Industry competition includes businesses that sell a similar product or service. So if you’re starting an education tech app, your industry is education technology and your competitors are other businesses creating education tech apps.
All businesses have competitors, and in some cases, industry competition is so fierce that companies have to fight for the business of potential customers. This is why some players have a negative view of competition.
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.
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.
The 5 forces that drive industry competition
According to Professor Michael E. Porter, there are five basic forces (Porter’s Five Forces) that drive competition in an industry:
1. Industry rivalry
The first of the five forces focuses on the intensity of the current competition in the marketplace.
Industry rivalry looks like competitors within an industry jockeying for position, using tactics such as product launches, advertising competition, and price competition.
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 good example of disrupting 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 the pricing. Prices are affected by how many customers purchase a product or service, how significant each customer is to a company and the 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.
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 and the suppliers, in turn, have the power to increase 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.
How should business owners deal with 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.
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.
Improve on existing products or services
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.
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.
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.
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.
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.
Some competitors may turn out to be good partners
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.
Case study: a small business that succeeded in a saturated market
The party and event planning industries are saturated with players; in the US alone as of 2015, there are 129,776 party and event planning businesses. But, this didn’t stop one former salesman from building a business from an initial “crazy” idea.
Iain Fox had been working in sales but found himself feeling “very unstable” in his job and he was not enjoying what he was doing. In 2006, while on holiday with his wife, the couple played miniature golf on a course next to their hotel.
While there, Iain told his wife, “Can you imagine doing this for a living?”
When they got home, Fox came up with the idea of creating a portable course that could be used at parties and other events. He left his sales career, built the course, bought a van, developed a website, and designed a logo. On March 2007, Crazy Fox Golf was born.
When he contacted venues such as pubs and leisure centers in his local area of Derbyshire and Nottinghamshire in the United Kingdom, he received mixed reactions. But his persistence paid off, and soon he started to get bookings. In the beginning, he did a bi-weekly event in a local leisure center. When people started talking about Crazy Fox Golf, more business came in. This led to an editorial coverage in the local papers which, in turn, brought in more business—this time, through corporate events.
When Fox tried advertising in phone directories, business opportunities weren’t as frequent as expected, but when he set up a Google AdWords account, the growth of his business increased significantly.
Crazy Fox Golf has continued to grow and has provided entertainment for a variety of corporate events for companies such as L’Oréal, Slimming World, and British Gas.
Fox started with a simple idea that seemed crazy to others but due to his persistence, his “crazy” idea is now a booming business recognized in the UK and some other countries.
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. It was revised in 2018.