TOPIC THREE
COMPETITIVE ADVANTAGE
Meaning of Competition
Competition is a commitment within an organization to make a very large change in competitive relationships
Competitive advantage
The term can be defined to mean ―anything that a firm does especially well when compared with rival firms‖. Note the emphasis on comparison with rival firms as competitive advantage is all about how best to best the rivals and stay competitive in the market.
Competitive forces in a business environment Michael E. Porter is the Bishop William Lawrence University Professor at Harvard
University and the author of ―The Five Competitive Forces That Shape Strategy‖. Porter‘s five forces have shaped a generation of academic research and business practice across industries and governments. Porter‘s tool is a step-up from the popular SWOT analysis pushing companies to look beyond competition and examine what other factors could impact the business environment. He identified five forces that make up the competitive environment that can eat into your profitability: buyer power, supplier power,
competitive rivalry, the threat of substitution, the threat of new entrants. According to Porter, if the forces are intense, as they are in the airline industry, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software and soft drinks, many companies are profitable. This framework encourages the industry‘s structure to position the company where forces are weakest. Below are factors affecting each force and tips to reshape the forces in your favor from Porter himself:
Buyer Power: the strength of your customers to drive down your prices.
Number of customers
Size of each order
Differences between competitors
Price sensitivity
Ability to substitute
Cost of changing
Tip: To counter customer power, expand your services so it’s harder for customers to leave you for a rival. Supplier Power: the ability of suppliers to drive up the prices of your inputs.
Number of suppliers
Size of suppliers
Uniqueness of service
Cost of changing
Tip: To neutralize supplier power, standardize specifications for parts so yourcompany can switch more easily among vendors.
Competitive Rivalry: the strength of competition in the industry.
Number of competitors
Quality differences
Switching costs
Customer loyalty
Tip: To temper price wars initiated by established rivals, invest more heavily in products that differ significantly from competitors’ offerings.
The Threat of Substitution: the extent to which different products and services can be used in place of your own.
Substitute performance
Cost of change
Tip: To limit the threat of substitutes, offer better value through wider product accessibility. Soft-drink producers did this by introducing vending machines and convenience store channels, which dramatically improved the availability of soft drinks relative to other beverages.
The Threat of New Entry: the ease with which new competitors can enter the market if they see that you are making good profits.
Time and cost of entry
Specialist knowledge
Economies of scale
Cost advantage
Technology IP
Barriers to entry
Tip: To scare off new entrants, elevate the fixed costs of competing; for instance, by escalating your R&D expenditures.
Benefits of analyzing organization’s competitive advantage
Here are 5 benefits that come from conducting a competitive analysis:
1. Fine-tune and Develop your Unique Selling Proposition (USP) Why your brand? This question is the deciding factor in separating you from your competition. A competitive analysis will give you insight into what other brands define as their ―why.‖ When comparing your competitors USP to your own USP, clear talking points surrounding your brand will arise, helping distinguish you from the competition.
2. Improve Owned Products and Services As your brand expands so will your customers‘ needs and expectations. One way to anticipate those needs and expectations is to analyze owned customer reviews as well as your competitors’ customer reviews. Comparing reviews will allow you to tap into market gaps and anticipate customers‘ needs and expectations as well as your competitors‘ pending improvements.
3. Establish a Brand Benchmark
Benchmarking as defined by Entrepreneur Magazine, is the process of building a foundation or point of reference for measuring growth. Both startups and established companies can benefit from benchmarking. With a competitive analysis unlock and analyze historical data that relates to how customers view you and your competitors. This will yield a greater understanding of your company‘s growth and scale.
4. Identify Gaps in R&D and Hiring
A competitive analysis goes beyond customer feedback and consumer-centric content. According to Buffer, having an understanding of who your competitors are hiring as well as company expansions helps paints a larger picture of upcoming trends competitors are anticipating, workplace culture, and other important factors customers look at when considering brand loyalty
5. Discover Potential Threats
Due to the dynamic nature of a competitive analysis, you are able to update and chart challenges that your competitors and the market are facing. This will help you anticipate potential market changes, threats, and campaigns that
can be rebutted Approaches in an organization’s competitive environment
Here, we explain five of the most popular competitive analysis frameworks with visuals and discuss what each is best suited for.
1. SWOT Analysis
The SWOT framework helps you evaluate the internal (Strengths and Weaknesses) and external factors (Opportunities and Threats) that impact your business or a course of action.
2. Porter’s Five Forces
Porter‘s Five Forces is a framework that examines the competitive market forces in an industry or segment. It helps you evaluate an industry or market according to five elements: new entrants, buyers, suppliers, substitutes, and competitive rivalry. According to Michael Porter‘s model, these are the key forces that directly affect how much competition a business faces in an industry.
3. Strategic Group Analysis
Strategic Group Analysis is a competitive analysis framework that lets you analyze organizations in clusters based on the similarity of strategy. By identifying the cluster your firm falls into for any given strategic dimension, you can get a sense of the impact of the different strategic approaches.
4. Growth Share Matrix
The Growth Share Matrix is an analysis framework that classifies the products in your company‘s portfolio against the competitive landscape of your industry.
Developed by the founder of the Boston Consulting Group (BCG) in 1970, the model gained widespread acceptance for helping companies decide which products to invest in based on competitiveness and market attractiveness.
5. Perceptual Mapping
Perceptual mapping is a visual representation of perceptions of your product relative to competing alternatives. It‘s also called positioning mapping, because it shows the position of your brand, product, or service mapped against that of your competitors. The first step is to determine two attributes you‘ll use as the basis for comparison. Next, you plot where your product and those of your
competitors fall on the spectrum of those two attributes
Porter’s model
Porter’s Five Forces is a framework for analyzing a company’s competitive environment. The number and power of a company’s competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company’s profitability.
