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Chapter 13: Problem 4

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

Expert verified
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

01

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.
02

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.
03

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.

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Most popular questions from this chapter

Is it possible for marginal revenue to be negative for a firm selling in a perfectly competitive market? Is it possible for marginal revenue to be negative for a firm selling in a monopolistically competitive market? Briefly explain.

Define marketing. Is marketing just another name for advertising?

Some companies have done a poor job protecting the images of their products. For example, Hormel's Spam brand name is widely ridiculed and is associated with annoying commercial messages received via e-mail. Think of other cases of companies failing to protect their brand names. What can companies do about the situation? Should the companies rebrand their products?

(Related to the Apply the Concept on page 464) In Chicago, Green Summit appears to be running nine different restaurants, with names such as Butcher Block, Milk Money, and Leafage. In reality, all the food for these restaurants is cooked in one central kitchen, and none of the restaurants have physical locations. The brands exist only as Web sites and on the delivery containers. An article on chicagotribune.com quoted the firm's \(\mathrm{CEO}\) as saying, "I don't really think anybody cares. They just want really high-quality food." a. If nobody cares whether a restaurant exists as a physical place, why does Green Summit have a Web site for each restaurant and packaging printed with each restaurant's name and logo? Aren't Green Summit's costs higher than if it just had a single name and one Web site? b. Does Green Summit's strategy increase or decrease productive efficiency in the restaurant business? Does the strategy increase or decrease allocative efficiency? Does it increase or decrease the well-being of its customers? Briefly explain.

Why is a monopolistically competitive firm not productively efficient? In what sense does a monopolistically competitive firm have excess capacity?
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