One of the key sections of any business plan is the analysis of the competition. I especially love the ones that start and end by saying “We don’t have any competitors.” Investors take that to mean either 1) there is no market for your product, or 2) you don’t understand the concept of business and competition. Either way you lose.
Way back in 1979, Michael E. Porter proposed a Five Forces framework for analyzing the competitive environment which I think still makes a lot of sense today. Every startup should size his product or service in the context of these five forces:
- Intensity of competitive rivalry. This is where most current business plan analyses focus today. These plans just list a few key competitors out there now, compare feature richness, quality considerations, and pricing. This is an important first step, but it’s only the beginning.
- Threat of new competitors entry. Startups that target profitable and growing markets with high returns should realize that these will draw many new entrants. It will certainly also decrease profitability over time, as well as test your sustainable competitive advantage. That leads to switching costs, sunk costs, brand equity, and a host of other considerations, commonly called “barriers to entry.”
- Utility of alternative solutions. You are never the only alternative, hopefully just the best, in price, utility, and satisfaction. If you new vehicle costs too much, people take the bus. At some level of function, availability, and price performance, customers jump ship away from you. These elements are referred to as “barriers to exit.”
- Bargaining power of customers. This is the degree to which customers can put your company under pressure, or leverage prices, delivery, features, and quality (market of outputs). A key is your differential advantage from alternatives. Small differentials and more competitors give customers higher leverage.
- Bargaining power of suppliers. Suppliers of raw materials, components, labor, and services to you can be a source of power over your ability to compete (market of inputs). You need to identify substitute inputs, supplier concentrations, and employee solidarity (labor unions), which can limit you or give you the advantage.
A few years ago, Andrew Grove is credited with postulating a sixth force in the marketplace – government, pressure groups, and the public. This force adds the concept of ‘complementors,’ and has led to the growth of partners and strategic alliances to balance the competitive environment.
These forces make up the micro environment of a company, which affect its ability to serve its customers and make a profit. A change in any of them should be your cue to re-assess the marketplace. All startups need to remember their core competences, business model, or network, which are the factors that allow them to maintain a competitive advantage.
I always remind startups that this section of the business plan should not be a negative one. Don’t merely list competitors, with their advantages and head start. It’s your opportunity to highlight and emphasize your relative advantages, whether they be price, features, bargaining power, or any of the six forces outlined above.
On the other hand, there is more at stake for startups than enterprises because they do not have the same financial capital of their bigger rivals. But with a clear understanding of where the power lies, you can take advantage of a position of strength, improve a situation of weakness, and avoid stepping into a pack of wolves with no protection. It’s a painful end.