Forces That Create Competition

The competitive environment includes your customers.

By John Cioffi

Competition can vary widely among industries, creating many different opportunities and threats. Michael Porter of Harvard proposed five major forces driving industry competition, and this model has stood the test of time. The five forces are: rivalry among existing competitors, threat of new entrants, pressure from substitute products, bargaining power of buyers and bargaining power of suppliers. Although these forces vary widely among industries, analyzing them provides you with a clear understanding of your competitive environment.

Rivalry Among Existing Competitors
Rivalry among existing competitors describes how current industry competitors behave toward one another. Issues that cause an industry to become more competitive, or more unstable, include:

• Price wars (only the low cost provider wins),
• High fixed costs (e.g., owning lots of equipment),
• High exit barriers (e.g., difficulty selling that equipment),
• Slow overall industry growth,
• Lack of differentiation among competitors.

Threat of New Entrants
The possibility exists that other companies, not yet competitors, will become competitors. The ability of these firms to enter your industry will depend upon two major factors: the reactions from existing competitors and the barriers to their entry into your industry. Effective barriers to their entry might include: lack of experience, high capital requirements (they need to buy the equipment too), lack of access to distribution channels, and high cost of switching to a new competitor.

Pressure from Substitute Products
This pressure comes from products or services that perform a similar function. Bear in mind that these products may “look” different, and business owners sometimes ignore them because of this. For example, in-line skates became competition to companies selling running gear.

Bargaining Power of Buyers
Buyers, or customers, have a powerful effect upon overall competitiveness. Look for factors that give buyers influence over your firm. These include:

• They purchase large volumes;
• Your products are similar to your competitor's;
• Buyers incur low costs to switch to your competitor;
• Your product is not critical to them.

Bargaining Power of Suppliers
Suppliers gain influence over your company, especially if there are only a small number of suppliers, substitute products are not a threat to them, your business volume with suppliers is relatively small, and their products are differentiated or important to you.

A Closer Look at your Rivals
We often believe that we know our competition. After all, we've been watching them for years. It is important, however, to assess the competitive environment in order to understand how our competitors' actions affect our success.

A manufacturer of high-quality, hydraulic bicycle brakes once told me that his company didn't have any competition. Of course, what he meant was that he didn't believe anyone else made the type of brakes that his company did. Their actual competition, however, included every business that made any type of device that can stop a bicycle. After all, if the customer will spend money to buy it, then the customer has already made the decision that it is competition. And the customer is the expert.

First determine who your competition is. Remember that competition includes anything that can function as your product does or that customers will buy instead of your product. Remember, too, that customers buy benefits, not just specifications, so take a close look at what they're really buying (e.g., do they buy standard-looking brakes, or do they buy any means to stop themselves?).

Competitor Analysis
Once you've identified the competition, you need to assess it. One way to do this is to analyze each competitor's goals, strategies, assumptions, strengths and weaknesses. The outline in the sidebar below presents an organized framework for this process. As you complete the competitor analysis, you will begin to understand how your competition behaves. You'll also be able to predict their likely reactions to your moves and those of the market. Very few things remain static in business, and yesterday's analysis may soon be outdated. Understanding your competition is an ongoing challenge.

If You Zig, Will They Zag?
The future is of high concern to the success of your business. For example, when you initiate a new marketing campaign or make a product change, you should understand how your competition will react. Otherwise, you're just flying blind. Generally, there are three ways that competitors behave: offensively, defensively, or non-reactively.

1. Behaves Offensively (e.g., Nike, right there in your face): What initiatives are likely? How determined is the competitor? What will the competitor gain/lose? What causes the competitor to react?
2. Behaves Defensively (e.g., regional airline that cowers to the majors): Will competitor react to my moves? How and when? How determined is the competitor? What will the competitor gain/lose? Where is the competitor vulnerable?
3. Behaves Non-Reactively: Why don't competitors react to my moves? Does competitor think my moves are harmless (e.g., Timex vs. Swiss watches, early days of PC vs. mainframe)? Is competitor correct? How can I continue to convince competitor of this—over the long term and even if he's wrong?

After completing the analysis, you will have a list of competitors, an evaluation of their capabilities, and an understanding of their likely moves in the marketplace. You'll have the information you need about your competition. Now you can focus more attention on the really important aspect of your business, your customers.

What Do Customers Really Think of You?
One way or another (e.g., discussions, surveys), you must determine what customers think about your firm. For example, do they perceive you to have the best service or quality? Try to find out their answers to some key questions. Don't fool yourself into thinking that you already know the answers. This is a major and very common mistake in many businesses.

Your surveys and questions should lead to at least two conclusions. First, you'll understand the needs of your customers, what they think of your company and its products, and the benefits they desire from you. Second, you'll be able to establish criteria for a “good customer.” Both of these conclusions are important to your success.

How Customers See You
Of course, you first must talk with your customers to understand their perceptions. If you don't know how to do this, hire a survey or marketing specialist to help you. Your customers' perceptions will guide you in improving your offerings, understanding your competition, and establishing criteria for the types of customers you can best serve.

Create the Advantage
It is critically important to understand your competitive environment and your customers. Oftentimes, we operate on our “gut feeling,” telling ourselves that, of course, we understand all this, we've been doing business for years. Make the effort to take a fresh look. Really analyze the competitive environment and ask your customers how you're doing, and really listen. You'll be amazed at the results, and you will have created a great competitive advantage.