Most people think of business competition as a tug of war between rivals, with each competing for more sales or market share. However, more and more we see that competition is much more complex than that. It’s not about who’s the biggest. It’s about who is the most profitable.
And profitability is defined by five competitive forces. Let’s start with your customers who would always be happier to pay less and get more. In the construction materials business, price competition is fierce because so many customers and consumers just want the cheapest product that meets their particular requirement.
Then there are your suppliers who’d ideally like to be paid more and deliver less. Powerful suppliers will use their clout to raise prices or insist on other more favourable terms.
A third source of competition comes from substitute products or services that meet the same basic need you do. These aren’t always obvious rivals. The toughest competitors may come from different industries.
Multiple new entrants can also create tension. For instance, smaller Readymix concrete suppliers challenging bigger well-established providers by operating smaller plants, providing more focussed customer service to fewer customers, reducing costs and offering better deals. This may push larger, more established businesses to spend more on agreements around ‘value added’ services to retain their customer base.
Finally, you still have to fight your existing rivals and intense competition reduces everyone’s profitability.
Most major materials businesses have been in this position for years forcing them to defend increasingly narrow profit margins.
These five forces define our industry structure and shape the company’s future. Once you understand them you can make better predictions, create more competitive strategies and increase profits.
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2-Day Management Workshop