Demand for a firm’s products/services is also affected by the nature and intensity of competition in an industry .While analyzing the competition , Michael Porter, in his book on Competition Advantage and Competitive Strategy , mentions that a firm should extend its competitive analysis to include substitutes also, besides scanning direct competitors .The objective of such an analysis is to assess and predict each competitor’s response to change in the firm’s strategy and industry conditions This analysis will hopefully ensure the firm emerging as a competitive organization and also deciding on whom it should pick up as its major rival in the industry .
Just as it is important to do this analysis for existing direct competitors, it is also important to analyse the potential competitors who may join the industry bandwagon. Forecasting such competitors is a difficult task but, according to Michael Porter an analysis of the following, will provide a strategist an insight into this valuable area:
(a)Firms not in the industry but likely to overcome entry barriers , particularly at a low cost. Typical example here are duplicators or firms that use low technology to produce the product.
(b)Firms who derive synergy from being in the industry ; e.g a soda water manufacturer getting into flavored soft drink manufacturing ;or a soft drink firm diversifying into fresh fruit juice manufacturing and marketing , and thus getting synergy from such diversification.
(c)Firms for whom competing in the industry is an obvious extension of the corporate strategy –for example, an automobile manufacturer marketing spare parts and competing with spare part manufacturer Experience reveals that in many cases , user preference is for the OE (original equipment manufacturer)parts.
(d)Customers or suppliers who may integrate backward or forward. Firms often integrate in such a way to derive economies of scale and also to ensure fuller utilization of capacity .For example a cable manufacturing firm getting into power generation business or a gear manufacturer buying/setting up a forgings shop. Such integration is often visible in those industries where the competitive position of a firm can significantly be altered by the suppliers or customers. Another useful exercise is to forecast acquisitions and mergers that might occur among existing players within an industry or form outside .Such alignments may prop up a weak competitor into a prominent player or may strengthen an already existing strong competitor.
Besides, the above , it is also necessary to identify weakness in the strength of the competitors. For example, a firm’s strength may be an extensive dealer network, but if it is not able to supply the goods on time and as desired by the dealers , it may find its rival firm gaining ground and market share. Dealers may lose confidence in the company’s capability to supply and may start stocking and pushing competitors ‘ products.
Thus an analysis of competition is critical for not only evolving competitive strategy but also for strengthening a firm’s capabilities.