Rivalry between competitors is increasing day by day, especially in the digital environment. One of the keys to this rivalry lies in the ease with which consumers can now compare product prices.
Price is not everything, of course, but it is still a determining factor when it comes to tipping the balance in one direction or another. For this reason, the use of price monitoring tools and Dynamic pricing have become indispensable for e-commerce companies that are committed to applying competitive pricing strategies.
One of the ways of measuring rivalry between competitors and assessing a company’s profitability potential is to resort to Michael Porter’s 5 forces.
Undoubtedly, competitive rivalry and Porter’s matrix are two important concepts in any business strategy. The former measures competitive intensity in a given industry, while the latter is more of a framework for analysing the competitive forces affecting each company. Together, they can provide valuable information and help any business establish and plan strategies to stay ahead of its business competitors.
For example, by understanding the competitive environment, companies can identify opportunities to differentiate themselves.
Using Porter’s 5 competitive forces theory as a guide and knowing the current market situation, you will have all the ingredients you need to gain a competitive advantage over your rivals or gain greater bargaining power with your suppliers.
In this article, we give you an overview of the importance of competitor rivalry and how to stay alert to changes in the market. In addition, we explain what Porter’s 5 forces are and their impact on the competitive landscape.
The importance of Porter’s 5 forces and competitor rivalry
It is difficult to compete in today’s large market if you do not take into account the intensity of competition in your industry and the relevance of Porter’s model.
Having the ability to negotiate advantageous purchase costs can be essential to beat rivals and offer better prices, thus attracting more customers to your online shop or business.
But it is also important to bear in mind that businesses are interdependent, which means that the cycle of responses and reactions between them can harm or benefit some businesses and the industry as a whole.
Certain forms of competition, such as price competition, can be highly unpredictable and have a detrimental effect on industry profitability.
On the other hand, strategies such as advertising and promotion campaigns can help stimulate demand and promote greater product variety, which has a positive impact on the market.
What are Porter’s 5 forces?
Professor Porter, one of Harvard’s top economists, developed this analysis in 1979. It is used to help identify whether an industry is undervalued, overvalued or has low competitive intensity.
Since then, Porter’s 5 Forces analysis has become one of the most widely used tools by experts to design business strategies, as well as to validate whether the current ones are adequate in terms of the competitive environment in which the company finds itself.
All this is of vital importance when conceiving a new project, creating new companies, launching new services or entering a new market. A study should always be carried out to analyse and measure your resources against those of your competitors. This study should be repeated periodically throughout the life cycle of any company.
Porter’s diagram
Porter’s 5 forces analysis consists of studying the position of companies in different key environments to:
Assess how a group of companies is affected by existing competition in the sector and confirm whether it is a good time to enter the market. Define what is driving or limiting the profitability of the business. Porter’s five forces allow, once the main threats and opportunities have been identified, to create a strategic marketing or business plan and set the roles in a team to increase competitiveness.
All of this is captured in a diagram that makes it easy to understand. Here is an example of Porter’s matrix:
What are Porter’s 5 forces?
We are going to see what Porter’s factors are and some examples of how to apply the 5 forces that they encompass. All this information will make it easier for you to analyse your company’s strategy and competitiveness.
In the diagram of Porter’s 5 forces, we have given you a preview of the factors that make up this model.
Porter’s classification is a framework for predicting the competitive intensity of a company and is based on 5 main factors:
Bargaining power of customers
Within Porter’s forces, the bargaining power of customers is one of the key factors.
Porter considers that the more organised consumers are, the more demands they will make on prices and product quality. Especially in cases where switching brands does not make a significant difference.
The following strategies can be used to deal with the problems arising from this consumer organisation:
- Improve sales channels.
- Increase product or service quality.
- Reducing prices to match or better those of the competition.
- Provide new added value that other similar products do not have.
- Increase investment in marketing and advertising to achieve a clear differentiation.
Bargaining power with suppliers
Have you ever wondered who has the upper hand when dealing with suppliers?
According to Porter’s analysis, when the balance between supply and demand is not tight, suppliers increase their bargaining power. For example, high demand allows suppliers to increase the price of the product.
To minimise this risk, it is advisable to have several suppliers that you can call on if your main supplier decides to raise the price above your margins.
Entry of new competitors
Before a competitor can enter a market, it has to overcome several challenges, such as complying with the relevant laws, developing its distribution channels, start-up costs, etc. Therefore, the greater the difficulty of market entry, the lesser the threat of new entrants in that sector.
The way to deal with this situation of strong rivalry is equivalent to the way consumers organise themselves. Therefore, in order to maintain your market share, you may need to increase your investment in advertising, expand or improve your sales channels, adjust your prices, etc.
Entry of substitute products
The fourth factor in Porter’s competitive strategies is based on the threat of substitute products.
Substitutes increase the risk of price erosion and reduce the profitability of the original product.
To counter the threat of new products, it is worthwhile:
- Analyse whether increasing marketing investment could help you stand out from the competition.
- Conduct a study to identify whether these products can potentially outperform your own. If so, determine whether you can adjust prices or add value.
- Track competitors’ prices to find out what strategy they are following and get ahead of them.
Rivalry between competitors
The last of Porter’s micro-environmental forces analyses the level of rivalry between competitors.
The most frequent structural components that can influence the level of competitiveness of a sector are the following:
- Product differentiation: the characteristics of a product that make it stand out for its function or purpose. Consumers’ inclination to substitute one product for another of a different brand will be more significant the closer the products offered by the different companies are to each other. In this case, the tendency will be to lower prices in order to become the preferred choice.
- Concentration: to find out whether one company dominates the market or whether there is a situation of segmentation. In the first case, the dominant firm is free to set prices. Oligopolies tend to have a parallel pricing arrangement.
- High exit barriers: competition will be intense when the cost of exiting the market is higher than remaining in the market and competing. Also when there are barriers that make it difficult for firms to exit an industry.
- High exit barriers: competition will be intense when the cost of exiting the market is higher than the cost of remaining in the market and competing. Also when there are barriers that make it difficult for firms to exit a sector.
These are just some of the factors that affect rivalry between competitors, but there are also other components such as emotional barriers, slow industry growth or governmental or contractual restrictions.
In these cases, analysing Porter’s extended rivalry allows us to identify whether it is appropriate:
- Displace the competition by lowering prices.
- Add value to your products.
- Increase production to reduce costs (economies of scale).
Examples of Porter’s e-commerce strategies
Porter’s model is a strategic evaluation tool that takes into account factors that go beyond product characteristics and is used to assess the viability of a company in a given sector.
By examining the competition, you can identify your competitive advantage and, consequently, determine what strategy to set to achieve a better positioning of your online shop.
Here are some examples of Porter’s strategies applicable to your business:
- Product launch strategy: introduce new services or products, or an improved version of an existing one, to increase sales and gain market share.
- Market penetration strategy: reach new markets to reach a larger number of customers.
- Competitive positioning strategy: establishes a leadership position in a particular market segment.
- Distribution strategy: develop and use effective distribution channels to reach target markets.
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In short, Porter’s 5 forces should be understood as a guide, as they give you access to monitoring tools and allow you to be informed of competitors’ actions, assess when it is appropriate to increase marketing investment to attract new opportunities, or gain a considerable advantage when negotiating with suppliers.
The aim of this post is not to teach you how to make a Porter’s 5 Forces model, as that is very complex. But we hope to have helped you understand what Porter’s analysis consists of with some examples applicable to your business.
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In today’s competitive market, it is difficult to beat your rivals, so it is important to keep a close eye on your competitors’ strategies. To do this, it is essential to use automated price tracking and dynamic pricing tools.
This is the only way to gain a competitive advantage:
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