Who is your competition?
This is a fundamental question you must ask yourself before you dive into creating a business. Without knowing who your competitors are and what the market is for your product and service, you won’t have all the information you need to make informed business decisions. Additionally, when you are looking to get financing, some lending institutions will ask you for a business plan. A thorough competitor analysis is indicative of a well-thought out business plan and can demonstrate a good understanding of the market. So, what exactly is a competitor analysis and how should you go about conducting one?
As defined by www.entrepreneur.com, a competitive analysis is “identifying your competitors and evaluating their strategies to determine their strengths and weaknesses relative to those of your own product service”. In layman’s terms, it’s looking at other companies in the market that offer something similar to that of your business. There are two broad categories for competitors that are typically considered: indirect and direct competitors. Your indirect competition is those businesses that satisfy similar needs to yours but with a different market offering. For example, if you are trying to satisfy people’s need for sugar and you are an ice cream parlour, your indirect competition could be a cupcake store. On the other hand, direct competition would be another ice cream parlour as it is offering the same type of good that you are.
What’s the best way to go about doing a competitor analysis? There are a number of different models and methods that you can use, but a common one is Porter’s Five Forces. This method was introduced by Michael Porter back in 1980 and helps new businesses examine their industry and look at the various forces that affect a company’s profitability, market position and power. The five forces are as follows:
Competition in the industry: This involves the number of competitors in the industry and their ability to undercut your business.
Potential of new entrants into the industry: This identifies whether your industry has conditions conducive to greater free entry into the market. If it’s easy to enter the industry, your market position could be weakened and hence, you would not be able to raise prices easily.
Power of suppliers: This force examines how unique inputs are and how easily suppliers are able to drive up costs. If the inputs can only be purchased from one supplier, the supplier is easily able to raise prices and businesses have no choice but to pay the premium.
Power of customers: This force looks at how customers can drive prices down and how loyal they are. If the customer base is small and powerful, they have the ability to negotiate deals to get lower prices.
Threat of substitute products: This force looks at how many substitutes exist that could be used in place of the one offered by a business. Having lots of substitutes means that businesses cannot raise prices and expect to get the same sales as customers will simply switch to a cheaper alternative.
Every single business has some form of competition, regardless of the sector or type of business. As much as it might seem like a good idea to say you have no competitors to seem unique, it is very unlikely that this is actually the case. Even if you have a revolutionary idea that no one else is doing, you probably have indirect competition. For example, Uber was a novel idea when it was introduced, however, it still had indirect competitors such as taxis and public transportation. As an entrepreneur, the more you plan out before launching your business and the more you understand the market you’re stepping into, the better prepared you will be for unexpected circumstances and failures. It is completely normal and even better to acknowledge your competition so that lenders know that you aware of those around you doing similar things. Just because you have competition does not mean that you won’t be successful – it just means that you will need to introduce a unique experience or something different than your competition to set yourself apart.
