Five forces of competition a startup should watch out for..
As business owners, we build a product or capacity and we ensure that we have one unique attribute that would differentiate ourselves from the competition. We also go to the external world and we would have heard us say that “There is no competition for us in this world” because we have something unique.
Well, as people who have gone through the entrepreneurship journey for some months would have realized that this statement is not right. This is because the competition is not necessarily defined as some organization that performs the exact services but as someone who can modify their offerings to equal that of yours. This could also involve some one who can create a new service or a solution in the space you are specializing in.
Michael Porter has clearly articulated in his five forces of competition. He talks about how multiple entities can become your competitor after they sense how successful you are. A startup business owner need to analyse their product from the context of these five forces.
- Competitive rivalry
A startup analysis of competition is very limited. The current business plan looks at the competition that exists today. Usually a few top companies are analysed and their capabilities are benchmarked. The features, the robustness, customers to name a few parameters are analysed. This alone will not be sufficient as there are other forces of competitors that will be outlined below.
- New competition entry
It is a good thing to be the first company in the category, i.e Pioneer. It will be a tough market in the early days. However, competition will enter when the market opens up for you and you begin growing. They will begin pricing their services lower than what you would price. New customers would be acquired. You will then begin reducing price of your solution to retain and acquire new customers. Your margins will take a hit.
- Alternate solutions
This is also called Substitutes. People solve the same problems from their point of view. Many a times we find that our customers are solving the same problem in a sub optimal way. They will be in fact happy about solving the problems because they will be thinking that they are doing the best. So, the alternate solutions should also be considered as potential competitors.
- Bargaining power of customers
The lack of uniqueness of your solution or the power of the customers in your target territory will lead to heavy bargaining power. The cost, the terms will be negotiated in the favour of your customers. You will be fine in acquiring your early sets of customers to gain traction and some customer logos. However, this becomes a problem if this is set as a market price. This should lead you to think of some unique feature that will put you in an advantageous situation.
- Bargaining power of suppliers
Your vendors or suppliers can be the next threat that a startup owner need to watch out for. Total dependency on suppliers will lead your suppliers to negotiate terms with you that you might not be comfortable with. These suppliers may also may gain an edge over you if they are located in clusters and have good relationships with each other. They may also find the business opportunity and may enter if they supply a critical component to you.
So , as a startup or a company launching a new product must keep in mind all the five forces of competition. They should anticipate changes that happen in the eco system that would lead to new entrants coming in. The startup should ensure that they build a business moat or a high barrier to entry as early as possible. This will make it difficult for new entrants to step in to the market. This will ensure a high level of differentiation which will keep the company in good stead.