53. Michael Porter and Competitive Advantage for Small Business (Part 3)

Having looked at Michael Porter’s first three forces from  his book, Competitive Advantage, the internal ones of Buying Power of Customers, Buying Powere of Suppliers and the existing Competitive Rivalry in the industry, we can now move on to the first external market force, the Threat of New Entrants.

Some markets are inherently very difficult to enter, either because existing suppliers cover all the niches and have very strong brands, or simply the cost of entry is very high. This might be because it takes major capital investment in equipment or premises to enter the market, or because in order to compete with existing players a new entrant would have to spend more on advertising than the existing players currently do – with no initial sales to fund that advertising. Or it may be that it needs a lot of knowledge to effectively compete – i.e. there is a significant learning curve that any new entrant has to experience. These are all barriers to entry.

Although we might here be thinking more of competing on a grand scale, say in breakfast cereals with Kellogs or Nabisco, the thinking is equally applicable to a new shop opening in the local High Street or a new professional service provider.

So how protected is your market from new entrants? Or how resistant to new entry is the market you want to enter? Well, even the big boys do not have it all their own way, because a new niche can often be formed in a currently heavily exploited market with strong competitors. And although the new competitors may eventually get bought by the big fish, well, maybe that was the outcome they wanted. In the breakfast cereal market, for instance, despite the massive strength of the big brands and their tendency to bring out new products to match perceived threats,  I notice on my local supermarket shelves a range of products from Dorset Cereals. They are positioned as a regional company but distributed nationally as a healthy product with higher expensive ingredient content than the big players, and apparently being quite successful creating and farming their own niche. And this is what Ben & Jerry’s did in the even more competitive ice cream market – until they were bought by Unilever.

So the threat of competitive entry is not just a matter of looking at the power of the existing players and judging that, if they are strong, there is no threat or opportunity. It also involves much finer appreciation and judgement about what opportunities for a niche there might be, and who might exploit it. Both Dorset Cereals and initially Ben & Jerry’s entered heavily advertised markets but relied on niche positioning, an individual character and word of mouth to establish a position, rather than trying to take on the big players head to head with heavy spend. (See the earlier blogs in this series relating to Seth Godin and the Purple Cow for more on this).

But surely in a recession there are likely to be fewer chances of a new entrant? Well I do not have any statistics to say whether historically this is so or not, but a recession is just the turbulent sort of time when incumbent brands are more vulnerable and other companies – or individuals – are more likely to be looking for new opportunities to use their underutilised capabilities. For instance, the building market is so depressed that many new build specialists are now happy to undertake repair and upgrade work that just a year ago they would have shunned. So there we have a depressed market segment with even more players taking an active role.

In a number of markets, repairers are starting to see an increase in sales as there is a cultural shift away from ‘throw away and buy new’ and towards ‘make do and mend’. And from what I have observed so far this is not purely a financially enforced movement, but a genuine emerging change of attitude: consumption is beginning to be seen as excessive rather than fashionable, and people whose income has not undergone any sudden change and whose livlihoods are not under any present threat are still acting more cautiously, less ostentatiously.

How are these factors affecting your market? Is your market less safe than you think? Are there opportunities waiting to be seized as attitudes change, competitors cut their resources, drop smaller less profitable products and services that perhaps you could operate at a profit? We have already seen High Street names such as Woolworth disappear? What other competitors will disappear from your markets? And what gaps will that open up? I believe it was a an old Chinese curse that said: “May you live in interesting times”. Well, we are in interesting financial times (we were going into recession and we are coming out!), whether we like it or not, so let’s enjoy the challenge.