5.0 THE COMPETITION (START AT TOP OF PAGE)

5.1 Overview of Competition

Competition varies widely across industries. Michael E. Porter, Professor of Business Administration at the Harvard Business School and a leading authority on competitive strategy and international competitiveness, developed the “Five Forces” model of competitive analysis (see Figure X) to help firms understand their environment and make better strategic decisions (for more information see Competitive Strategy: Techniques for Analyzing Industries and Competitors, by Michael E. Porter, 1980, Free Press). The following subsection discuss each of the Five Forces of competition for the ___________________ industry.

FIGURE X

Porter’s Five Forces Model of Competition

5.1.1 Rivalry Among Competitive Firms

Rivalry is usually the most powerful of the Five Forces. The strategies one firm pursues can be successful only to the extent that they provide a competitive advantage over other companies. Strategic changes by one firm may be met by counter-actions, such as price reductions, quality enhancements, new features, additional services, extended warranties, or increased advertising.

Rivalry becomes greater among competing firms for the following reasons:

(1) the number of competitors increases;

(2) competitors become more equal in size or capability;

(3) demand for the industry’s products declines; and

(4) price cutting becomes more common.

Rivalry also increases when consumers can switch brands easily, when barriers to leaving the market are high, when fixed costs are high, when the product is perishable, when rival firms are diverse in strategies, origins and culture, and when mergers and acquisitions are common. As rivalry intensifies, industry profits decline – sometimes to the point where an industry becomes inherently unattractive.

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5.1.2 Potential Entry of New Competitors

When new firms can easily enter an industry, competition among companies increases. However, barriers to entry can include the need to gain economies of scale quickly, the need to access technology and specialized know-how, lack of experience, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw materials, possession of patents, undesirable locations, counterattack by entrenched firms and potential market saturation.

Despite numerous barriers to entry, new firms sometimes enter industries with higher quality products, lower prices, or substantial marketing resources. The strategist’s job is to identify potential new firms entering the market, monitor the new rival firms’ strategies, counterattack as needed and capitalize on existing strengths and opportunities.

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Could add a text box – if appropriate.

5.1.3 Development of Substitute Products

In many industries, companies compete closely with producers of substitute products in other industries. For example, steel framing has become a substitute to the traditional wood framing used in housing construction. The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product.

Competitive pressures arising from substitute products increase as the relative price of substitute products declines and consumers’ switching costs decrease. The competitive strength of substitute products is best measured by the inroads into market share those products obtain, as well as those firms’ plans for increased capacity and market penetration.

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5.1.4 Bargaining Power of Suppliers

Suppliers’ bargaining power affects the intensity of competition in an industry, particularly when many suppliers are present, few input substitutes exist or switching inputs is especially costly. It is often in suppliers and producers’ best interest to assist each other with reasonable prices, improved quality, new services, just-in-time delivery and reduced inventory costs, thus enhancing long-term profitability for all companies.

Companies may pursue an upstream integration strategy to gain control or ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly or incapable of meeting the firm’s needs on a consistent basis. Companies can generally negotiate more favorable supplier terms when upstream integration is a commonly used strategy among rival firms in the industry.

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5.1.5 Bargaining Power of Customers

When customers are concentrated, large, or buy in volume, their bargaining power represents a major force affecting industry competition. Rival firms may offer extended warranties or special services to gain loyalty when the customer’s bargaining power is strong. Customer bargaining power is also higher when the products purchased are commodities or have little differentiation. When this is the case, consumers can often negotiate selling price, warranty coverage, accessory packages, and other variables to a greater extent.

ADD ONE PARAGRAPH THAT SUMMARIZES YOUR INDUSTRY (WEAK, MODERATE, OR STRONG)

5.2 Current Competitors

IDENTIFY AND DISCUSS THE KEY COMPETITORS.

THESE SHOULD BE FIRMS THAT YOU WILL COMPETE AGAINST DIRECTLY IN THE MARKETPLACE (USUALLY LOCAL FIRMS – LOOK IN THE YELLOW PAGES). DISCUSS THE DIFFERENCES BETWEEN YOU AND THESE FIRMS.

ULTIMATELY, THE QUESTIONS YOU SHOULD ANSWER ARE HOW ARE YOU DIFFERENT AND WHY WILL YOU SUCCEED AGAINST THE COMPETITION.