Article published in the American City Business Journals on March 2, 2020
Before you enter a new business or develop strategies to build competitive advantage for an existing business, you need to understand your business’s competitive position in the marketplace.
Michael Porter at Harvard Business School said, “Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do — it’s a matter of being different at what you do.” So, how will you be different than your competition?
A company’s ability to set itself apart from competition is in part based on its position within the industry in which it participates. In his book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” Porter identifies five forces that impact the competitiveness of a company, as detailed below:
Number of competitors within an industry
Are there many companies against which to compete? If there are, this increases the importance of differentiating your company from the competition.
Ease of entry of a new competitor
Is entry of a new competitor difficult due to the capital intensiveness of the business or the difficulty of gaining access to state-of-the-art technology?
Are there few suppliers in the industry, which gives them power to dictate the price and terms under which they sell you raw materials? Always have more than one supplier for all critical raw materials to help you determine if you are buying at or better than fair market price and to ensure reliable supply if one source is disrupted.
Are there a few large customers, which gives them power to dictate the price and terms under which they buy your products? You are much better off supplying products to many small customers than a handful of large ones. This way, no one or two customers can significantly harm your business by demanding price concessions.
Threat from substitutes
How easy is it for a customer to use a substitute product?
If a company is in multiple businesses, these five forces may be different for each business.
A company is rarely if ever fortunate to have all five forces significantly favorable to them. This also might invite competitors into the marketplace.
Business leaders must develop strategies to successfully compete regardless of how they are impacted by Porter’s five forces.
In addition to understanding these five forces, business leaders should prepare a SWOT analysis for each of their businesses, describing their strengths, weaknesses, opportunities, and threats. Strategies can then be developed to build on strengths, address weaknesses, take advantage of opportunities, and defend against threats. To the extent the information is available, develop a SWOT analysis of your competitors to identify their competitive strengths and weaknesses.
When entering a business, especially when significant capital will be invested and is potentially at risk, Porter’s five force analysis and a SWOT analysis are especially important so that you know how to compete.
Is the market growing at a sufficient rate to accommodate you, a new supplier, without setting off a price war? What will be the competitive response to a new supplier?
If you have nothing to offer besides a lower price, ensure that your cost structure is significantly below that of the competition. Be prepared for the competition to defend their business through price cuts and be sure that you have the staying power to ride out a price war.
When entering a new market, you should always ask yourself, Why will people buy from our company? What is the incentive for customers to switch away from their incumbent supplier and buy from us? Do they benefit from having a second source of supply? Will they use your company for leverage to get better pricing and terms from their incumbent supplier?
It’s best if your product or service is disruptive or built on a different business model, which makes it difficult for other providers to respond to your market entry. Uber saw an opportunity to disrupt the traditional taxicab market with an on-demand car service that leverages a device nearly all of us carry — a smart phone. The taxi industry had a hard time responding and lost market share, significantly reducing the value of taxi companies.
Regardless of your competitive position in the marketplace, you should always be on a journey to become the preferred provider to the market — a company that provides a great customer/client experience. This is the company that delights the customer, is trustworthy and offers high-quality, reliable products and services. It’s the company that customers want to buy from versus the competition. This is a journey that never ends.
Stan Silverman is founder and CEO of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisor and widely read nationally syndicated columnist on leadership, entrepreneurship and corporate governance. He can be reached at Stan@SilvermanLeadership.com.