There is a great quote from Conrad Hilton I use regularly in my discussions with business owners.
“There are three kinds of companies – those who make things happen, those who watch things happen, and those who wonder what happened.”
While all business owners and leaders desire to be in the “make things happen” category, we can often struggle to pull all the right levers and make this a reality.
One lever I often see ignored or poorly understood, is the competitive reality of the target market. While it is never a winning strategy to simply copy or mimic your competitors, it can also be a fatal mistake to be ignorant of the competitive landscape. Often the most unpleasant surprises for a business come out of left field and are initiated by the competition. As Michael Porter has stated in several articles and books, “You know that to sustain long-term profitability you must respond strategically to competition.”
In other words, don’t copy your competitor’s moves but do understand how they influence the profitability of your industry so you can effectively exploit game-changing opportunities and trends.
The most effective tool I’ve employed for gaining these insights is Michael Porter’s Five Competitive Forces analysis. It not only brings clarity to the competitive structure of your market, but also highlights key factors you may not fully understand, and that require more thought and investigation.
In Porter’s model, there are five forces that shape competition:
- Threat of Entry – new entrants who bring new capacity, and a desire to gain market share that often drives down prices and profitability.
- Power of Suppliers – powerful suppliers capture more of the value for themselves limiting your profitability and limiting your ability to deliver differentiating quality and service.
- Power of Buyers – similar to powerful suppliers, powerful customers capture more of the value and play market participants off against one another.
- Threat of Substitutes – a substitute performs the same or a similar function as your product or service, but by a different means (e.g. plastic as a substitute for aluminum).
- Rivalry Among Existing Competitors – High rivalry limits the profitability of an industry, and can vary based upon intensity and the basis for the competition.
Learning and applying these concepts is an excellent leadership team exercise which should drive healthy discussion, and provide insights into the competitive marketplace and your business strategy. The outcome of the exercise is to identify strategic opportunities that exploit market structure and/or trends. This outcome will help you and your team answer the two most important questions when it comes to strategy:
- How will we beat our competition (now and into the future)?
- How will we make money while doing this?
If this article resonates with you, I recommend purchasing a copy of Michael Porters’ article entitled, “The Five Competitive Forces that Shape Strategy” from the HBR web-site. It’s an excellent article which provides helpful detail and all the information required to prepare for a thoughtful, collaborative leadership discussion.
Article by John Leduc