Understanding Your Competition.
When you decide to get involved in selling a product or service into a market, do you spend any time analyzing that market and the potential return you can hope to get? Do you look closely at existing competitors to get an understanding of market dynamics? Do you feel you know your competitors sufficiently well to allow you to make rational decisions about competing in a market or niche? This article looks at the attractiveness of your industry and how you can better understand your competition.
It is important that you have a clear understanding of the competitive landscape in which your business operates. If you do not gather market intelligence about the industry, your competitors and their business strategies, you will find it difficult to compete effectively for your share of the customer spend. Knowing your competitors and profiling how they operate allows you to make sensible decisions in relation to whether you should continue in your chosen market segment as well as how you should price and market your own product set.
Without getting too theoretical about how you can intelligently look at the competitive model for your industry, and the niche within which you operate, it is useful to look at the model developed by Prof. Michael Porter of Harvard Business School, for analyzing the 5 forces that interact in any competitive market. A simple version of the model is shown below.
Essentially, what the model is showing is that there are 5 concurrent forces impacting every industry and that the profitability of the industry will be dictated by the power of these forces. Where the forces are strong, profitability will be low and where the forces are weak, profitability will be high. When you are defining your industry, you need to look at A) the industry structure, B) how the industry is changing, and C) what the implications of these changes are for your business.
A more detailed version of the model is shown below. It is well worthwhile spending 10 or 15 minutes trying to analyse where your business stands in relation to each of the 5 boxes and establishing the attractiveness of your industry segment and where the market power actually lies.
Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. If there are barriers to entry, this provides protection for existing competitors.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels that competitors can charge.
Bargaining Power of Supplier
The cost of items bought from suppliers can have a significant impact on a company’s profitability. If suppliers have high bargaining power over a company, then the company is not in control of its profit margins and it may make the industry segment unattractive.
Bargaining Power of Buyers
If buyers have lots of choice or if they can act as a collective unit in their purchasing decisions, this can reduce margins and the attractiveness of the industry segment for all competitors.
Intensity of Rivalry
If rivalry is intense in any given industry, this will make it unattractive to market participants as rivalry drives prices down and the only winner is the consumer.
So what does all of this mean for your business? Well, each of these measures above has looked at the negative consequences for your business. Remember, the opposite will apply in each case as well. In essence, it comes back to the fact that you should choose your industry and market segment carefully, if you want to ensure that you enjoy high levels of profitability. If profitability is consistently low, you might want to consider finding a more attractive industry segment to exploit. You can discover typical industry gross and net margins across almost 100 different industry segments at www.BizStats.com. This will in fact tell you whether you are achieving average industry margins or not.
You must develop a really good understanding of the market in which you operate and the individual top competitors in your space. The strategies employed by your competitors in relation to product, pricing, promotion and distribution should be well known to you. You must understand your relative position in the competitive landscape and appreciate the dynamics that drive your industry as well as the market participants and their individual market share. Maintaining this level of market scanning will allow you to anticipate market trends and to implement first mover business strategies that will deliver competitive advantage for your business.
Ensure your business goals are well defined and that you have a clear awareness of any competitive threats from the top competitors in your industry. Gain an understanding of where the market power lies in your industry and pay particular attention to the holders of this power. Try to implement strategies to counteract competitive threats to your business as soon as they occur. Be vigilant about the emergence of new entrants in your market and take actions to protect your business from encroachment if you can.
Every member of your team needs to keep their radar antenna up and gather market intelligence from their interactions with customers, suppliers and business associates and feed this information into a central repository in your business from where it can be shared with all employees.
When you have a pretty good understanding of your main competitors and how they compete, this allows you to anticipate some of their tactical moves and to respond to them in a timely fashion. It also enables you to make reasonable business judgements in relation to how you should price, promote and distribute your products. Nevertheless, your competitor knowledge will never be perfect and you will always have some room for improvement. Incomplete information can foster imperfect business decisions and strategies. The knock on effect of faulty decisions can be a drop in sales and a fall in profitability.
If your business goals are a mirror image of your competitors’ goals, then you will most likely see intense competition in your market which tends to drive prices down for all. It is better if your goals and tactics can be different from your competitors so that you may successfully compete on your own terms and build sustainable competitive advantage.
Even though you may not always be able to get firm confirmation of your competitors’ business goals, it is not a good idea to stop trying to tap lots of sources of information. Your competitors’ annual filed accounts can often be accessed online and certain assumptions can be made about their business, even if the accounts are in abridged format. Larger businesses which are listed on the stock exchange will have published accounts that will often disclose the market focus of competitors. This information can be obtained online or from subscriber databases such as LexisNexis.
The internet is a treasure trove of information about your competitors and you can even set a Google alert to let you know any time a competitor features in a newspaper or other publication. You can also get RSS feeds from relevant websites. All of these separate sources of information, when coupled with your first hand knowledge and market intelligence, can help you to make certain assumptions about competitor goals. This puts you in a position to make rational judgements and allows you to develop market focused business strategies that can work in favour of your business.