Question

7-Eleven, Inc., operates more than 20,000 convenience stores worldwide. Edward Moneypenny, 7 -Eleven's chief financial officer, was asked to name the biggest risk the company faced. He replied, "I would say that the biggest risk that 7 -Eleven faces, like all retailers, is competition ... because that is something that you've got to be aware of in this business." In what sense is competition a "risk" to a business? Why would a company in the retail business need to be particularly aware of competition?

Short answer

Competition is a risk to a business because it can lead to lower profits due to competitors offering similar products at lower prices, more effectively, or innovatively. The retail sector needs to be particularly aware of competition because it operates in an environment with low barriers to entry and price-sensitive consumers, making it easy for new competitors to enter and customers to switch to competitors, thereby affecting their profitability and market share.

Step-by-step solution

Understanding Business Risk

To start with, it's important to understand what business risk is. Business risk is the possibility a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. These risks are brought on by various factors, one of which is competition.

Explaining How Competition is a Risk

Competition is a business risk because a competing business might offer similar products or services at a lower price, more effectively, or more efficiently. It might also innovate by creating new products or services that make those offered by the existing business obsolete. These factors can result in the existing company losing market share, experiencing lower profits, or even going out of business.

Why Retail Businesses Need to be Particularly Aware of Competition

Retail businesses operate in a market environment that often has low barriers to entry, meaning new competitors can easily enter the market and attract customers with new, unique, or lower-priced offerings. Retail consumers are also typically price-sensitive and can easily switch to a competitor offering lower prices or a better shopping experience. Hence, retail businesses can face significant risk from competition and need to continuously monitor the market and adjust accordingly to maintain their competitive advantage.

Key concepts

Competition in Business

Competition in business refers to the rivalry that exists between companies that offer similar products or services. This competition can create various challenges and opportunities for businesses. As companies vie for the attention and resources of consumers, they often focus on factors like pricing, quality, and customer service to differentiate themselves.
Competition drives businesses to innovate and improve their offerings, which can be beneficial to consumers who receive better products and services at competitive prices. However, for businesses, competition can be a double-edged sword. It becomes a risk when companies fail to keep up with industry standards or lose relevance in the market.
In essence, business competition can impact a company's profitability and long-term sustainability. Companies must adopt strategies to manage these risks by staying ahead of market trends and maintaining an edge over their rivals.

Retail Competition

Retail competition is especially intense due to the nature of the retail market. Retailers compete over various aspects like product variety, pricing, store location, customer service, and the shopping experience. This competition is often fierce because the retail industry has relatively low barriers to entry.
New entrants can disrupt the market quickly with unique products or strategic pricing. Established retailers need to constantly adapt and innovate to meet customer demands. They must also create a distinct shopping experience to stand out from the multitude of options available to consumers.

• Price Sensitivity: Consumers in the retail sector are highly sensitive to price changes. A minor price advantage can sway customer preferences easily.
• Customer Experience: Offering a personalized and enjoyable shopping experience is crucial to retain customers.

Retailers must be vigilant and responsive, as failing to adapt might result in losing loyal customers to a competitor.

Market Share

Market share is the portion of a market controlled by a particular company, product, or brand. It is an important indicator of competitive position in the industry. Increasing market share generally implies attracting more customers, thereby increasing revenue and profitability.
A company with a larger market share can reap several benefits:

• Economies of Scale: Larger market share often leads to increased production, reducing unit costs, and enhancing profitability.
• Bargaining Power: Companies can negotiate better terms with suppliers due to higher demand for their products.

However, losing market share to competitors can be detrimental, signaling a loss of consumer interest or satisfaction. To preserve and grow market share, businesses need robust marketing strategies, consistent product quality, and continuous customer engagement.

Competitive Advantage

Competitive advantage refers to the attributes that allow a company to outperform its competitors. This advantage can be achieved through various means like cost leadership, differentiation, or focus strategies.
A sustainable competitive advantage ensures long-term success and involves unique offerings that cannot be easily replicated by competitors. Some ways to achieve competitive advantage include:

• Innovation: Continuously introducing new and improved products or services that meet consumer needs better than competitors.
• Brand Loyalty: Building a strong brand that resonates with customers, fostering loyalty that discourages them from switching to competitors.

In the ever-changing business landscape, having a clear competitive advantage is crucial for survival and growth. Companies must identify their strengths and develop strategies to capitalize on them effectively.