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The competitive environment and how small firms compete

Edexcel IAL Business · WBS12 Managing business activities

How a business behaves depends heavily on its rivals: how many there are, how big they are and what they do. Small businesses need strategies that do not rely on matching big firms' prices.

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Number, size and behaviour of competitors

Many small competitors: little control over price, products are similar, so firms compete on service, location and small differences.
A few large competitors: firms watch each other closely; a price cut by one may trigger a price war, so firms often compete through branding, advertising and new products instead.
One dominant firm: it can influence prices and may make entry hard for small rivals.
Behaviour: aggressive pricing, heavy promotion, new product launches, loyalty schemes, or the opening of a new store nearby all change the market for everyone.

New entrants increase competition; closures of rivals can open opportunities. The October 2024 WBS12 paper asked candidates to analyse why closures caused competitors to fail and to assess competitive methods in a takeaway food market.

Effects of more competition

More competition usually pushes prices and margins down, forces firms to cut costs and improve quality, and increases spending on marketing. Consumers benefit from choice and lower prices; weaker firms may fail.

How small businesses compete

Small firms rarely win on price because they lack economies of scale. Instead they can:

Offer excellent customer service and a personal relationship.
Target a niche market that large firms ignore.
Differentiate: unique, specialist, local, handmade or ethical products.
Be flexible: customise orders and respond quickly to changing tastes.
Use location and convenience: being nearby, open longer.
Use online channels and social media to reach customers cheaply.
Build loyalty: loyalty cards, community links, local reputation.

Worked example

A large supermarket opens near an independent grocer. Recommend how the grocer should respond.

It cannot match the supermarket's prices, because the supermarket buys in bulk with lower unit costs.
It could stock local and specialist products the supermarket does not, offer home delivery and personal service, and open longer hours for convenience.
This differentiates it and targets customers who value service and local produce.

Answer: Compete on differentiation and service, not price.

Key idea: Competitors' number, size and behaviour shape pricing and strategy. More competition lowers prices and margins. Small firms compete through service, niches, differentiation, flexibility, location and loyalty.

Check yourself

Which is the most suitable way for a small independent café to compete with a large chain?
- Undercut the chain's prices permanently
- Open hundreds of new branches quickly
- Offer a distinctive local atmosphere and personal service
- Spend more on national TV advertising
Show answer
Offer a distinctive local atmosphere and personal service. Small firms win on differentiation, not scale.
In a market with a few large firms, why might firms avoid cutting prices?
- Rivals may respond with their own cuts, starting a price war that lowers everyone's profit
- Price cuts are illegal
- Price cuts always reduce sales
- Customers never notice price changes
Show answer
Rivals may respond with their own cuts, starting a price war that lowers everyone's profit. Interdependence: each firm reacts to the others.
A new competitor enters the market. The most likely effect on existing firms is
- higher profit margins
- less need for marketing
- pressure to cut prices or improve their offer
- higher capacity utilisation
Show answer
pressure to cut prices or improve their offer. More choice for customers means more pressure on existing firms.
Targeting a niche market means
- selling to the mass market at the lowest price
- focusing on a small, specific segment of a market
- selling only online
- copying the market leader
Show answer
focusing on a small, specific segment of a market. Niches are small, specialised segments.
Why do small firms usually find it hard to compete on price with large firms?
- They are not allowed to cut prices
- They have unlimited liability
- They cannot advertise
- They lack economies of scale, so their unit costs are higher
Show answer
They lack economies of scale, so their unit costs are higher. Large firms buy and produce more cheaply per unit.
State two ways a small business can compete with larger rivals.
Show answer
By offering better, more personal customer service and by targeting a niche market with specialist or differentiated products.. Customer service plus a niche, differentiation, flexibility or loyalty.

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Sources

Last updated 8 November 2026. Spotted a mistake? Tell us.