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The One Year, Thirty Minute Challenge :: Week 42 :: Marketing :: Five Forces Plus 1

When vending your products and services, you spend a lot of time pressing out –

  • You create new products and services you believe current and potential customers will want
  • You tweak existing products and service to keep them attractive to current and potential customers
  • You improve the customer experience to encourage loyalty and decrease defection
  • You create new messaging to tell your story in a more compelling way

But, any healthy assessment of an organization’s competitive environment asks the question, “What is pressing back against us?” Competitors, customers, vendors, and the environment at large are always changing. So, in addition to the proactive “pressing out”, you must counterpunch – not necessarily responding tit-for-tat, but tracking what’s going on around you and responding when advantageous.

Michael Porter introduced his “Five Forces Model” in 1979. Forty years later, it’s still an effective way to examine the competitive forces in your industry. In the mid-1990s, a sixth force was added to the model (some folks have credited it to Andy Grove, the former Intel CEO).

In this week’s One Year, Thirty Minute Challenge, we’re going to walk through the six forces and ask questions that will help you look critically at what is “pressing back” at you. Then, more importantly, we’ll suggest some “counterpunching” options you can evaluate with you team.

Rivalry among existing competitors – Other companies serving the same customers, offering products similar to yours, pose, in some ways, the stickiest problem. The gut reaction to lower prices only sets up a race to the bottom as each competitor settles for less and less revenue to pick up a few more points of market share. Competing on price is an unsustainable tactic. So, for products that are largely undifferentiated, what can you do instead? The short answer is to change the basis of competition. Overnight package delivery is big business, but since the end result is a package moved from point A to point B overnight, it’s highly undifferentiated. The competitors in this industry have done a good job of turning our attention to unique competencies that distinguish them from their competitors – package tracking and outsourced logistics provider to name a couple. So, if you find yourself in a slugfest with a capable competitor, consider this –

  • Are the products or services truly undifferentiated or have you done a substandard job explaining your unique value proposition?
  • If they are truly indistinguishable (electrical outlet covers, for instance), can you shift the basis of competition to a unique delivery competency or customer experience?
  • Can you move up or down to premium or economy versions of the product and capture an “end” of the market?
  • Can you leverage the competencies that allow you to create this product and use them in a “blue ocean” – one that’s free from the bloody red waters of your war with current competitors?

 

Threat of New Entrants – If you’re making money, someone else would love to make it as well. Any successful enterprise is going to draw the attention of existing companies looking for new opportunities and startups looking to crash a successful party. There’s an important discipline that comes into play here that we discussed in an earlier One Year, Thirty Minute ChallengeCreative Destruction. Creative Destruction is the practice of scrutinizing your current products and processes to make sure they are impervious to competitors and, if they are not, replacing them so that they are. If you’re not engaging in this exercise, potential new entrants will be. So, how do we stave off new entrants?

  • Build a great database and communicate with the people in it frequently. In theory, you know infinitely more about your market than a new entrant does. Use your experience to be a better listener, understanding the needs of the market more accurately than potential new entrants. Tell your story in a meaningful way.
  • Give great service. Don’t give customers a reason to look elsewhere for the same good or service.
  • Leverage the learning curve that you’ve already ascended. That learning curve should translate into better vendor relationships, more mature processes, and consequently, lower costs. You should be able to price match or even undercut a new entrant and still make more money because your costs are lower.
  • One last, more radical, idea. If a new competitor is exceedingly capable, maybe you should buy them. Unless they are incredibly well capitalized, they might have shot the wad creating their new product or service.

 

Threat of Substitute Products – This force is different from competition with existing rivals because it considers enterprises competing for the same dollars – going to the movie theater vs streaming a movie at home or playing mini-golf vs going to the movie theater. Substitute products can span industry types – gym membership (a service) vs buying a Peloton bike (a product with an optional subscription service). Value creation is always a holy grail exercise, but, in this case, it’s really the entire discussion. How can you create an offering of surpassing value for this particular dollar?

  • What is the desired end result for this expenditure? Get healthy, be entertained, not be hungry any more, be confident that my car is safe and reliable again?
  • What stands in the way of the customer achieving that goal? How can you most efficiently and convincingly eradicate those obstacles?
  • What pushes them closer to that goal? How can you most efficiently and convincingly show them that your solution takes them faster and farther towards that goal?
  • How can you communicate that you “get it” and that your methodology for reaching their goal affords them complete control, provides the biggest bang for the buck, overcomes all of their objections and checks every box – or at least checks the boxes better than all available alternatives?

 

Bargaining Power of Customers – You know intuitively that customers have power, but in some circumstances their power is outsized. If a customer’s defection leaves you with a ton of unrecovered acquisition costs (i.e. it cost you a bunch of money to get the customer to buy the first time and they’ve not made enough purchases to offset those costs) or, on the other end of the spectrum, if one or two customers represent such a large part of your revenue that their departure could cripple or destroy your company, those customers exercise substantial control over your company.

  • It seems a counterintuitive, but how can you inflict some pain on the customer if they leave? I, of course, don’t mean real pain, but something like loyalty points or a discount that can only be redeemed on a future purchase. Withhold that benefit until they transact more business.
  • If your product or service is a bit more sophisticated, can you introduce some switching costs into the equation? If you provide a service like accounting or tax preparation, institute an onboarding regimen that involves a thorough (but valuable) data-gathering exercise where you not only gather historical financial data but discuss future financial goals. The prospect of spending that time again, with a new provider, might dissuade them from defecting.
  • If one customer represents a significant percentage of your revenue (high customer concentration in finance lingo) there are a couple of things you might want to consider. If you service only one industry, can you solicit other potential clients in that industry and leverage your deep industry expertise? If servicing competitors poses a problem for your large client, change geography so that prospective client bases don’t overlap. Or, look for ways to leverage the skills you are using to service that client and find other industries where those skills are in demand. Project management, software development, process improvement and a host of other skills are highly transferrable.

 

Bargaining Power of Suppliers – The risk with a powerful supplier is three-fold. They can drive up your costs with price increases because the materials they supply are unique or scarce. They can halt or cripple your value creation activities by being late or erratic in delivery. Or they can negatively affect your quality by providing products that perform inconsistently.

  • How can you create a partnership with a powerful supplier? How can you configure your relationship so that successes and failures are shared? For example, a retroactive per piece payment or bonus payment if every shipment in the previous quarter was on time and the defect rate was below 1%? Or penalty payments, a .5% reduction in unit cost for each hour the production line was out of service because of a stockout on the part the vendor supplies?
  • How can you give them greater visibility into your processes so they can see how their product is utilized and when it will be reordered next (so they can prepare for production)?
  • How can you leverage their expertise to improve quality and drive down costs as you contemplate future versions of their product? How early can you bring them into the discussion? If you help them build ease of manufacturing into future versions, costs can come down.

 

Complimentary Products – We are awash in manifestations of this competitive force – razors and blades, phones and cases, phones and apps, printers and ink – and the list goes on. But, leveraging this for competitive advantage has some fairly straightforward components.

  • Can you clearly see the beginning and ending of the complementary wave you’re riding? If you make cell phone cases, you’ll be retooling every 8-12 months. If you make ink cartridges for printers, a model could be in use for several years. Complimentary products also vary in complexity – a VHS tape had moving parts, a DVD had none.
  • Will you be directly benefitting from both sides of the equation? Will you be making razors and blades or will you only be making blades?
  • If the complimentary products are in the tech realm, is the successor technology likely to be in your wheelhouse? Streaming video is not at all like Blu-Ray Players and Blu-Ray discs. Can you be proficient in and can you afford to play in very disparate spaces?

 

In almost every case, the things you do to press out will be more important than the things that are pressing in, but you can’t ignore the environment in which you complete.

 

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