Income School Blog

Five Forces—Intensity of Rivalry

How strong is your business compared to your competition?

Or take it even one step back and tell me, who is your competition?  In any business situation, it’s important to understand who your competition is.

Let me give you three main types of competitors to help you identify who your competitors really are.

  1. Rivals—Are there other businesses that does exactly what you do?  I’ll call these types of competitors “Rivals”.  They are basically just like you, offering really similar products or services.  Think McDonald’s and Burger King.  The competition here can be pretty fierce and requires cutting cost to maintain a lower price, or improving your product or service to maintain a higher value for customers.
  2. Overlappers—Are there other businesses that are different, but have products or services that overlap with yours?  I’ll call these types of competitors “Overlappers”.  These companies are fundamentally different from yours.  They may have completely different goals and mostly different products, but some of their products fill the same need as yours.  These products are targeted at generally the same people as yours.  So while these companies may not be fiercely competitive toward you, they do compete in the same space.
  3. Alternatives—Are there businesses that offer products or services the people choose to buy instead of yours?  I’ll call these types of competitors “Alternatives”.  These are the least obvious competitors, but they’re as important as any.  These competitors offer products that potential customers might buy instead of yours.  So the products are different, but they need they fill is basically the same.

What strategy you employ to deal with a competitor depends a lot on the type of competitor they are.

For example, if you have some strong rivals, then you may focus on keeping cost down and maintaining the lowest prices.  However, this strategy will generally drive you into the ground, especially if you’re a small business.  You’ll always struggle at keeping your cost lower than larger, more efficient competitors.

Another option for dealing with strong rivals is to focus on innovating.  Provide the next big thing before your competitors can.  This can get you way ahead and grow your market share without requiring you to lower your prices.

Think Apple.  I know they’re big, but it was the major innovation behind the iPod and then the iPhone that really set them apart from any competitors in their space.  Even today, iPads are probably the most popular tablets out there because Apple got there first.

If you have some big overlappers, then your strategy can be different.  You don’t need to fight these competitors head on, because you have different core purposes.  So with these competitors you can adopt a less aggressive strategy.   You can add product or service offerings that cater to the target market that doesn’t overlap.

An example of this might be stores like Target and Ross.  Target sells lots of brand new stuff, including clothes, home decor, toys, some groceries, home office supplier, etc.  Ross sells new stuff, but it’s all the leftovers from department stores.  So their selection constantly varies, but their prices are really low.  They are two really different businesses, but both sell clothes, home decor, and toys.  So while the businesses are really different, they have some overlapping products that some of Target’s customers might be willing to buy at Ross for a lower price.

In both the rival and overlap situations, you can niche down and specialize more to better serve and capture a bigger piece of a smaller market.  You can also focus on “growing the pie” as they say.  Here, you work on increasing the awareness of your product space in general so the target market gets bigger.  That way, you can grow without having to get a bigger piece of the market pie.  You just make the pie bigger.

Lastly, if there are alternative products that take away from your customer base, you’ll employ slightly different strategies.  You may niche down, or improve the quality of applicability of your products, much like you would in the case of a rival, but the way you go about doing that will be different for a competitor with alternative products than it would be for a truly rival competitor.

Some alternative products are new innovations that can make old products become obsolete.  Competitors with these types of products are extremely important to watch.  In some cases, your product will inevitably become obsolete because of the alternative.  The important thing here is to recognize the trend and stay on top of it if you can.  Match your competitor’s new offering, or take it a step further and improve upon it.  You don’t always want to play “me too” with your competitors.  But refusing to recognize a trend in your market is a recipe for disaster.

An example of this would be the MP3 player.  When those first came out, they were an alternative to the portable CD player.  They’re a different product, and lots of CD player manufacturers didn’t recognize them immediately as competition.  But today, how many people do you see walking around with CD players?  How many actual CD’s do you buy anymore.  For most of us, those days are history because of the advent of the MP3.

What’s important here is that you identify who your competitors are.  By helping you recognize the different types of competitors that exist I hope you’ll find it easier to identify who they actually are.

So why does it matter what the competitive environment for your business is like?

Well, I hope the answer is fairly obvious.  If you face very strong competition, it’s going to be hard to make your business grow and succeed.  It’s not impossible, I don’t want to discourage you from trying.  But it’s going to be harder than if you were to establish a business in a less competitive space.

That being said, if you have an existing business in a space that is really competitive, that may be good news for you.  Highly competitive business environments create a huge barrier to entry for new businesses.  Simply put, if your business environment is really competitive, people are going to think twice before opening another similar business.

So what if you are working in a really competitive business environment?

Then this is where strategy is really important.  Understanding your competitor is essential if you’re going to thrive or even survive in business.  You need to know what they do and how they do it.  You need to find out who their target customers are and how they target them.

So start here.

Figure out who your competitors are.  And figure out what they’re doing.

Once you understand your competitors, you’ll have the information you need to start developing a strategy.



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