2.4 Competitive Analysis
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Competition analysis is mentioned in the same breath with the five forces model of Porter. How exactly? We are going to identify five competitive forces in your market. Ultimately, the competitive analysis gives an overview of the competitive forces at play in your market. This competition forces you to identify your market opportunities and threats.
Five forces model as a tool
Since the American professor Michael Porter in 1979 presented his five forces model, the model is no longer possible to imagine contemporary marketing. The article “How Competitive Forces Shape Strategy” (Porter, M. 1979. How Competitive Forces Shape Strategy. Harvard Business Review, 1979 March April.) Published in the Harvard Business Review is prized by marketers around the world.
Why a competitive analysis with five powers?
Competition is not only in the battle between players within a given market, but goes beyond that according to Porter. It is just too simple and short-sighted to limit your thoughts about competition to your direct competitors in the industry. Porter makes the following statement about the relationship between strategy and competition.
The essence of strategy is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically.Michael Porter
This clearly states that competition is a leading factor in determining strategy. However, it is a mistake to limit your view on competition to your direct competitors. To get the competition according to the five competitive forces of Porter in the picture, you have to perform the competitive analysis.
Michael Porter shows in his article that the nature and extent of competition in a particular sector depends on the following five forces;
• threat of new entrants
• bargaining power of customers
• bargaining power of suppliers
• threat of substitute products (optional)
• maneuvers among current participants in the industry
Competition vs. competitors
Time to correct a common mistake once and for all. The terms of competition and competitors are often used wrongly. Let us look at these terms through Porter’s eyes.
Can be read as a (competition) “force”. Various forces can externally influence a company.
These forces are not only confined to the market in which you are active, but also from potential entrants; customers, suppliers and substitutes. The competition brings these five forces analysis in view.
Are specific providers in the market. The competitor analysis focuses on the characteristics of these individual players. The competitor analysis is used to identify the internal competition (industry competition).
Is focused on the five-competitive forces.
Is focused on the direct competitors within the industry.
Make Competitive Analysis
The article by Porter includes several factors per competitive power which you as a marketer should look at. Below an overview of these factors for your competitive analysis. This link specifically deals with the five forces model.
intensity of rivalry
The following factors, according to Porter, may affect the intensity of rivals between themselves.
• large number of direct competitors or competitors are roughly as powerful
• the growth and innovation of the industry is limited
• The product has limited degrees of differentiation between themselves and switching costs are low
• fixed costs are high, or the product is perishable
• Capacity is strongly linked to production periods with a short duration but with large amounts that enter the market
• exit barriers are high. It’s hard to leave the industry through certain assets
• parties are very different in methods they approach the market
bargaining power of customers
According to Porter, the power of customers can be high when;
• this is concentrated and / or purchased in large volumes
• the products are standard and undifferentiated
• the products are only a fraction of the value of the final product
• customers have low profit margins, this creates an incentive to put pressure on prices
• the product is not, or to a lesser extent important for the quality of the final product
• the product has not saved money for customers and will not be earned back by the customer
• the threat is real that customers are integrating backwards into the supply chain
bargaining power of suppliers
According to Porter, the power of the supplier can be high when;
• The industry is dominated by a few suppliers which are more direct competitors than suppliers
• the products are highly differentiated from each other
• products have a high degree of switching costs
• it has nothing to do with other products that the industry requires
• plays a potential threat in which suppliers integrate forward within the value chain
• The industry is a minor consumer of the suppliers group
threat of substitute products
Possible substitutes that deserve the most attention, according to Porter;
• A. substitute products that are subject to trends using their price-performance ratio improved in comparison to the current product within the industry.
• B. are produced by industries that achieve high profit margins. Porter meant by this that sectors with high profit margins have the means to rapidly design products with better price-performance ratios.
On this last point, I would like to make a nuance. When Porter published his article in 1979, greater capital was required for development. In my view Technological Development ensured that large amounts of capital are not always required to develop a better price-performance with a substitution product.
Spotify is a good example. The Swedish company has grown as a startup with limited capital – compared with traditional music distribution – a new standard in the music industry. This while it was a substitute in the beginning for traditional music carriers.
This is of course not always the case. In my opinion: capital nowadays is less frequently required by development than before. Obviously there are still examples of substitutes that needs capital-power – in comparison to the traditional industry – to develop a better alternative.
threat of new entrants
According to Porter, there are 6 main sources that make it difficult to enter the market
1. Economies of scale
2. Product differentiation
3. capital requirements
4. Cost disadvantages independent of size
5. access to distribution channels
By following scenarios the risk of potential entrants is possibly reduced.
• the incumbents possess substantial resources to fight back
• likelihood that incumbent firms will reduce their prices to maintain market share
• low growth in the industry, making it difficult for a novice to take on the industry
Conclusion Competitive Analysis
After developing your competitive analysis, you need to formulate the conclusion in the form of opportunities and threats. This can be done as follows.
1. Describe the different competitive forces using the five forces model. Also take trends and ‘expected’ situation with you in your competitive analysis.
2. Describe in a concise summary of the most important factors in your competitive analysis. Work with a three-point scale (low, medium, high) or with a five-point scale (very low, low, medium, high, very high). Enter a value for each factor for the “current situation” and “expected” situation.
3. Process the summary to specific opportunities and threats. For example, “suppliers-power is steadily increasing in the next 3 years, by reducing the number of quality suppliers.” Lets you process the competitive analysis to specific opportunities and threats that provide input to the SWOT matrix and confrontation.
Five forces model in practice
For experienced marketers the five forces model is a widely used tool for competitive analysis. The model is to commit to specific product-market combinations (abbreviated PMCs), brands or business units.
Input for confrontation matrix
It is advisable to use the competitive analysis in combination with the SWOT matrix and confrontation. This approach yields a picture of the market-fit on. From this you can optimize internal factors for your market.
Criticism of the five forces model
The five forces model is not only hailed as competitive analysis. For example, the model would be too much reasoning from existing markets. Players who innovate a strong market often come not from the industry itself but from outside. So Spotify threw the music market at loggerheads without having previously part of it out. Or Tesla came up with an alternative to the existing automotive industry without ever having a car made before.
Another example of “strategic innovation” comes from the German company Hello Fresh. Serving as home-delivery grocer sells meals with healthy recipes subscription. Hello Fresh has before this “new market” had never created a position in the existing supermarket world.
Pay attention to product development and innovation by parties outside your industry. Competition analysis is not a crystal ball, but it offers guidance to reflect on the forces that cater to your business.
How to deal with highly innovative newcomers to the market a new standard in determining whether a new niche to tap into the existing market? Take in your competitive analysis points below them.
1. Determine if it is a substitute or an entrant in the existing market. in the example of Spotify, you could call it a substitute of traditional CDs where the shape of the product and the experience here has changed significantly. In the case of Tesla concerns (in my view) a ‘innovative new entrant’ to the existing automotive market.
2. If the industry for a long time is hardly innovated, it is highly advisable to ascertain how likely (or threat) is that this is going to happen. Challenge yourself and your organization to get an answer to this question. Forget technological innovations – for example related markets – not in your thought experiment.
Paul van Vlissingen, in his book the following statement made on the prediction of tomorrow (van Vlissingen, P. 2007.
Entrepreneurs are donkeys, page 190. Publisher Balance.).
Entrepreneurship is working in the world of tomorrow, estimating that world will be decisive for success.Paul van Vlissingen
Since 2012 I'm working on the development of the 7 step Marketing Method. " Marketing accessible to everyone" that's my goal as an entrepreneur and marketer.