Meeting competitive threats in a tight market
Monday, 21 April 2008
By Louis Coutts
There isn’t any doubt that things are getting tighter in the market place. This means that the sustainability of businesses will be influenced enormously over the next couple of years by their ability to respond to the various competitive threats that have traditionally influenced business profitability.
I have spoken before about the Harvard guru on the concept of competitive advantage. Back in 1985 Michael Porter published a book called “Competitive Advantage” which is still a classic in the literature of competition, and in it he identified five competitive threats that influence profitability. It might be worth your while to reflect on them and determine the extent to which you need to factor them into your business plan during the challenging times ahead.
He reduced the concept to a diagrammatic form as follows:
Porter takes over five hundred pages to provide explanations for his concept and the following is a poor but hopefully useful summary.
The centre box represents that area of competition of which we are most familiar and that consists of our known and direct competitors. Some industry, observation and bench marking helps us understand what our competitors are up to and we try and stay ahead of the pack.
However, we tend not to be as aware of the other threats. For instance, not too long ago there were numerous choices for office supplies. That was before Officeworks came along. Where have all the local office supply shops gone?
Quite a few, who had done very well over the years, are out of business. They didn’t see or respond to the threat of a new entrant. Quite a few businesses in the past few years have lost shelf space with the major supermarkets to Asian products that package food in Asia less expensively than we do here in Australia.
In the bottom square we see the term “substitute products”. How many corner printing shops have gone out of business because they didn’t see the impact that the computer, desk top publishing software and cheap printers would have on their business? The sugar industry suffered a real set back with the introduction of the product “Equal”, and that is not to mention the cork industry which has been decimated by the introduction of the screw cap.
We then see in the left box “Suppliers”. I have seen so many businesses at a competitive disadvantage through failure to recognise the power of the supplier.
Some businesses thought that they were smart because they delayed payment to suppliers and invested the money on the short term market. They pointed to the revenue generated by constantly having a month of supplier money invested over 12 months. Guess what! They didn’t factor in the reason their competitors were beating them on price in the tender process. The reason was that the supplier decided which organisation deserved a better price and the winner was always the business that didn’t screw them.
Finally, there is the box “Buyers”. Customers are fantastic but we have to constantly keep in mind that they have the final decision on which business deserves their loyalty and dollar. A lot of businesses make the mistake of bending over backwards to get big customers without factoring in the extent to which the customer might control them. The greater the business is on the support of an individual customer, the greater the exposure and the easier it is for the customer to dictate the terms upon which it will continue to support the business or go elsewhere.
Often the threats to our business emerge from unexpected quarters. What this concept of Porter does is to create an awareness of the necessity to be multi dimensional in the way we organise our business. When we drill right down into these issues we see how important it is to be aware of what is going on in the market place.
It is rumoured that Howard Hughes saw a demonstration of a television set when he owned a host of cinemas. He decided on the spot to sell his cinemas.
The organisation that is internally dysfunctional to the point that it upsets its customers will often blame a cost cutting competitor for taking work away without giving credence to that immutable rule of management: “The customer is always right.”
Times are such that we need to be much more aware of these various factors and those who are able to adjust will find the going a lot easier than those who bury their head in the sand.
Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.
To read more Louis Coutts blogs, click here .
Advertisement
