Lecture Mail: Lesson 2 Day 2
Hi All! Be sure to read the last paragraph!
We talked about Michael Porter’s admonition that companies should constantly
monitor the competition. Besides existing competition, other areas of the environment
that are important to watch include substitute products/services, potential
competitors, suppliers and customers. These five areas are presented in Exhibit
2.6 in what has come to be called “Five Forces Analysis.” Each is
briefly discussed below.
1. Existing/established competitors:
It’s usually easiest to identify the companies that produce the same things
you do and directly compete. Market share is defined in terms of what percentage
these companies own.
2. Beware, however, of the threat of substitutes. These are products that may
not be exactly like yours but could potentially replace them. For example, in
the area of ice cream (a favorite topic of ours!), Bruster’s and Cold
Stone Creamery are direct competitors. Bruster’s had better watch Smoak’s
Bakery and the Atlanta Bread Company because, while they’re not in the
ice cream business, they do produce really good treats.
3. Then there are potential competitors. These are the companies you never thought
about but that could be the biggest threat partly because they have nothing
to lose. Going back to our ice cream example, an existing company or brand new
entrepreneur may go head to head with Bruster’s. Maybe a sushi restaurant
discovers that it has a hit on its hands with its green tea dessert (it could
happen!) and decides to promote it big time.
4. Suppliers: who has the upper hand when there is only one source of raw materials
for your product, you or the supplier? Porter argues that it is important to
understand who has the power in a relationship when there are many suppliers
or just one. When the number of potential suppliers shrinks, the producer loses
the advantage.
5. Buyers: same thing with customers. If there is only one customer for your
product, who has the power in the relationship?
Porter was the first person to argue that successful firms will pay attention to all five areas. Take a look at your web-sites. Who else—besides the two of them—serves as direct competition. Can you name a substitute competitor and a potential competitor? Are there one or many suppliers? What about buyers?