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Competitors are rivals who try to meet the same customer needs and wants. As external stakeholders, they benefit from other companies’ failures. They like it when other companies compete fairly or fail.
Competitors are interested in diverting customers from the company. They set targets and strategies based on the actions of other companies in the industry.
Why competitors matter
In most markets, companies face a crucial reality—competition. Depending on the market structure, this competition can come from a multitude of players. Monopolistic competitive markets are bustling with numerous rivals, while oligopolies feature a select few dominant players.
This competitive environment significantly shapes a company’s strategy and, ultimately, its success. To thrive, businesses must develop a sustainable competitive advantage. This advantage signifies the ability to deliver superior value to customers compared to rivals. This can be achieved through factors like better product features, exceptional customer service, or a more efficient cost structure.
Companies that neglect to analyze their competitors are at a significant disadvantage. By understanding their rivals’ strengths, weaknesses, strategies, and vulnerabilities, businesses can gain valuable insights. This knowledge allows them to proactively develop strategies to stay ahead of the curve rather than simply reacting to competitor moves. Analyzing competitor market share can also provide valuable context for understanding their effectiveness.
Through effective competitor analysis, companies can identify opportunities to differentiate themselves, optimize pricing strategies, and anticipate future market shifts. This proactive approach is key to achieving sustainable growth and profitability in a competitive landscape.
Types of competitors
Three types of competitors in an industry. They are:
- Direct competitors
- Indirect competitors
- Future competitors
Direct competitors
Direct competitors offer similar products and services for the same target market and customer base. They seek to seize customers and market share from the company to grow their profits and sales.
For example, smartphone manufacturers compete fiercely to provide the best value by offering their customers the most suitable products. They compete in many ways and most easily through price. They also compete on features. Some smartphones offer a higher camera resolution, longer battery life, or more memory capacity.
Indirect competitors
Businesses also face indirect competition. Competitors may offer products to different market segments but provide solutions to meet customers’ similar needs or desires. In other words, the two are substitutes, though not perfect.
For example, in the transportation industry, airlines compete indirectly with railroad companies. Airline companies may target higher-income consumers than rail companies. However, both services fulfill the same basic need, namely services for people’s mobility.
Future competitors
Future competitors represent existing and potential companies to enter the market, even though they haven’t done so at this time. We also refer to it as a potential rival.
One source of future competition is from indirect rival. They are much more prepared and more likely to enter the market when they see the right opportunity.
Competitor interests
In the dynamic world of business, rivals are constantly strategizing to gain an edge. Here’s a deeper dive into what drives their actions:
- Market share and profitability: Core rivals are interested in increasing their market share and profitability at the expense of rivals. They will closely monitor your pricing, marketing strategies, and product development to identify opportunities.
- Customer acquisition and retention: Your rivals may seek to attract your customers by offering lower prices, superior features, or improved customer service. Understanding their customer acquisition strategies can help you develop effective countermeasures.
- Industry trends and regulations: They are interested in staying ahead of industry trends and upcoming regulations. Analyzing their actions can provide insights into future market shifts and potential challenges.
Competitor influences
Competitors don’t operate in a vacuum. Their actions can have a significant impact on your business strategy and overall success. Here’s a breakdown of some key areas where their influence is felt:
- Pricing strategies: Their pricing strategies can trigger price wars or force you to adjust your pricing model to remain competitive.
- Product innovation: Their innovation can render your products obsolete or less attractive to customers. Monitoring their research and development efforts can help you stay ahead of the curve.
- Marketing and distribution channels: Their marketing and distribution channels can influence customer perception and brand awareness. Analyzing their strategies can inform your own marketing and distribution decisions.
- Consumer behavior and trends: They are attuned to evolving consumer preferences and buying habits. Understanding their approach to these trends can help you adapt your offerings to meet changing customer needs.
How to deal with competitors
The presence of competitors can be a double-edged sword. While they can pose a threat, they can also be a source of valuable information and motivation. Here are some strategies to effectively deal with them:
Go on the offensive: Attacking your competitors
One approach is to take an aggressive stance. If your product or service isn’t competitive enough, a strategic attack can help you gain traction. This might involve:
- Product innovation: Enhance your offering by adding new features, improving functionality, or addressing customer pain points identified through
competitor analysis . - Enhanced marketing and advertising: Launch more aggressive marketing campaigns that highlight your unique selling points and target competitor weaknesses.
- Revamped packaging and design: Attract customers with a fresh and appealing product presentation that stands out on shelves or online marketplaces.
- Expanded service offerings: Provide additional services that complement your core product and increase customer value perception.
By implementing these improvements, you can make your offering more attractive to potential customers and potentially steal market share from your rivals.
Adapting to the market: Following the leaders
Not all companies have the resources or desire to engage in a head-to-head battle with market leaders. For some, a more strategic approach is to adapt to the existing competitive landscape. This involves:
- Identifying leader strategies: Carefully analyze the strategies employed by market leaders. This could involve their pricing models, marketing tactics, or product development roadmaps.
- Finding niche opportunities: Look for gaps in the market that the leaders may be neglecting. These niches could present opportunities to establish a foothold and build a loyal customer base.
Cost optimization: Focus on streamlining operations and reducing costs to become a more efficient competitor. This can allow you to offer competitive pricing or invest in other areas like customer service.
Competition strategy
Porter proposed three basic competitive strategy alternatives. We call this Porter’s generic strategies.
- Cost leadership
- Differentiation
- Focus
Cost leadership strategy
This strategy requires companies to operate most efficiently for a certain level of quality. In other words, companies must produce at the lowest possible cost compared to the average of their industry competitors.
To profit more than competitors, the company can sell its products at the industry average price or slightly below the industry average to attract more customers.
Long story short, a cost leadership strategy offers lower margins compared to a differentiation strategy. The critical success factors of this strategy are cost efficiency and selling as many products as possible. When price wars emerge in the market, companies can maintain profitability due to lower costs while competitors suffer losses.
Differentiation strategy
The differentiation strategy requires companies to develop products that are unique and highly desirable to consumers. This uniqueness allows customers to be willing to pay higher prices.
The differentiation strategy offers high profit margins because of the premium price. Companies may not have to sell high volumes to achieve their revenue and profitability targets. To market them, they will usually focus on a few quality-conscious customers instead of price-conscious customers.
This strategy requires companies to continue innovating and adapting to changing consumer tastes. Failure to do so ultimately renders competitive advantage unsustainable.
Focus strategy
Under a focus strategy, the company basically adopts a differentiation strategy or price leadership. It’s just that the company concentrates on a narrow segment (market niche) instead of the main market.
By focusing its strategy on a narrower market, the company enjoys a high level of customer loyalty. Competitive pressure is also relatively low because large competitors are usually reluctant to enter the market.
However, the company can only sell at a lower volume, which implies lower bargaining power over its suppliers. Long story short, making sure the market is profitable is the first task before entering this market.
Understanding rivalry intensity: When the competition heats up
Within Michael Porter’s Five Forces framework, rivalry intensity gauges the level of competition among existing firms in an industry. This fierce competition can be a double-edged sword, driving innovation but also squeezing profit margins. Let’s delve into factors that contribute to high rivalry intensity, creating a dynamic and challenging competitive environment.
Factors contributing to high rivalry intensity
A multitude of competitors: When numerous companies crowd an industry (monopolistic competition), competition is likely to be intense. Each player vies for market share and brand recognition, leading to aggressive marketing campaigns, price wars, and product innovation races.
Slow industry growth: In stagnant or slow-growing industries, existing companies are forced to fight over a limited market share. This can lead to intense competition as companies try to steal customers from each other.
Fragmented market leadership: The absence of a clear market leader creates uncertainty. Companies may constantly battle for dominance, using aggressive tactics to capture a larger customer base.
High fixed costs: Businesses with high fixed costs face pressure to maintain high production volumes to spread these costs across a larger number of units sold. This can trigger price wars as companies compete for market share to justify their production levels.
Commoditized products: When products offer little differentiation and are perceived as similar by customers, price becomes a key competitive factor. This can lead to intense price wars as companies try to undercut each other.
Low switching costs: If switching to a competitor’s product is easy and inexpensive for customers, companies have less leverage and are forced to compete more aggressively on price or features.
Weak brand loyalty: Customers who are easily swayed by price promotions or competitor offerings create an environment where companies must constantly fight for attention. This can lead to frequent price fluctuations and discounts.
Excess production capacity: When industries have significant surplus production capacity, companies may be incentivized to engage in price wars to offload excess inventory, further intensifying competition.
Strategic disparity among competitors: When competitors pursue diverse strategies and target different customer segments, the competitive landscape becomes more unpredictable. This can lead to unexpected attacks and rapid market shifts.
Low exit barriers: Low exit barriers, meaning it’s relatively easy for companies to leave the industry, can create a volatile environment. New entrants may frequently disrupt the market, and struggling companies may resort to aggressive tactics to survive before exiting.
