How Your Competition Affects Your Strategic Plan
The vast majority of strategy implementation failures have a common root cause behind them. Strategic planning must be balanced between the internal workings of the organization and the external world in which organization resides and operates. Balance between these perspectives is not enough though. For strategy to be successfully implemented, the correct internal and external attributes must be analyzed and planned for. One major component of the external environment that gets too little attention during planning, is competitive rivalry.
Competitive rivalry is sometimes difficult for organizations to assess, primarily because they lack a process to aid them in evaluating all of the dimensions where competition comes into play. In evaluating where customer demand should guide your business, it is helpful to borrow from a quote from hockey’s great Wayne Gretzky. When asked how he performs so well against opponents, he said, “I skate to where the puck is going to be, not where it has been.” That same principle not only applies in business, but is key to success in business strategic planning.
To best predict “where the puck will be” in terms of customer demand and expectation of price, it requires us to know several things about the market, our competition and our suppliers. To be more specific, to forecast demand, we need to view our market in terms of current competitive rivals and examine the threat of new entrants that might erode our customer base in the future. Likewise, pricing and demand are impacted by the bargaining power of substitutes which might serve as a replacement to our product or service. Pricing and demand are also impacted by the bargaining power of our customers and our suppliers.
One very effective technique for performing an analysis of these factors is 5-Forces. The 5-forces analysis was pioneered by Harvard professor Michael Porter and is the perfect approach to examine the competitive forces in the external environment. His model provided a framework to examine an industry as being influenced by five forces and has become a frequently used tool for analyzing a company’s industry structure and its corporate strategy. These five competitive forces help shape every single industry and market and the model helps us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry.
Let’s look at these areas of analysis in a bit more detail. To evaluate competitive rivalry, we examine:
– Existing loyalty to a major brand
– Incentives for using a particular brand
– High fixed costs
– Scarcity of resources
– High costs of switching companies
– Government restrictions or legislation
The Power of Buyers
– Small number of buyers
– Large volume purchases
– Switching to a competitive product is simple
– Product is not extremely important to buyers; they can do without the product for a period of time
– Customers are price sensitive
The Availability of Substitutes
What is the likelihood that someone will switch to a competitive product or service?
– Switching to a competitor’s product is costly
– Switching to a competitor’s product is easy and cheap
– No substitutes and the product is extremely important to buyers – can’t do without it
– No substitutes and the product is unimportant to buyers – can do without it
Power of Suppliers
– Few suppliers of a particular product
– Numerous suppliers of a particular product
Regardless of the technique used, strategic planning must include an analysis of competitive rivalry. The organization’s external environment must be well understood in terms of who competitors are, what strategies they are following, what is working for them and what is not. We must understand how the market is evolving. Suppliers also must be analyzed and planned for in order to understand their impact to our strategy. Missing this competitive rivalry dimension of planning compromises implementation of even the best laid strategic plans.