All of us want to be competitive, we want to win over the competition. But do we really understand the competition and our competitive advantage? Without understanding the same, how can we create our Competitive Strategy
If we really want to understand Business at a macro level, I strongly recommend reading this book. This book is surprisingly simple and interesting, given its boring looking subject. Even though it was first published in 1980, and currently in its 60th printing edition, it still stands true.
The complete name of the book is Competitive Strategy: Techniques for Analyzing Industries and Competitors. This book is written by Michael Porter.
Who should read this book?
- All business owners, Directors, partners.
- CXO level people and those who think and drive strategies for their business.
- All students studying management e.g. BBA, MBA, B. Com, or any other Business or commerce course.
- Everybody who is planning to start the business.
- Stock Investors or Private equity investors.
Competitive Strategy. What this book is about?
Generally, we all think that we face competition from our peer rival, that they affect our competitiveness. But this is not true, In fact, there are FIVE factors.
This book helps us in analysing our company, our industry and our competitors and how competitive all of these are. The ideas discussed will surely redefine the way we look at ourselves and our strategy towards our business.
Five forces of Competition
- The threat of Entry.
- Threat of Substitution
- Supplier Bargaining Power
- Buyer Bargaining Power
- The intensity of rivalry.
So, in order to stay profitable and stay in business for a long time, we have to make sure that we defend ourself against these five forces and also manage them in our favour.
Now let us consider each of these five forces in some detail.
Threat of Entry
In some business, the barrier of entry is very low, in terms of capital or skill requirement. Consider Computer Hardware and System integration business or boxed computer Software selling. The threat of new entrant is very high.
As compared to this developing and selling CRM, is very heavily protected against new entrants. The long gestation period of product development and the risks involved with it, make it slightly difficult. Also, it is not easy for any customer to switch a platform like CRM, as switching costs are high.
There can various types of barriers, e.g.: Technology, economies of scale, financial investment, switching costs, Govt Control or license etc. However, in current times excellent Customer service (loyalty) is the biggest entry barrier for our competitors. If the threat of entry is very high, then our business will be in a permanent struggle for revenue and profitability.
Threat of substitution
Laptops and desktops are very rapidly getting substituted by Mobile Phones. In-house, IT infrastructure is getting replaced by Cloud technologies. Cameras, Music Players, Landline Phones, etc all got substituted by Mobile Phones.
In today’s world, having excellent customer service is perhaps the best way to improve our competitiveness.
Cheaper and high performing substitutes are bigger threats to any business or Industry. If Electric vehicles become cheaper and sustainable then they may replace fuel-driven vehicles, which may, in turn, collapse entire petro Industry and petro-nations.
Bargaining power of Supplier
If your suppliers are very large MNCs, then they control the pricing and market policies. If we are their buyers or their dealers, then we have very little say over the conditions.
In these situations, it is always better to have multiple suppliers or alternatives. Better would be to focus and work with smaller and local suppliers, which will have more equal relationships with us.
E.g.: rather than becoming resellers of a very well known brand of software, it is better to work with smaller and local companies, which will take care of us in a better way.
Bargaining power of Buyers
This scenario is very similar to having powerful supplies. If we have created an entire business on a single (or few) client, we always face the danger of extinction or bullied by our large buyers. If those buyers stop buying or demand lower prices, we have to bulge.
This is one of most talked about the competitive threat, if our rivals have lower prices, better customer service, better advertising and marketing, or new products, it badly affects our competitiveness.
Competition on dimensions other than price – on product features, support services, delivery time, or brand image, for instance – is less likely to erode profitability because it improves customer value and can support higher prices.Michael Porter
In most of the Industries, businesses fight on pricing, but that is not effective. In fact, reducing prices is the sign of immature sales strategy and process.
How to handle or fight these competitive threats?
Every factor will have its own strategy, based on our strengths and weakness. Here the role of the entrepreneur plays a major role. Because it depends on our strategy.
We will have to design our strategy for each of our products and offerings for each of these five forces.
What is strategy?
This is one of the most misunderstood terms. Here is a very small video by Michael Porter, where he defines what is strategy. Check the video.
The essence of strategy is choosing what not to do. The chief strategist of an organisation has to be the leader – the CEO.Michael Porter