Healthy Competition

Sep 25, 2020


I love competition-- as long as I’m winning! Like cyclists riding through mountains, businesses face ups and downs. What role does competition play?

I love a healthy competition-- as long as I’m winning! Which is why you won’t find me competing in Colorado’s Triple Bypass, a bicycle race covering 120 miles over three mountain passes averaging two miles above sea level! Just like cyclists riding the through mountains, businesses face ups and downs. Especially when it comes to competition. The U.S. Federal Trade Commission seeks to provide fair competition by enforcing laws prohibiting collusion between competitors. For example, it’s illegal for competitors to cooperate in such a way that a winning bid is predetermined (bid rigging) or advantageous pricing structures are established (price fixing).

Competition can be quite fierce and complex. Thankfully, Michael Porter’s Five Forces model gives us a framework for analyzing an organization’s competitive environment.

The five forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market. - Investopedia

Assuming competition is healthy, fair, and legal, what are the Five Forces and how do they affect pricing?

  1. Rivalry Among Existing Competitors: Strong rivalry within a market or industry tends to keep prices down, especially when goods and services are not easily differentiated. Prices are higher when the number of competitors is relatively low.
  2. Power of Suppliers: Suppliers have more power (and charge more) when required inputs to goods or services are hard to obtain or fewer suppliers make inputs available. When inputs are readily available or interchangeable, suppliers have less power.
  3. Power of Customers: Customers (or buyers) drive prices down when they are few in number or it’s expensive to attract new customers. Customers lose their power when they act independently or it’s expensive to switch to a different seller.
  4. Potential of New Entrants: Strong barriers to entry reduce the number of new competitors entering the market, allowing existing companies to charge more. If competitors can enter the market with a small investment of time or money, prices tend to be lower.
  5. Threat of Substitute Products: If it’s easy to substitute one offering for another, prices are lower. If the desirable good or service is unique or special in some way, even by reputation, then the prices of that offering can be higher.

Whew! You made it through this weighty material-- much like a cyclist cresting the third of three peaks in the Triple Bypass. Not only does the Bypass challenge its riders to pedal up 10,805 feet in elevation gain, they also coast down 11,135 feet! But, that doesn’t mean it’s easy. Fortunately, like in business, not all of the ups and downs happen at the same time. Yet, we should be law-abiding and mindful of the power of existing rivals, suppliers, customers, new entrants, and alternative products.

Additional Resources: Harvard Business Review Video: The Five Competitive Forces That Shape Strategy (13:11)-- even if you don’t watch the whole thing, I’m curious if the books in their bookshelf appear to be heavier than the books in your bookshelf...? šŸ§  Also, check out the Triple Bypass Map, click on the Grade button to see more detail! Oh, I checked, the race is only 118 miles, not 120… šŸ¤”  Finally, Investopia offers a dry, but clear video!

by Michelle Sugerman • Leading Synergies, LLC • © All Rights Reserved

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