52. Michael Porter and Competitive Advantage for Small Business (Part 2)

The third of Michael Porter’s Five Forces affecting market attractiveness  identified in his 1985 book Competitive Advantage is the level of Competitive Rivalry in the Industry. The degree of competition affects the price a service can command and ultimately the survival of the players in it. Porter was thinking of large national and global industries but the same principles apply to the shops on the High Street and businesses which often target local businesses – for instance, web designers.

This business will illustrate quite well what I mean. When the web first began to take off designing web sites was highly technical and web designers commanded premium rates as demand outsripped supply and the learning process was not quick.

That began to change as the web and the tools used to develop web sites became more sophisticated, and more could be done without highly specialised programming skills. Many individuals began to learn how to create a website as much for interest as for a business opportunity. But many also began to turn this into income.

Eventually website development became extremely competitive, and, even as the market segmented into basic websites and those with more sophisticated demands at both ends competition drove prices down, and many of the less successful players found that they did not have the basis of a business – or in some cases, even an income from self-employment. The best, of course, continued to prosper, and those who had strengthened their positions most in the good times.

The level of market rivalry is also influenced by the absolute size of the market. In growth times businesses can sometimes survive although they do not have the competitive strength they need to prosper long term. But when times get tougher and in recession, they cannot survive.

Thus on the High Street, although Woolworths has for many years been trying to find an identiity for itself in its marketplace, it is now as sales generally head into decline that it has finally failed. And it will not be the last retailer to fail in this recession.

Survival will depend on a unique market position, the ability to adapt to changing demand and spending patterns and a strong enough balance sheet to work through the rough waters. The failures of course are the part of the natural process of fitting supply to demand through survival of the fittest, and, just as in nature the fittest is the fastest, strongest, most intelliegent, so in business it is the business that has the most relevant USP (unique selling point), that is best funded or that adapts most successfully to new circumstances  that will survive.

 The Competitive Rivalry in most markets will grow more intense until failures make a little more space for the survivors, and until renewed growth increases the market available. Are you fit to be one of the survivors in the current environment, and what can you do to improve your chances?