When building a business or joining a business competition, one of the most frequently asked questions is: Who is your competitor? It’s easy to map a direct one like Apple vs Samsung or Playstation vs Nintendo. But is it enough?
To solve this problem, Porter proposed a solution called Porter’s Five Forces in 1979 to assess and evaluate the competitive strength and position of a business organization. This is the theory:
Porter’s theory is based on the concept that there are five forces that drive competition and attractiveness of a market. These five forces are:
- The threat of new entrants: The first to assess is how hard it is to enter a particular market. For example smartphone market vs road-side restaurant. It’s easy to see that smartphone market has a greater barrier to enter as it requires a lot more capital cost to start a business in this market. The other things to consider are patents, government policies and economies of scale. The bigger the barrier for your business the better as there’s a smaller chance new competitor to pop-up in the future.
- Products or services substitutes: A lot of times, direct competition is not always the biggest competition. Take OTA (online travel agency) business for example, Traveloka or Tiket.com competition is not only a travel agency but also a home entertainment service, like Netflix or Nintendo. Why? Because these businesses are stealing customer’s will to travel outside home and decided to stay-at-home.
- Bargaining Power of Supplier: The other important thing to consider is our business’s supplier. Is it easy for them to drives up prices? Is it for us to search for another supplier? It is an important aspect to assess to make sure our business could run in a stable and not be bothered by our supplier in the future.
- Bargaining Power of Buyer: Beside supplier, the other important aspect to assess is our buyer. How easy it is for our customers to drive prices down? Is it easy for them to search for other products similar to ours? With e-commerce becoming popular, it is really easy for customer to compare prices from one product to the others, so preparation for this aspect is a must.
- Competitive Rivalry: The last aspect is our direct competitor, which is the one that offers similar and undifferentiated products or services. Like Apple, Samsung, Xiaomi, and Huawei on the smartphone market. The more competitor we have will reduce market attractiveness. So it’s best to first know who is our direct competitor and whether we could devise a strategy to face them on this particular market.
So there are the five forces proposed by Porter to map competition. This tool is really great and easy to use, whether it is for starting a business or a business competition. We need to first know our competitor before going on how our strategy will be to enter a market.
Got any questions? Please don’t hesitate to ask in the comment section. Good luck and happy learning!