Leg Zero: Porter´s five forces model explained: Force number One: Industry Rivalry (part II)
Good day for all! I am so happy to share with you today again.
Yesterday we covered the meaning of concentration. We learned to calculate the concentration “CR4” and we also expressed the difficulty to define our industry. Each consulting advisor may have their own simple or complicated methodology to define the scope and number of firms competing with your beautiful business, nevertheless, I will offer you my own hint of simplicity to define your industry. The industry in which your business competes is the group of companies who sell the same or “kind of the same” product or service, in the same market segment, for the same group of clients who are looking to fulfill the same needs.
When we define our value proposition, it is easy to know who are our direct competitors because the value propositions are very similar. Taken this into consideration will help you to make a good industry analysis.
Today I will write about the second factor of analysis of the Industry Rivalry: DIVERSITY OF COMPETITORS.
Michael Porter is a big fan of diversity of competitors. He encourages diversity of value propositions based on customer segments and personal tastes. To me, it is clear as the water that diversity of competitors increases the possibilities to drive productivity and profits in order to outperform the competition. The more you offer a product which differentiates from the rest, the best advantages you can profit. Each owner of each firm has the right to set up its own goals, culture, philosophy, and leadership.
If the company “Coffee Cup” has decided to grow the number of stores by building their shops in gas stations, that is their strategy for capturing clients under the “take away” premise. If the company “Juan Valdez” decides to open stores inside recognized malls in San Salvador, it is targeting different client needs than the Coffee Cup company. Each coffee shop format implies diversity of competition and diversity of cost structures, outsourcing, maybe franchising and of course your profits. The key is to innovate and make your own differences from the rest of the competitors in your same segment.
Usually, when I do a diversity of competitors analysis, I build a matrix or table in excel. I start by doing a list of the direct competitors in one column, and I assign different variables which are shared by all, such as customer service, quality, availability, variety of the offer, clients satisfaction, location, price, etc.. For each company you will assign a score for each variable or competing factor. Afterwards, you build a graph connecting each score for each of these competing factors. You can make a graph for each company and the industry.
And these graphs called value curves are nothing else than one tool methodology from the Blue Ocean Strategy tools created by professors Kim and Mauborgne, INSEAD. This is a tool analysis which helps very much to understand the diversity of your competition. After I will finish with Porter methodology I will dedicate several posts to explain you the premises of Kim-Mauborgne Blue Ocean Strategy tools.
Well, I will stop here for this week. I am to trying to deliver the strategy models as simple as I can. I wish this blog to be understood by people who have never taken a course of business strategy. I know people who are amazing in their artistic creations of several nature (jewelry, artisan crafts, fashion products, bags, shoes, pastries, jams, restaurants, books, apparel, etc.) and they do not have the background on how to profit. I hope very much to help them with these tools.
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