Anticipate Competitors More Effectively

Successful businesses are able to accurately identify the most threatening competitors. Having this ability allows your company to defend its place in the market. However, many managers make the error of overlooking some of the most threatening competition. According to the Harvard Business Review, there are several forces that are often missed when shaping competitive strategies.

Companies need to look beyond typical rivals. They need to focus on prospective new entrants, suppliers, customers and substitution threats. Creating strategies to address these threats will allow your company to sustain and grow market share.

Risk of New Entrants

A new company entering the market causes ripples in the industry. For example, when Pepsi entered the bottled water market, competitors were taken by surprise. The company leveraged assets from complementary products to secure a prominent position in the market. Apple used the same strategy when capturing the music distribution marketplace. These large companies quickly capture market share, even when competitors didn’t see it coming. The entrance of a new player in the market puts pressure on pricing and the return on investment necessary to compete. For companies already struggling, this is a serious challenge.

Industries have different risks for new competition entering the market. This risk depends on the barriers the new company faces when entering the playing field. If barriers are high, your company can expect a low risk for new entrants. If barriers are lower, however, you should pay attention to companies that may pose a threat.

Bargaining Power of Suppliers

Powerful suppliers are a hidden threat to your company. Suppliers charging high prices and limiting products or services can threaten your business model. If suppliers increase pricing, this puts the squeeze on companies who can’t afford to pass costs along to customers. For example, if the marketplace is saturated with competitors, the company may have limited ability to raise prices, fearing customers will chose the competitor’s product instead.

When a supplier is used by many companies in the industry, the supplier is usually powerful. For example, Microsoft is a large seller of operating systems. Companies have very few options when deciding to make a change, which makes the supplier a threat. Switching suppliers is also expensive. If a company can’t afford to pony up the resources to make the switch, the supplier gains power. Suppliers that offer a unique product, which can’t be easily be substituted, also have more leverage.

Bargaining Power of Buyers

Buyers are another force that is often overlooked. Powerful buyers have the ability to drive down prices, increase quality and play industry competitors against each other. If a single company makes up a large portion of your business, the company is usually a powerful buyer. A customer who has large fixed costs and low margins usually puts more pressure on your business.

Powerful buyers are aware of their leverage. Some of these buyers are willing to play your company against the competition to find the best deal. Buyers who don’t lose much money when switching vendors also have more power. If the customer can secure lower pricing elsewhere without a penalty, the organization doesn’t have anything to lose. Some buyers with significant resources may leverage better pricing with your company by threatening to take the service in-house. For example, soda companies have threatened packaging manufactures by showing they can produce the items in-house, if needed.

Substitution Items

The final threat to consider is substitution. A substitution product or service provides the same function to the customer, but is a different item. For example, online travel companies are a substitute for old fashion brick and mortar travel agents. Videoconferencing is a substitute for business travel. Businesses often overlook substitution products when planning for potential threats. However, these items can surprise a business and substantially affect the company’s success.

If your products and services have many prospective substitutes, profitability may be at risk. Substitute products may also interfere with your company’s pricing strategy. For example, once the product’s price exceeds a certain level, the customer may prefer the substitute which is less expensive.

Combat substitute products by differentiating your product or service. This can be accomplished through marketing campaigns, product quality or other strategies.

Understanding some of the most overlooked threats will assist in developing more effective strategies. A company should always consider these risks when evaluating potential strengths and weaknesses. If a new company is entering the market, evaluate the organization’s largest threats to identify their weaknesses. Taking a detailed look at the industry will also uncover potential opportunities. These opportunities are important to boosting performance and gaining market share. Your company will be positioned better in the market and have a more effective strategy in place.

Resource:

Michael E. Porter. “The Five Competitive Forces that Shape Strategy.” The Harvard Business Review 2006.


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Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.