Five Forces of Competition

When I advise clients and ask about competition, their first answers are about immediate competitors in their industry; other companies offering broadly similar products or services in the same market place.

This is valid of course, and we need to assess the relative strengths and weaknesses of such competitors using techniques such as Charting the Competition. Every business needs to know what it can excel at in relation to competitors in order to understand where it has Competitive Advantage.

But there is a bigger picture.

The competitive environment is  more complex than simply rivals ‘jockeying for position’. While rivals are looking at each other, the world around them is changing and threats are appearing behind them all, from left field, and other directions. These are the other four forces of competition.

Harvard University Professor Michael Porter defined the ‘Five Forces of Competition’ as follows:

1. Rivalry between existing firms in the current marketplace
2. The threat of New Entrants to the market place
3. The threat of Substitute Products
4. Bargaining Power of Suppliers
5. Bargaining Power of Buyers

These larger factors can make an industry less attractive for ALL players, or totally undermine or transform an industry. These wider forces often go unnoticed because enterprises are focused only on immediate rivals – even while the world around them all is changing radically.

Businesses in the creative industries, especially design, media and technology companies, need to keep a lookout for changes in the wider competitive environment in order to devise their business strategies.

The Threat of New Entrants due to low ‘barriers to entry’

This force of competition is particularly relevant in the creative and digital industries.

It’s easy for new businesses to start up because the cost of technology and equipment is very low and there are few regulatory restrictions. Put bluntly, anyone can set up as a web designer or video maker with inexpensive equipment and no requirements for professional qualifications. (In contrast, for example, it requires a lot of capital to enter manufacturing and lawyers need qualifications.)
This offers exciting possibilities for new businesses; at the same time, existing firms don’t feel threatened by the inexperienced new kids on the block. But the bigger picture is that supply increases rapidly, even in a growing market. The shift in the supply and demand balance of power between suppliers and customers, increases the Bargaining Power of Buyers, and drives average prices down, making it harder all companies to make profits.

The answer? Move into areas where rivals cannot follow because there are barriers to entry due to specific expertise, access to equipment, financial requirements, ownership of intellectual property or regulatory restrictions. Move to the ‘high ground’ in your industry where new entrants cannot follow.

This concept of wider competitive forces makes it imperative that we constantly keep a lookout in the changing business environment using techniques such as PEST Analysis and the ICEDRIPS checklist.