The Complexity of identifying Your Competitors

With whom do you compete? A straightforward question, but not necessarily one with a straightforward answer. There can be two areas of complexity in identifying your competitors: variation by segment and indirect competition. You should expect competition to differ in some of your main business segments. What your backers want to know is how intense competition is within your main business segment, and whether it is going to intensify. And why. They want to get a sense of what is likely to happen to pricing in your market. Future pricing is critical in financial forecasting, more important even than market share gain, since every penny of a price rise falls straight to the bottom line. Likewise, every penny of a price reduction directly impacts the bottom line. Your backer needs to know. The more bargaining power your customers have over you, the tougher typically the competition. Ask any supplier to the large supermarket chains. Or to automotive manufacturers. Often this is no more than a reflection of the number of providers in a marketplace, compared with the number of customers. The more choice of provider the customer has, the tougher the competition. Customer power is also influenced by switching costs. If it is easy and relatively painless to switch suppliers, competition is tougher. If switching costs are high, competition eases. How much bargaining power do customers in your industry have over providers? High, low, medium? What about in the future? Why? The more bargaining power suppliers have over the service providers, the tougher typically the competition. Again it can often be just a function of numbers. There are, for example, numerous steel or aluminium converters, but few (and increasingly fewer) metal producers (e.g., steel mills, which smelt the iron ore and blend it with alloys to make steel blooms, ingots, slabs, and sheet). When these metal converters sell components to automotive manufacturers, they can find themselves in a viselike squeeze, with huge steel or aluminium suppliers at one end and auto giant customers at the other. But the best of them learn how to duck, dive, and survive. Too many startup business plans are based on the premise that theirs is a new concept. Competition is nonexistent or irrelevant. In the vast majority of cases, this is at best only partially true. There is always competition. Whatever your solution to the perceived needs of the customer, someone else somewhere else has another solution. Or will have. If others don't have a solution now, they may well come up with one after they have examined yours. You'll identify marketplace competitors (soon to be augmented by one new player—namely, you) and assess competitive intensity, perhaps to be intensified by your firm's entry. An example would be a startup boutique specializing in designer clothes for children that's opening on Main Street. Your competitors would include other such boutiques; any boutiques focusing on adult clothes but also offering a selection for children; children's wear chain stores; the children's wear departments of department stores; and all variants of the same using different routes to market, for example, catalog shopping businesses or online retailers. What if your idea is a new concept? Who are your competitors? They are whoever was providing an alternative solution to the customer before your business existed, competing for a similar share of the customer's wallet as you are. Suppose you invented an ingenious wooden roller-ball back-massaging device that released aromatherapeutic oils as you massaged. It's new, it's unique, it's brilliant, it works! But it has competition. The customer's need is relief from back tension or pain. Customers are prepared to dip into their pockets to relieve that pain. They have a range of alternative solutions: They can buy other wooden roller-ball devices, plastic and metal versions, or powered massage devices and massage chairs. They can go to a masseur, even an aromatherapist. They can purchase the oils and self-administer. They can take pills. All these are competitors, even if only indirect ones. Yours will occupy a particular price positioning—above basic roller-ball devices, below power-driven ones—but the customer has the option to trade up or down.