The Forces of Competition

Thanks for stopping by, and welcome to my blog.

In this article, we will discuss an important tool/framework for analyzing competition in business: The Porter’s Five Forces framework.

Competition in business is tough; to ensure continued survival, businesses must device means of beating the competition.

Competition forces businesses to think creatively, and introduce innovative products and services that are, sometimes, beyond customers’ imagination. Examples include the smart phones and the collaborations we have seen lately between Banks and Fin-tech companies to deliver improved customer experience.

Effectively managing competition takes a lot of effort and determines if the business will be a profit-making or loss-making business.

Analysis of the competition within the operating environment provides insights to what the business should to do to remain profitable.

The Porter’s Fives Forces framework, as mentioned earlier, helps to analyze competition in business.

This framework was developed by a professor at the Harvard University: Michael Eugene Porter.

Though created 40 years ago, the Porter’s Five Forces framework remains a useful too to understanding how a company is positioned competitively.

The five forces of competition, are as follows:

1. Threat of entrants
2. Threat of substitution
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Rivalry among existing competitors

We will now look at each of these forces and highlight its impact to the business.

Threat of entrants

This involves analyzing the impact to the organization revenue generation due to emergence of new companies who offer the same product or services as you do. This will enable you identify and maximize the advantages you have over the new entrant – this could be better knowledge of the business environment.

Sometimes, there could be barriers discouraging new entrants, these include:

1. Economies of scale
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Access to distribution channels
6. Cost disadvantages.

Established organizations, from experience, have devised means of navigating through these barriers. For instance, achieving cost reduction through government subsidies, use of inexpensive but quality raw materials.

Threat of Substitution

This threat exists when a competitor offers similar, lower-priced product. If not identified and managed timely, the business could lose high portions of the market share. Response to this threat can be a review of the product pricing mechanism to see how a drop in price can affect profit.

Bargaining power of buyers

This refers to pressure that customers can put on businesses to provide better quality products and services at lower prices. For instance, customer that purchases products in large volume can request for higher discounts.

Bargaining power of suppliers

This refers to when a supplier is in control. For instance, when the supplier is one of the few in the industry that produce a critical component for your product. This can push up the operating cost for the organization. The increase in cost may not be easily passed on to consumers, leading to a reduction in company’s profit.

Rivalry amongst industry competitors.

Competition is a component of business that we cannot wish away unless we are operating in a monopolistic market. Competition turns into intense rivalry when it becomes difficult to make profit due to slow growth in the industry, or Lack of product differentiation between you and your competitor. This can limit profits due to price cutting and increase in product advertising costs.

Thanks for reading and I do hope you picked a lesson or two from the article.

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