as yours but they still operate in the same industry and satisfy the same consumer need.

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Describe replacement competition.

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Replacement competitors are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.

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The rivalry between Pepsi and Coca Cola is an example of:

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Direct competition

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Which of the following statements is correct?

I. Businesses can learn from the strengths and failures of their competitors.

II. Studying competitors can help a business find its own competitive advantage.

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Both statements are correct.

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Competition can:

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All of the above answers are correct.

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Name two advantages of competition.

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Increased innovation.
Helps businesses gain more insight into the wants and needs of consumers

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Name two disadvantages of competition.

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Customers can get confused by the wide range of similar products.
Businesses could end up accruing a lot of extra costs.

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Name an example of replacement competition.

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Smartphones replacing digital cameras.

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___ can be defined as the aggregation of businesses in the same market competing for the attention of consumers.

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Competition

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Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.

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True

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___ competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

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Direct

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___ competitors are businesses that sell products that are not the same as yours but still operate in the same industry and satisfy the same consumer need.

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Indirect

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___ are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies.

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Replacement competitors (also known as potential or phantom competitors)

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Replacement competitors are also known as...

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potential or phantom competitors

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The introduction of smartphones ultimately replaced digital cameras, even though the function of the product is completely different is an example of...

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replacement competition.

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Competition can be beneficial for businesses, but not for customers.

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False

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Innovation helps drive ___, which increases living standards.

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economic growth

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Imagine there are two companies that operate in the same industry and satisfy a similar consumer need. However, they are known for two different items. What type of competition is it?

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Indirect

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Imagine there are two companies that operate in the same industry, offer very similar products, satisfy the same need and target similar customer segments. They even use similar channels of distribution. What type of competition is it?

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Direct

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McDonald's and KFC are direct competitors.

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False

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The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead. What type of competition is it?

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Replacement competition

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Competing can be costly.

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True

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Lower costs for businesses mean lower prices for customers.

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True

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Areas of Competition

Areas of Competition

Areas of Competition

Importance of Competition in Business

Competition and Consumers

Types of Competition in Business

Advantages of knowing your competitors

Disadvantages of competition in business

Areas of Competition - Key takeaways

Frequently Asked Questions about Areas of Competition

What are the three types of competition in business?

What is all about business competition?

What are competitor companies?

How do competitors affect a business?

How do competitors attract customers?

Final Areas of Competition Quiz

Areas of Competition Quiz - Teste dein Wissen

More explanations about Strategic Direction

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