Industry competition includes businesses that sell a similar product or service. So if you’re starting an online clothing store, your industry is digital retail and your competitors are other online apparel companies.
All businesses have competitors, and in some cases, industry competition is so fierce that companies have to fight for the business of potential customers. Some players have a negative vision of competition but it’s simply the reality of doing business.
Defining your competition
Despite the negative implication of the term “competition,” the very state of industry competition can have a major influence on business strategy. Don’t make the mistake of assuming that you don’t have industry competition if your product or service seems truly unique.
Every single business has competition, and if there’s really a market for what you’re selling and you are on the cutting edge of something that’s never been done before, you’ll see your industry grow, and new competitors will emerge all the time.
Keep in mind that strategically responding to competition in your industry isn’t just about your marketing strategy or how you’ll maximize your market share. Your strategic plan for growth should speak to competition among your suppliers, economies of scale, potential new entrants, and substitute products that could threaten your viability.
Developing a competitive matrix can be a helpful tool for thinking through who your competitors are and how your product or service is different from theirs.
The 5 forces that drive industry competition
In order to fully understand how to develop a strategy to face competition, it’s good for you to know what really drives it. According to Professor Michael E. Porter, there are five basic forces (Porter’s Five Forces) that drive competition in every industry:
1. Industry rivalry
Industry rivalry refers to the intensity of competition already established in a given market. These businesses are pushing against one another, attempting to leverage any competitive advantage they may have. This typically means price wars, ad campaigns playing on weaknesses, and product launches that focus on new features or overall quality.
When business owners feel competitive pressure or see an opportunity to improve their current position, rivalry can become intense. Sometimes it can even lead to industry disruption. Rideshare companies like Uber and Lyft are a great example of disruption in the urban transportation industry. They have been able to leverage tech, a new pricing and delivery model, and a latent resource—cars that are otherwise sitting unused by their owners—to capture a huge share of the taxi market.
2. Threat of new entrants
New industry players are always a threat to existing businesses. The seriousness of the threat, however, will depend on barriers to entry and the reaction from current competitors in the marketplace.
If barriers to entry are low (e.g. it costs little to enter the industry; there are few economies of scale in place), new entrants can weaken the existing businesses’ position in the market.
3. Bargaining power of customers
Customers can affect pricing. Prices are affected by how many customers purchase a product or service, how significant each customer is to a company, and the perceived cost to a customer of switching from one business to another.
If a company has a limited but powerful client base purchasing its product, they can often dictate their terms and drive prices down. Similarly, if a company has a broad client base with multiple industry options, they may be able to focus on price, quality of service to attract a niche audience within the market.
4. Bargaining power of suppliers
If customers can drive prices down, suppliers can drive prices up. This force is driven by the number of suppliers, the uniqueness of the supplier’s product, and how much it would cost a company to switch from one supplier to another.
If a company has few suppliers, it becomes dependent on them, giving the suppliers the power to raise their prices.
5. Threat of substitutes
The demand for substitutes can reduce the demand for industry products and services. If a company increases its prices, customers are more likely to switch to cheaper alternatives. This can significantly reduce a company’s power within the industry if they aren’t well established or make a decision that customers interpret as ill-willed.
How to handle industry competition
Competition is everywhere. There is no way existing businesses can stop new entrants from trying to get a share of the market, but there are plenty of strategies that can help them retain their position in the marketplace or get them ahead of the competition.
1. Identify a need in the industry and satisfy it with a product or service
It is great to be the inventor of a specific product or service, but sometimes all you have to do is reinvent what is already out in the market. For example, as of 2017, Forbes reports that Nike is still the most valuable sports brand in the world in the business category, with a value of $29.6 billion.
The Nike brand first became popular in 1972 when company founders Phil Knight and Bill Bowerman invented “lighter weight training shoes that had an outsole with waffle-type nubs for traction.” They saw the need for a shoe that would improve an individual’s athletic performance. In 1979, the company launched its Nike Air technology and this strengthened the Nike brand further.
2. Improve on existing products or services
Virgin Airlines was established by Richard Branson when his flight to the Virgin Islands in 1984 was canceled. He chartered a plane and offered other travelers a seat on that plane for $29.
Today, Virgin Airlines still offers affordable fares, full-service flights, and excellent customer service. Instead of copying what was already being offered by other airlines, Virgin offered something much better to air travelers.
3. Highlight your differences
Be sure that you fully understand what makes you different from the competition. Are your prices more reasonable? Do you only use local vendors? Maybe it’s even the strength of your company culture.
Whatever the case may be, make sure you know what currently differentiates you from the competition. Know what resonates with customers and how you can continue to strengthen your position around that concept.
4. Clarify your brand and message
You know your company, you know what you care about, but that doesn’t mean that your branding and messaging does a good job of explaining that. Establish a clear narrative around your business and what you can do for customers as their guide, supporter, or resource. Encourage them to be the hero of their story by utilizing your company’s products or services to get the job done.
From there, you need to ensure that your branding reinforces that message. The more accurately your branding represents what you’re trying to say, the more likely people will connect with it.
5. Focus on the needs of your customers
Apple has developed several innovative products and created a network of services that seamlessly work together. The company continues to provide customers beautifully designed, high-tech products that make working with electronic gadgets faster and easier.
Apple makes the customer experience central to the product design and development process by incorporating participatory design to understand customer pain points and opportunities. In addition, Apple has ensured that its computing and entertainment devices—the Mac, iPod, iPhone, iPad, and iTunes—integrate to create a streamlined, intuitive system.
6. Focus on the needs of your employees
One aspect of competition that is often overlooked, is the potential for competitors to attempt to recruit your employees. If you have similar product lines and are working in the same industry, they may try to recruit your best people. Aside from that, having a happy and dedicated workforce also leads to a healthier, more competitive company.
Encourage your employees to collaborate, take initiative, and try new things. Make the business just as much theirs as it is yours and encourage them to find a healthy work-life balance. Happier employees mean more dedicated employees which can lead to a better representation of your business and leverage against your competitors.
7. Do not focus on your competitors
Do not fall into the habit of constantly checking on your competitors. Doing so will draw your attention away from the needs of your customers.
As a result, instead of developing your products into something that will address your customers’ needs, you start looking at what your competitors are doing for their customers. This will be detrimental to your business and you may end up losing customers to your competitors. Instead, talk to your customers regularly—ask them what they like and what they hate about your product or service, so you can use their feedback to improve.
8. Do not underestimate your competitors
You don’t want to obsess over your competitors, but you shouldn’t ignore them either—that too can be bad for business.
In 2013, Nokia sold its handset business to Microsoft for $7.2 billion. At one time, Nokia had been the dominant mobile phone manufacturer in the world, but by the time the company was acquired by Microsoft, it only had three percent of the global smartphone market. Nokia underestimated how dominant the iPhone and Android smartphones would become over the coming years.
To avoid the same fate, never project future success based on current market conditions, as market players, product innovations, and customer expectations can change in an instant.
9. Explore partnership opportunities
In some cases, companies that used to be competitors have learned that collaboration can be mutually beneficial. Sometimes this manifests as acquisition—one company being absorbed into another—but it might also look like a strategic partnership where two parties retain independence.
By looking at your competitors as potential partners and by creating strategic alliances, you may open yourself up to more business and more success in your industry.
10. Target new markets
If you’ve been able to solidify your service within one target market or the competition has a stranglehold on it, you may want to consider expanding to other target customers. Maybe customers in a different age group are interested or if you launched a lower-priced product you may attract those at a different income level. You can’t get complacent in either scenario and expanding to new markets is one of the fastest ways to grow your business and spread out the competition.
Competition is a good sign
Don’t panic when other businesses enter your space. When others want a share of the market, it’s proof that you’re doing something right.
Others want to get in on the same business when they notice that business owners are onto something. When your competitors copy your moves, it means you are leading in your industry. Just remember to keep developing your product or service so that you won’t get left behind.
Competition is everywhere. Businesses come and go. But consider competition as a challenge for you to improve your products or services. Analyze and strategize. A good strategy will help you compete with other industry players and ultimately get you ahead in the game.
Editor’s note: this article first published in 2016 and revised in 2020.