Securing competitive advantage
Before spending a single dollar launching your new venture, you should have a clear view of how it is going to compete in the market and, importantly, how it will achieve competitive advantage. Your business strategy should take into account not only the actions and reactions of direct competitors, but also the position of suppliers and customers, availability of alternative products that satisfy the same basic need, and the prospect that new competitors will enter the market.
A common tool used to divine competitive strategy is Porter’s framework of five competitive forces, which provides a market-based analysis of the industry and your venture’s competitive strengths and weaknesses. The ‘five forces’ are:
1. Rivalry among existing competitors
The degree and nature of competition among rivals in a growing market with myriad, equal-sized competitors will differ considerably from that of mature markets with fewer, larger competitors. It is important to understand the locus of competition – price, service, advertising, or product innovation – and how this competitive dynamic will change in response to new entrants (e.g. aggressive price discounting or advertising battles).
2. Power of customers
Consumers “compete” with industry participants by demanding cost reductions, improvements in service and quality, and playing competitors off against one another. The greater the degree of “consumer power,” the more competition there is (eroding profitability). One of the primary sources of consumer power is access to information about competing products. Where information access is symmetrical, consumers can more readily compare products and prices. Witness, for example, the dramatic changes to the travel industry occasioned by increased consumer access to fare and flight details via the web.
3. Power of suppliers
Suppliers, too, can influence the competitive landscape by increasing input cost prices, restricting supply or altering the quality of raw materials. If there are fewer suppliers, or intense demand (as in the case of the resources industry), then suppliers are well positioned to dictate trading terms.
4. Threat of substitutes
In all markets there is a degree of product substitution. Consumers can substitute one brand of dog food for another, in the same way different model cars, mobile phones and TV sets are substitutable. The easier it is for consumers to substitute one product for a rival product providing the same function, the greater the competition and the harder it is to extract premium profit margins.
5. Threat of new entrants
This is perhaps the most dominant force influencing the nature of the competitive landscape. High barriers to market entry discourage new competitors, lowering overall competition within the market.
The most common barriers to entry are high capital requirements (such as investment in manufacturing plant and equipment), scale economies (where the cost of producing a product decreases as volume increases), product differentiation (where existing products have high consumer loyalty), government regulation, and ‘absolute cost’ (where one or more competitors have non-replicable advantages, such as proprietary technology or access to cheaper raw materials).
Once you have fully analysed these competitive forces, you will be in a position to determine the path to obtaining sustainable competitive advantage; that is, a unique, value creating strategy that places your venture apart from its competitors and which these other firms are unable to duplicate.
Examples abound, but the two most common sources of competitive advantage are superior skills – in the form of management and workforce talent and industry experience – and superior resources, including proprietary technology. These advantages provide a basis for pursuing a competitive strategy focusing on, for example, superior product quality, low cost production techniques, exclusive distribution channels, brand positioning or an extreme customer and service focus.
Mark Neely is a lawyer, technology commercialisation consultant and the author of 10 books, including The Business Internet Companion.
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