To formulate a winning strategy, you must be aware of the competitive environment your business operates in.
When developing, planning or reviewing the effectiveness of a strategy, a business must consider the competitive environment it is in. Identifying and analysing the main influences on competitiveness, and knowing how to respond to them will assist in creating an effective strategy. Michael E Porter, of Harvard Business School, developed a model that identifies the 5 most significant forces that determine competition in a market or industry:
Threat of New EntrantsHow easily can new competitors enter the market? Consider the barriers to entry, such as the need for specialist technology, customer brand loyalty, capital investment requirements. If there are few limitations to new entrants, there is a risk of losing market share. On the other hand, when seeking to enter a new market, low barriers to entry could be advantageous in gaining a foothold, but you must differentiate to maintain a position in that market.
Bargaining Power of BuyersHow much influence do your customers have on your prices? Being dependent on a small number of large, influential customers puts a business in a vulnerable position, particularly if products are low-value and undifferentiated. Seek to develop a USP that will enable you to remain competitive without lowering prices.
Threat of Substitute Products or ServicesHow exclusive is your product? If buyers can easily switch to substitute products with little or no cost, the competitiveness of your business will be affected. Again, developing a USP is key in reducing this threat, which can be done through effective marketing, making customers perceive your product as different.
Bargaining Power of SuppliersAs with customers, if suppliers are able to exert significant influence on the price you pay for your goods, this will affect the profitability, and competitiveness of your business. Large suppliers with unique products and high switching costs can wield significant power over an industry, making it very difficult to grow profitability.
Rivalry among Existing CompetitorsSometimes known as 'Jockeying for Power', this is the competition within a market amongst similar rivals. Competition is most intense where there are numerous contenders of similar size, in a slow-growing industry with undifferentiated products. In this scenario, market share can only be gained by reducing a competitors share, therefore competition is fierce.
As can be seen in each of these influences on competitiveness, differentiation is the key to developing and maintaining an edge over your rivals. Creating unique value in your brand or product for the customer will significantly enhance your long term competitiveness and profitability.