After coming up with a business idea, filling out the business model canvas and developing the company’s mission, there is still a missing piece which needs to be adressed to sustain long-term business success: you must reflect upon and strategically respond to your competition. Naturally, one thinks of established rivals and direct competitors, however four additional forces can hurt prospective profits:
Consider commercial aviation: It’s one of the least profitable industries because all five forces are strong. Established rivals compete intensely on price. Customers are always searching for the best deal regardless of carrier. Suppliers—plane and engine manufacturers, along with unionized labor forces—bargain away the lion’s share of airlines’ profits. New players enter the industry in a constant stream. And substitutes are readily available—such as train or car travel.
Through understanding how the five competitive forces influence profitability in your industry, you can develop a strategy for enhancing your company’s long-term profits. Porter suggests the following:
In the heavy-truck industry, many buyers operate large fleets and are highly motivated to drive down truck prices. Trucks are built to regulated standards and offer similar features, so price competition is stiff; unions exercise considerable supplier power; and buyers can use substitutes such as cargo delivery by rail.
To create and sustain long-term profitability within this industry, heavy-truck maker Paccar chose to focus on one customer group where competitive forces are weakest: individual drivers who own their trucks and contract directly with suppliers. These operators have limited clout as buyers and are less price sensitive because of their emotional ties to and economic dependence on their own trucks.
For these customers, Paccar has developed such features as luxurious sleeper cabins, plush leather seats, and sleek exterior styling. Buyers can select from thousands of options to put their personal signature on these built-to-order trucks.
Customers pay Paccar a 10% premium, and the company has been profitable for 68 straight years and earned a long-run return on equity above 20%.
With the advent of the Internet and digital distribution of music, unauthorized downloading created an illegal but potent substitute for record companies’ services. The record companies tried to develop technical platforms for digital distribution themselves, but major labels didn’t want to sell their music through a platform owned by a rival.
Into this vacuum stepped Apple, with its iTunes music store supporting its iPod music player. The birth of this powerful new gatekeeper has whittled down the number of major labels from six in 1997 to four today.
Use tactics designed specifically to reduce the share of profits leaking to other players.
Think about how the 5 forces influence your own business and what you can do to exploit or reshape them, or what you can do to position your business beneficially to gain a competetive advantage.
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NOTE: This model was not created by us. It was developed by Michael E. Porter and refurbished in the Harvard Business Review. To read the full article via: https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
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