The competition is always something that needs to be considered when you’re researching potential new markets for your product or service. And the level of competition within a market can make it easier or more difficult for you to enter and succeed. You may find that a market is already saturated with products or services like yours, which can either turn you off of the market or give you the chance to come up with new creative marketing ideas. Alternately, you may find there’s a demand for your product or service that currently isn’t being fulfilled in a market. Regardless, being aware of the competition you’re up against will help you move forward, either into the market or on to different markets.
Business economist Michael Porter identified the following five forces of competition, which can be used to analyze an industry or market and formulate a competitive strategy:
- The threat of new entrants or barriers to entry. The threat of new companies entering a market adds to the level of competition. Existing competitors and governments will often take action to inhibit the entrance of new competitors. These actions act as market entry barriers.
- Intensity of rivalry among existing competitors in the market. Competitors in a market will always be attempting to gain a competitive advantage. The effect of competition is often to reduce profits. Markets with few competitors will experience less rivalry. High fixed costs, high exit costs, and slow market growth all increase the level of rivalry between competitors in the market.
- The threat posed by substitute products. Substitute products are those products that can replace a product but are not a direct competitor. For example, plastic bottles can be substituted for aluminum cans. A drastic reduction in the price of plastic bottles will create competitive pressures on the aluminum can industry. When a product has many potential substitutes in a market, its competitiveness is reduced.
- The bargaining power of buyers. When buyers in a market are powerful, they can determine the price paid for supplies. This will increase the level of competition among suppliers. Buyers are powerful when there are few of them or when they are powerful enough to purchase suppliers.
- The bargaining power of suppliers. If suppliers in a market are powerful, then they can exert pressures on buyers. These pressures will include high prices that will make buyer companies less competitive. Suppliers are powerful in markets when they are concentrated or integrated or when there are significant costs associated with switching suppliers. Suppliers are weak when there are many of them competing against each other.