In a quest for profitability and a larger share of the market, businesses have several hurdles to clear. Harvard Business School professor Michael Porter defined these hurdles as five forces that stand in the way of achieving a competitive advantage. He identifies the power that customers wield, along with competition and even suppliers among these forces.
Competition Within the Industry
Most businesses see customer demand as something finite, with only a little to go around. Businesses in the same industry compete to capture as much of that customer base as they can. For example, among fast-food restaurants, a customer may decide between one or the other to find the best or cheapest hamburger.
A customer may choose to do without a product or buy something entirely different. This creates a third choice and adds to the competition mix. In the fast-food example, a potential customer may decide to eat dinner at home or go somewhere else entirely for a chicken sandwich. Even organizations with a monopoly on certain products, such as software companies, face the possibility the customer will opt for something else that does a similar job.
New companies create a formidable challenge to competitive advantage. They may already have a customer base and tend to be hungry to capture more business. Even if a new company operates on a small scale, that's still enough to chip into a large company's profits.
Buyers wield enough power to force a business to lower prices, increase services or carry a less-profitable product. Competition within an industry plays in here, because the customer can go elsewhere if he feels his needs are not met.
A company may have a hard time finding the supplies it needs at the price it wants. This is especially true with a small business that can't buy in bulk like large companies can. A business owner must shop around to find the best deal, determine how much to buy and deal with the logistics of getting the product where he needs it. The high cost of supplies often forces a business to increase its own prices to compensate, cutting into any competitive advantage it may have.
Using the Forces
Lattice Capital, an independent corporate advisory company, recommends taking each of the five forces and weighing them to determine the most important concerns for your business. A business owner can leverage its strengths and improve on its weaknesses -- perhaps by adjusting prices, rethinking quality or tightening supply chains.