So far we have discussed the key elements of Porter’s Five Forces and focused more closely on the first four: Potential Entrants, Substitutes, Buyer Power and Suppliers.
In today’s blog we are investigating the last of Porter’s Five Forces: Industry Competitors.
Whatever sector you work in, there are likely to be competitors. While healthy competition can drive your company to excel, the actions of your business rivals can affect your profits and even put you out of business.
Who are your industry competitors?
Whether you run a small business from home or a multi-national, there will almost certainly be other companies offering the same or similar products and services. They may vary in quality and price, but knowing your competitors and understanding their business strategies is essential to your own success.
Low levels of competition in a particular sector can lead to more Potential Entrants setting up business in that field, which means that no company should rest on its laurels as there could be competitors waiting in the wings.
What form can industry competition take?
When we consider competition, the first thing we tend to think of is competing on price. However, there are other ways that rivals might try to win business from your potential customers, for example:
- Bringing out a new model – this could be a better product, such as a more effective vacuum cleaner or production machinery that saves money by reducing energy bills, or it could be a desirable product such as a new computer game or fashion item;
- Providing better customer service – for example a hotel or restaurant with a more personal touch or a company offering a genuine 24/7 service call out;
- Offering a specific USP that makes customers desire a product irrespective of price, for example Fairtrade products or energy produced from renewable sources;
- Marketing campaigns – clever marketing campaigns, taglines and branding can make a company’s products or services more desirable, and targeting new audiences can win market share, for example through social media campaigns.
On occasion, a new company will completely shake up an established industry by bringing in a new way of doing business. This may cause competitors to change their own business models or lead to companies folding through failure to adapt.
What are the downsides of industry competition?
Fierce competition, in particular price wars, can be detrimental to the companies involved, as it can result in reduced profit margins all round. It can also lead to large corporations driving smaller businesses out of the market, affecting the local economy and reducing future choice for consumers.
And the upsides?
Healthy competition can lead to innovation, resulting in better products reaching the market or more effective in-house systems. Bringing new products to market can not only benefit the companies producing them but also boost the local economy through growth and jobs.
Price wars and other forms of competition can sometimes benefit consumers more than the companies involved, for example through making cheaper or better products more accessible, or ensuring a market is well-regulated.
What other factors might come into play?
Other factors can include changes to industry growth. For example, the launch of mobile phones led to many competing companies entering the market; however, after a while, this growth slowed as the number of new customers decreased and the focus switched more to servicing existing customers.
Companies offering generic products, such as energy companies offering gas and electric to consumers, will usually compete mostly on price as there are few other points of difference.
As with Potential Entrants and Substitutes, ease of switching can also play a part, as if a consumer is not tied into a long contract, it’s easier for an industry competitor to lure them away from their existing provider.
Finally, some large companies with long-term strategies will be prepared to reduce profit or even make a loss in the short term in order to dominate a market in the long term, which can be a difficult proposition for smaller competitors.
Competition can take many forms and every business should be aware of the different ways companies compete, from price and customer service to marketing and innovation. Forward-thinking companies will know exactly who their industry competitors are, whether they are long-standing rivals or new entrants in the market.