Indirect Competition

Coke versus Pepsi. Nike versus Adidas. Google versus Facebook. When we think competition, we think rivals. However, the true intent of business competition is not to beat the opponent. The real goal is to earn greater profits for the company. The battle for these profits is fought on multiple fronts, only one of which is with direct rivals. The indirect competitors for profits include customers, suppliers, potential entrants, and producers of substitutes. Michael Porter described these players and their interaction with one another as the Five Forces of Competition.23 Porter wrote, “The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability. Understanding the forces that shape industry competition is the starting point for developing strategy. The five forces reveal why industry profitability is what it is.”24

While direct rivals consume most of the mind share of leaders, it’s the indirect competitors that can quietly eat away at your profits and position in the industry value chain. As professors Bergen and Peteraf write, “Among those competitors that possess equivalent resources, indirect competitors pose the strongest threat to a focal company.”25 To more fully understand how these indirect competitors influence your business, the following sets of questions have been developed for each type of indirect competitor: customers, suppliers, potential entrants, and substitutes.

When considering customers and their effect on your portion of profits, the following questions may be helpful:

  • • Have we been able to raise prices in the past in order to secure a greater share of profits? Why or why not?
  • • Have we cultivated the perception of differentiated value in the minds of customers for our offerings?
  • • Are there switching costs for customers to overcome in transitioning from one offering to another within the market?
  • • Is there any indication our customers would integrate backwards into our part of the industry value chain?
  • • What is the size of our customer’s margins and how much pressure is there on those margins?

When considering suppliers and their effect on your portion of profits, the following questions may be helpful:

  • • Have we been able to obtain price decreases from our suppliers in the past two years? Why or why not?
  • • How many potential suppliers are in the market that could readily fulfill our needs?
  • • What percentage of our supplier’s business do we represent?
  • • Is there any indication our suppliers would integrate forward into our position in the industry value chain?
  • • What is the size of our supplier’s margins and how much pressure is there on those margins?

When considering potential entrants and their effect on your portion of profits, the following questions may be helpful:

  • • Has there been an influx of new competitors into our market in the past two years? Why or why not?
  • • What is the threshold level of capital and intellectual property required to successfully enter our market?
  • • Is our market susceptible to disruptive innovation in the form of a simpler, low-cost, more convenient offering with an enabling technology that appeals to greater segments of customers?
  • • Do economies of scale serve as an advantage and barrier to entry in this market?
  • • What unmet customer needs or jobs to be done could a new entrant fulfill?

When considering substitutes and their effect on your portion of profits, the following questions may be helpful:

• Have there been any substitutes entering the market in the past two years? If so, what unmet needs have they filled and how successful have they been?

  • • What potential offerings not currently used in this market could perform a function that would fulfill customer’s needs?
  • • Have we established any switching costs that would stop or slow the defection of current customers to a substitute’s offering?
  • • Which part of the market would be most ripe for a substitute to enter? Why?
  • • Could we establish a tiered offering from a functionality, convenience, or cost perspective that would effectively combat a substitute offering?
 
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