Competition is an unavoidable part of business. No matter the industry, it’s likely there will always be competitors challenging a company’s ability to make a profit.
Instead of trying to avoid competition, it’s more valuable to learn how to succeed amidst competition. The secret lies in understanding who the competitors are, and what specifically they’re doing that impacts your company.
Ask someone to name their company’s competitors and they will likely tell you the names of rival companies within a similar industry. In reality, though, that’s only a small portion of the competitive forces a company faces.
In his spring 1979 article (“How competitive forces shape strategy”) in the Harvard Business Review, Michael E. Porter outlined other competitors companies face every day.
These include an unlikely cast of characters — such as powerful buyers/consumers, powerful suppliers, alternate/substitute products and even companies that have yet to enter the industry.
In order to truly succeed amidst competition, it’s important to come up with a strategy that understands all sources of competition and the underlying forces that control them.
Competition from rival companies
What’s the most obvious form of competition? It’s likely that company down the street (or across the globe) that is selling similar products and services within a specific industry.
Rival companies can hurt one another’s profits, wrote Porter, especially when several factors occur:
- There’s a large pool of competing companies and they’re all roughly the same size with equal power.
- The companies offer very similar products/services allowing buyers to easily move from one company to another without major pain points.
- There are high fixed costs to make the products or offer the services.
- The industry as a whole is experiencing slow growth.
- It is difficult to leave the industry, incentivising companies to stick even when profits are low.
Some of these factors are unavoidable. Whenever possible, though, companies should try to reduce this rivalry by differentiating their products, lowering fixed costs, and selling products to the fastest-growing segment of their consumers.
Competition from new companies
Competing against rival companies is one thing (since the competitors are known threats), but there’s also the possibility that rival companies may not have even entered the industry yet.
How likely is it that this type of competitor will seemingly appear out of nowhere?
According to Porter, there are a few factors that influence how credible this “threat of entry” truly is:
- Required size and scale of start-ups — New companies that enter the industry must be willing to put in large up-front investments and enter as a large company (or accept that they’ll be at a genuine disadvantage). The size and current landscape of a given industry will determine how large a company needs to become to compete, and how quickly that company needs to accelerate to get there.
- Product/service differentiation — If a new company wants to enter a crowded industry, it will need to do a lot to win customers away from the existing companies. The company may need to spend a lot on advertising/marketing and show that their product is different enough from the competition to stand out.
- Required licenses/regulations — Government regulations or licenses may add an extra hurdle for companies to overcome.
- Where the product/service is sold — More of a concern in pre-Internet days when brick-and-mortar stores were king, the new company needs to come up with a plan for where the product will be sold to customers. Even in virtual marketplaces, the company may need to work hard to stand out among the pack.
If a newcomer does overcome these barriers to entry and joins the industry, then it could quickly become one of the main rivals a company will need to compete against.
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Competition from powerful buyers
Since customers sell products to buyers/consumers, it seems to consider buyers a form of competition.
But, as Porter notes, buyers can detract from profit in a number of ways:
- They can easily switch from one company to the next especially if the product is standard within the industry with nothing to make it uniquely valuable.
- They can demand higher quality or more service.
- They buy in quantity, which means they also have buying power and can bring down costs.
Buyers will be especially keen on reducing prices if the products are expensive compared to their incomes or when a high-quality product isn’t required.
The best way to combat this? Differentiate the product so that it is unique. If it can demonstrate an increase in quality, all the better.
Competition from powerful suppliers
What about suppliers — the companies that provide the raw materials that a company will use to make their product or service?
Much like buyers, suppliers also have the potential to wield power over a company.
According to Porter, a supplier will try to raise prices and decrease the quality of its goods. This can occur when:
- The supplier doesn’t need to compete with other suppliers.
- The supplier can meet the buying company’s product specifications, which means it’d be expensive for that company to switch to a new supplier.
- The industry is just one of many varied customers for the supplier; losing that company wouldn’t be a huge loss to the supplier’s business.
Competition from alternate products/services
A company can also face competition when companies or an entirely new industry begins making similar, alternative products. If consumers begin to buy these “substitutes products,” it will eat into a company’s ability to make a profit.
Porter writes about a few key substitute products that came onto the scene in the late 1970s.
High fructose corn syrup began to be seen as an alternative to sugar, changing the landscape of the main players in the soft drink industry. And the fibreglass insulation industry took a hit when substitutes — cellulose, rock wool, and styrofoam — hit the market.
In recent years, television providers like Comcast and Verizon have seen the rise of an alternate product: Internet-streaming television. Some consumers are ditching traditional cable packages and turning to subscription-based models that are cheaper and have more specific choices.
Additional strategies to overcome competition
So how does a company deal with all these competitive forces coming from different directions at the same time?
Porter outlines three main strategies:
- Stand out from the pack — Follow the example of Dr. Pepper, a company that in the mid-20th century went up against juggernauts Pepsi-Cola and Coca-Cola. Dr. Pepper launched a large advertising campaign to promote its unique product and it did work to gain consumer loyalty and brand differentiation.
- Go on the offensive — If a company doesn’t like the competitive forces it needs to deal with, it can try to change them. A company can make a large investment to make raw materials cheaper or find a way to more easily enter a new industry.
- Pay attention to industry change — The competitive forces that a company will need to deal with will change over time. By conducting long-range planning companies can better predict how competition will change in the coming years and decades — and make changes accordingly.
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