Industry Trends
Competitors
Suppliers
Customers
Introduction
Before you start crafting your plan in step 4, it is important to have quantified answers to many questions about your business and the environment in which it exists. By completing the 8 questions in step 1 (external questionnaire), you will have completed a significant part of the foundation for a strategic framework that will attract customers and sustain profitability.
This questionnaire will provide the information needed to:
- Help select a strategic direction.
- Isolate your external threats and weaknesses.
- Focus on the key competitive issues to attract customers.
Your answers to the questionnaire will be extrapolated into part of your strategic framework. It is obvious then, that your strategy will be only as good as the answers you provide.
After completing the external questionnaire, review your answers, looking for assumptions, opinions, qualified measurements, or guesses you may have made. For example, you may have stated that the threat of new competitors is low because of the high start-up investment cost. The phrase “high start-up investment cost” is a qualified statement and should be researched to estimate the actual basic start-up cost in time, effort, and money.
Once you are happy with your answers, move on to Strategy Formulation Step 2 of 4: internal analysis.
Questionnaire
Vision
A vision statement summarizes the desired future state of the organization and provides both focus and inspiration for its continued success.
Example: If you are in the restaurant business you might say, “We are committed to being recognized as serving the highest quality authentic Italian foods in an authentic Italian environment with franchised restaurant operations nationwide.”
- What is your vision?
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Mission
A mission statement summarizes your business in terms of what you do, who are your customers, and what benefits you provide them.
Example: If you provide turnkey office facilities you might say, “We sell full function turnkey office facilities to small businesses owners, providing them with big business support at a fraction of the cost.
2. What is your mission?
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Customer target segment
Target segment refers to the customers served and the products or services provided. This includes a customer profile for who is being served, a customer profile for who is not being served and on outline of the products or services being offered.
Example: In the real estate market, the organization may be specialized in commercial and farm properties. Their targeted customers may be categorized by income, life style, business background, education, etc. A specialized health care management organization may offer assisted living services to seniors with specific disadvantages or disabilities.
3. What is your customer target segment?
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Competitive Strength
Michael Porter is a professor at The Institute for Strategy and Competitiveness based at the Harvard Business School. He is a leading authority on competitive strategy. Porter suggests five competitive forces at work that shape an organization’s strategy:
- Threat of new entrants to a market
- Bargaining power of suppliers
- Bargaining power of customers
- Threat of substitute products
- Degree of competitive rivalry
Understanding the five forces is the starting point for developing strategy. By knowing how the five competitive forces are interacting in your industry, you will be better equipped to develop a strategy that will enhance your organization’s long term profitability.
Suggested/Optional reading: “The Five Competitive Forces That Shape Strategy” by Michael E. Porter – Harvard Business Review, January 2008.
This article can be purchased directly from Harvard Business Review at https://hbr.org/product/the-five-competitive-forces-that-shape-strategy-hbr-bestseller/R0801E-PDF-ENG.
Threat of New Entrants to the Market
New entrants to your market may gain a portion of the market and increase competition. Your position is stronger when barriers to others entering the market exist. Barriers can be
- Investment cost: High initial investment costs will discourage others from entering the market.
- Economies of scale: Lower unit or product costs for the incumbent organization will make it difficult for smaller, newer organizations to compete.
- Regulatory and legal restrictions: Restrictions such as patents and copyrights, as well as government regulations, can prevent new organizations from competing.
- Product differentiation and brand value: Products with strong marketing or customer loyalty will make it difficult for new organizations to gain market share.
- Access to suppliers and distribution channels: An inability to do business with suppliers and distributors makes it difficult for new organizations to enter the market.
- Retaliation by established organizations: The threat of a price war will discourage new organizations from entering the market.
Examples of what makes it easy for competitors to enter the market:
- Low investment requirements
- Easy access to suppliers or distribution channels
- Simple or common technology
- The absence of strong marketing and/or customer loyalty
4a. What makes it easy for competitors to enter your market?
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Examples of what makes it difficult for competitors to enter the market:
- High investment requirements
- Established brands
- Patented technology or products
- Specialized skills or proprietary know-how
- Restricted supplier access or distribution channels
The need to achieve high sales volumes to achieve profitability or low unit costs
4b. What makes it difficult for competitors to enter your market?
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Bargaining Power of Suppliers
If an organization’s suppliers have bargaining power, they may raise prices or limit supply.
Examples of what may give suppliers bargaining power:
- The cost of switching suppliers is unreasonable
- The product supply is low or sparse
- Your customers are unlikely to switch products
- There are no or few substitute products
- There are only a limited number of suppliers
5. What is the bargaining power of your suppliers?
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Bargaining Power of Customers
If an organization’s customers have bargaining power, they may demand lower prices or improved quality at the original price.
Examples of what may give customers bargaining power:
- There are only a limited number of customers
- They have the option of buying directly from your supplier
- There are a number of competing organizations from which the customer may choose
- It is not inconvenient for the customer to switch to another supplier
6. What is the bargaining power of your customers?
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Threat of Substitute Products
Substitute products are alternative products that can satisfy the same customer need. If there are alternative products available, they can restrict pricing and reduce profits.
Examples of when customers may elect to use a substitute or alternative product:
- When price and performance of a substitute product can match your product. For example, when the price of beef gets too high the customer may substitute chicken or pork.
- Low customer born switching costs
- Low customer loyalty
7. What is the threat of substitute products?
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Degree of Competitive Rivalry
If there is intense rivalry in a market area or industry, providers may engage in:
- Investment in product differentiation through innovation
- Increased marketing promotion
- Price wars
All these activities could increase your costs of doing business as well as lower profits.
Examples of what may create competitive rivalry:
- Number of competitors in the market: Competitive rivalry may be high where there are many current or potential competitors or just a few competitors such as Coke® and Pepsi®.
- Market growth: Competition can be intense in a market that is not developing.
- Product differentiation: A low degree of product differentiation will result in price competition. An example of this would be milk.
- Brand loyalty: A low degree of brand loyalty will result in price competition.
- Substitute products: The availability of substitute or similar products will result in price competition.
- “Brick and mortar” versus On-line operations: The method of shopping and purchasing may result in price competition.
- Local tax structures versus on-line purchasing: Ordering abroad or from other tax structure locations may result in price competition.
8. What is the degree of competitive rivalry?
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