Knowing your competitors is also part of the job. In entrepreneurship, the neighbor’s grass matters! The goal of doing this is to understand the market and not allow the company to fall behind.
Michael Porter, creator of the Porter's 5 forces, understands that dealing with competition is essential for a good business strategy. However, he went deeper than it seems.
The author argues that competitors are not just similar companies. The market is strained by other factors that directly affect the company. These factors are called forces by Porter.
Porter’s 5 Forces
1. Rivalry among Competitors
Rivalry is one of the first forces an entrepreneur feels. It can be measured by the number of companies in the same field and the similarity of prices. The more similar companies, the higher the rivalry.
Understanding the level of rivalry is important to know which price best fits your real scenario. Moreover, it indicates which marketing strategies are necessary.
2. Bargaining Power of Suppliers
Suppliers can raise prices or reduce quality. This will certainly impact your business. If suppliers are few and sell to many buyers, the company needs to remain alert.
Therefore, the customer will have a significant impact if they lose the supplier, but the supplier will not be affected if they lose the customer. This gives the supplier room to act as they wish, which could harm the customer.
3. Bargaining Power of Buyers
With this power, customers can convince the seller to lower prices or switch to other suppliers. This usually happens when the purchase is large.
Other factors such as the buyer's purchasing power or level of knowledge also interfere with bargaining power. Therefore, it is necessary to assess where the company is and which customers it aims to attract.
4. Threat of New Entrants
New competitors come with novelties, strength, and desire. However, for them to gain space, someone else will have to lose. To reduce this, surrounding companies start to lower prices to regain buyer attention.
The way to reduce this threat is to operate in a more stringent market that has entry barriers. Thus, the number of entrants is reduced.
5. Threat of Substitute Products or Services
Even things that don’t have direct participation in your market influence it! New products can replace your service/product and reduce your sales.
For example: plants and sculptures are different markets, but both can be used to decorate a garden. Thus, when the customer opts for one, the other is losing a sale.