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“The essence of strategy is choosing what not to do.” - Michael E. Porter
When and why do consumers prefer your competitors? Is it because of the price or other quality offered? Are you sure you are not missing essential market insights, trends, and opportunities? What are your competitors' vulnerabilities? These are regular core questions asked in any marketing department aimed at generating qualified leads.
There is only one solution to these questions: start a competitor analysis and monitor data over time. The competitive intelligence gained will guide you toward the right marketing strategy, help you bring visibility into your standing in the industry, and give you a clear picture of which competitors to attack or avoid.
Where to start? To say it with Michael E. Porter’s words: “The essence of strategy is choosing what not to do.”
When running a competitor analysis, you can consider different models; the most famous one is Porter’s Competitive Forces (1985). This article explains the model, its practical application in B2B marketing, and its relevance in today’s market.
Porter’s Competitive Forces Model: Your Industry’s Very Own Avengers.
To begin with, Michael E. Porter (1947) is the founder of the modern strategy field and one of the world’s most influential thinkers on management and competitiveness: economist, researcher, author of 20 books and over 130 articles, advisor, speaker, and the Bishop William Lawrence University Professor at Harvard Business School and the director of the school’s Institute for Strategy and Competitiveness.
Now, Porter’s Model isn’t just another bedtime story. It is the key to unlocking the secrets of your industry’s dark and mysterious competitive landscape.
Companies use Porter’s model to develop strategies to increase their competitive edge. Porter’s model identifies five major forces that can endanger or enhance a company’s position in a given industry; these are:
1. The Threat of New Entrants
2. The Bargaining Power of Suppliers
3. The Bargaining Power of Consumers
4. The Threat of Substitute Products or Services
5. Rivalry among existing competitors
1. The Threat of New Entrants: The Internet - Where Competitors are Born Like Mushrooms.
The threat of new competitors entering your market is high when entry is easy. Barriers to entry, for example, include economy of scale, strong brand identity, marketing and PR power, cost advantage, etc. For most firms, the Internet increases the threat that new competitors will enter the market because it reduces traditional barriers to entry, such as the need for a sales force or a physical storefront. Today, competitors frequently need to set up a website and plan the right social media strategy to get started. And, just with that, the geographical reach of the Internet also enables distant competitors to compete more directly with an existing firm.
2. The Bargaining Power of Suppliers: Where the Internet Plays Cupid for Buyers and Suppliers.
Supplier power is high when buyers have few choices from whom to buy and low when buyers have many choices. Therefore, organizations would rather have more potential suppliers so that they will be in a stronger position to negotiate price, quality, and delivery terms. The Internet’s impact on suppliers is mixed. On the one hand, it enables buyers to find alternative suppliers and to compare prices more efficiently, thereby reducing the supplier’s bargaining power. On the other hand, as companies use the Internet to integrate their supply chains, participating suppliers prosper by locking in customers.
3. The Bargaining Power of Customers: the Power Play of Buyers, Buyers Everywhere.
This force examines the power of the consumer and its effect on pricing and quality. Buyers' power is high when there are many choices from whom to buy and low when buyers have few choices.
4. The Threat of Substitute Products or Services: When Choice Overload Makes it Too Hard to Choose
This force studies how easy it is for consumers to switch from a business’s product or service to that of a competitor. It examines the number of competitors, how their prices and quality compare to the business being examined, and how much of a profit those competitors are earning, which would determine if they can lower their costs even more. If there are many alternatives to an organization’s product or services, the threat of substitutes is high.
5. Rivalry Among Existing Competitors: The Battleground of An Enterprise
This force examines how intense the competition is in the marketplace. It considers the number of existing competitors and what each one can do. The threat of rivalry is high when there is intense competition among many firms in an industry, like in a “battleground of Enterprise.” The threat is low when the competition involves fewer firms and is less intense.
“Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time,” Porter wrote in a Harvard Business Review article.
References
Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard Business Review
Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review
Porter, M.E. (2001) Strategy and the Internet. Harvard Business Review, March link
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Download our Free Guide: How Porter’s Five Forces Can Help Your Businesses Analyze the Competition + Free Template.
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