Marketing Environment & Competitor Analysis
In a marketing environment, a competitor analysis is a crucial part of a small business’s overall strategy and should include a thorough assessment of the strengths, weaknesses, opportunities and threats of current and prospective competitors as well as the political, economic and technological influences that affect the way in which a business competes. One of the most effective tools for assessing the competitive landscape of a business is the Five Competitive Forces model developed by Michael E. Porter of Harvard Business School. Before making any strategic decisions, small businesses should use these five forces as a foundation for developing a strong analysis of the competition.
Threat of New Potential Entrants
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This external force refers to the potential competitors that are not currently in the market but have the capabilities and resources to compete. When markets are profitable, they become attractive to new businesses; this increases capacity but decreases profitability. The decision for a business to go into a new market depends heavily on the barriers to entry or obstacles that dissuade new competitors from entering. High startup costs, existing patents, government regulations and licensing requirements are examples of barriers to entry.
Threat of Substitute Products
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Substitute products are identical or similar products from different manufacturers that effectively satisfy a customer’s needs at a lower price and can lower industry attractiveness and profitability because they restrict price levels. The threat of substitute products or services depends on a buyer’s willingness to substitute a product, the relative price and performance of substitutes and the costs of switching to substitutes.
Bargaining Power of Suppliers
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Suppliers of raw materials, equipment and components – or markets of inputs -- can control the supply chain and heavily influence pricing and terms when there are few substitutes in the market. The more concentrated and controlled the supply, the less negotiating opportunities a business has. A supplier’s bargaining power increases if the following factors apply: Switching suppliers is too costly, a supplier's input can't be provided by anyone else, or the input is an integral component of a company’s product. The power of suppliers can be an important economic factor in the marketplace because of the impact they can have on customer profits.
Bargaining Power of Buyers
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Buyers are the customers – or market of outputs – and they have the power to affect price and terms of purchases. By putting pressure on an industry to lower prices and improve quality, influential buyers can reduce the profitability potential of a business and increase competition in the industry. The bargaining power of buyers can be strong or weak. Buyers are strong when they buy in large volume, substitute products are available or the supply chain is varied. These factors can change over time and should be regarded as a possible threat in a competitive analysis.
Rivalry Among Competitors
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Rivalry for market share among industry competitors can range from low to extreme, and the level of intensity refers to the extent to which businesses within an industry put pressure on one another. The intensity of the rivalry can pose a threat to an industry as a whole by limiting profit potential when competitors forcefully target one another’s markets and aggressively price products to gain the business. Several factors determine the intensity of rivalry, including the extent of exit barriers, amount of fixed costs, number of competitors in the industry, growth rate of the industry and demand conditions.
References
- Harvard Business Review: The Five Competitive Forces That Shape Strategy
- Competitive Strategy: Techniques for Analyzing Industries and Competition; Michael E. Porter
- Management Study Guide: Porter’s Five Forces Model of Competition
Writer Bio
Based in Wilmington, N.C., Melissa Warren has been writing professionally for more than 10 years. Her work has appeared in “Our State” magazine and other regional publications. Warren holds a Bachelor of Arts in English with a certificate in professional writing from the University of North Carolina in Wilmington.