Understanding Competition – to enter or not enter? 

by  Joanne Mansell.

 We tend to think of competition as a bad thing – buyers deciding who to buy from based purely on price.  It is hard to distinguish yourself from your competitors.  At the other extreme you can have a brilliant product “whose time hasn’t come” and you are fighting an uphill battle because you need to sell people on the IDEA as well as the product.

 What do you do about it?

 What your business and products need is an industry which has enough competition to not have to blaze the trail, yet not too much competition.  How do you know??!

 The five forces model comes from the work of Michael Porter.  The purpose is to define the competitiveness of an industry as an indicator for entry – should you go into the industry or not?  Some competitiveness is required so that the market will be “hungry” for the product, yet too much competition is likely to undermine profit and therefore a new entrant is unlikely to succeed.

 1.                    Barriers to Entry.  Principle: How costly is it to get in to this industry?

 Factors which affect cost include distribution, economy of scale, differentiation of product or brand, and learning curve.  Franchising can be a good option – the product is known, you have the brand power of a parent company, and the set up costs of buying equipment may be cheaper.  Working from home or a virtual office can also reduce the costs of setup and make it cheaper to get in to the industry.  Government action can be a barrier to entry by high costs of licences, certification or permits and you also need to consider the impact of foreign exchange rates and import/export costs.

 If times are tough in your industry you may like to “shop around” to find another industry you can branch out into.  Sydney company Medicraft now makes hospital beds.  They used to make frames for mesh handbags (the type often known by the trademark name of “Glomesh”) until that market was flooded by cheap copy bags from overseas.  The Geisser family realised their expertise (and factory set up) was in making metal products.

 2.                    Rivalry Among Competitors.  Principle:  how does competition affect you?

 Competition can grow your business - Large competitors can help you to promote your market.  If industry leaders start promoting a product it can help create a market for yours – as long as you tell customers you also offer that product or service. 

 Who are you competing with? - Consider how to form alliances with competitors, or at least strategic interrelationships.  Can you form a co-operative and advertise as a group?  This happens particularly in the tourism industry.  A locality of bed and breakfast providers will share advertising and perhaps create a website which allows them to appear alongside large competitors.  In this case you are no longer competing with other local B&B’s but all of you are competing with the large hotel chains.  The first decision the consumer makes is what accommodation level to go for (B&B or hotel) and then choose between the B&Bs – by working as a group you have broken in to a market that otherwise was out of reach.

 3.                    Suppliers.  Principle: Effects of suppliers upon your business.

 When deciding the business or industry to work within you must consider the impact suppliers have on you.  If your only input is reams of paper you have a lot of choice.  If you require a particular screw that is imported from overseas you are less in control of your business.  Your quality and ability to product your product is threatened by supply and changes the raw materials (price or quality).  Consider the cost to you of retooling (if they switch from imperial to metric or change supported computer hardware).   Is the survival of your business tied to one supplier – the most common example for this is that you become known for a flagship product – you then are at their mercy.  If they put prices up you cannot change to a competitors product. 

 4.                    Buyers/Customers.  Principle: whare are the buyers doing?

 Who are the buyers?  What can they switch to?  What are their demands in terms of profit or quality? The two angles for marketing are to satisfy a large number of buyers with a generic product or to tailor a product to a small number of (higher price) buyers.   Is one of these segments more suited to you than another?  Should you be in both with different products?

 Consider consultants (such as myself as a “life coach”) – I provide individual attention to one person at a higher hourly fee, or clients can come to a workshop or seminar at a lower cost (per hour) and receive general information.  This is having the same base product or information but varying the price to suit the needs of the buyer or customer.  Can you do this in your business?  What is the trend in your industry – towards specialisation or generalisation?

 5.                    Substitutes.  Principles:  What else would do or can [buyers] do without?

 This is the threat of substitution or “doing without”.  For some businesses or industries a threat is that clients will do it themselves (even when it produces a poor quality end result).  Is this a threat to your industry, business or product?  What is the best way for you to deal with this?

 How do I apply this?

 Examine the industry you are in or intend to move into. 

For your products consider the following summary:

 1. Barriers to Entry.  Key question: How costly is it to get in (or stay in) this industry? 

2. Rivalry Among Competitors.  Key question: Does competition help your business (through recognition or alliances) are you spending time, money and effort competing rather than producing?

3. Suppliers.  Key question: What are the effects of suppliers upon your business – are you dependent or is your relationship synergistic? What are the alternatives?

4. Buyers/Customers.  Key question: Whare are the buyers doing, what products do they want?  Is the trend towards lower cost or higher quality? What is their perception of “value” in relation to your product(s)?

5. Substitutes.  Key question: What else creates the outcome of your product or service – can customers “do without”?

 The answers to these questions will help you decide what industry, products and services you should be in and how to market them.  What is the best way for you to compete – or should you be competing at all?

 For more information on these concepts, or to book a business or life coaching session with the author, Joanne Mansell please phone 0416 181 654.  The first half hour consultation is complimentary.  For more articles (including business planning basics) see www.kaizencoaching.com.au

 Joanne Mansell, Kaizen Coaching – “Mind, Body, Life Fitness”

(c) Kaizen Coaching 2000-2004. Trademarks Kaizen Coaching, Building an Extraordinary Business and Sportsmind are used with permission of their respective owners.