Why is it important for any business to understand its industry and competition? How can the business sustain its advantage by doing so?
Any business in an open market is going to experience attacks from multiple fronts. Hence it's necessary to find the right place to defend. To find this right place to bunker/charge, we need to look around. In the business context, we need to understand the industry and the competition. Porter’s five forces explore more into the question of ‘how to find the correct position’ and the resultant advantages.
Porter’s Five forces:
The competing companies themselves aren’t the only factor that defines the state of competition of an industry — other forces include the threats from new entrants and substitute products and the bargaining power of the suppliers and the buyers. These are five competitive forces, as termed by Michael Porter. The lower the strength of these forces, the better chances for superior performance. The following image describes the same.
Keep finding a cozy spot: A corporate strategist’s task is to position their company in the industry in such a way that it experiences the mildest amount of these five forces. Asking the following questions would help in identifying this position: What are the barriers to entry?; Is the product technologically optimum (metrics: viable, feasible, affordable)?; How powerful are the buyer and supplier resources (physical and economical)?
Find magnitudes of the forces: All the forces are going to have different magnitudes, so the positioning of a company in a competitive market first and foremost involves identifying these magnitudes. A good way to identify magnitudes is to do A/B tests in the market, for instance, prices can be increased for a period of time to understand how strong the buyer resistance is, or micro-products could be launched to explore new entry points or check where the entry barriers are low. If we wish to explore how powerful a supplier is, we can explore their competitor pricing, and check for any tension in the relationship. My assumption here is that some tension in a relationship shall make it a more positive-sum game (win-win)..... though this zone must be quite narrow, as the biting point of a clutch.
Sources of Barrier to Entry/ Advantages to a business:
Economies of scale: Companies that have achieved high production efficiencies. They can produce a high number of products at a reduced cost per unit.
Product differentiation: Companies with a brand association that reflects quality, customer service, first in the industry, etc.
Capital requirements: Companies that have the capital for up-front advertising, research, customer credit (cashback/coupons), or to incur losses.
Cost advantages: Companies having special access to raw materials, patents, government subsidies, etc. Example: Peter Thiel made sure that Palantir (a big data company) has government ties aka an established revenue source from the military.
Access to distribution channels: Most critical barrier for DTC products. Having distribution channels like stores, wholesalers, web.
Keep steering, change is always coming: The job of a corporate strategist is to determine what position to take, what fronts to defend, where to steer when the environment changes, and where to push when there’s a gap to occupy. The industry is continuously changing, the more macro we go, the difficult will be the analysis and might even be less accurate. Hence, what environments to analyze is also a core necessity to this role.
Advantages of using this framework: Profitability and Sustainability. To run a profitable business that survives over a long period of time.
Possible loopholes:
How macro can this framework go without reducing accuracies?
A lot of variances in framework depending on the industry and environment. You have to develop this strategy from the ground up for each industry.
Difficult to forecast, lots of situations and data points. And hence lots of probabilities.
PS: Paperboat would be a good case analysis to explore more on this topic.
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Very informative and interesting article. Keep writing.