Understanding Competition Strategy in Business

Many business owners are running their companies without really understanding the importance of business strategy. Retired independent business advisor Nilesh Waghela knows that it's vital that business owners understand their competition, no matter what industry they're in.

This can be achieved by reading Michael E. Porter's strategy concepts. He has two models, the Five Forces model and the Generic Strategies, that will help any business owner get ahead. Here's what you need to know.

Understanding the Generic Strategies

First there are the Generic Strategies, which outline how businesses aim to gain a competitive edge. There are four ways they can do this:

1. Cost Leadership: Companies aim to get ahead of the competition by keeping their costs low, bringing customers to them as they can offer the same product as others, but cheaper.
2. Differentiation: Here, companies aim to bring customers something different when they sell to them. By offering exclusives, they're ensuring customers will need to come to them for the product.
3. Cost Focus: To get ahead, the company will research and focus on a key market, ensuring it’s offering the best value for the product it’s selling.
4. Differentiation Focus: Here, a company will look into building up brand loyalty. It will work on creating an exclusive product and encouraging brand loyalty.

Business Strategy Execution

Understanding the Five Forces

Once a business has a generic strategy, it will need to understand the competition. By using the Five Forces, it will be able to adapt to the market.

1. Industry Competition: The more competitors there are in the market, the harder it will be to secure customers. Customers hold the power as they have more choice.
2. Power of Suppliers: If there are less suppliers to choose from, they'll hold all the cards when it comes to pricing. This will have a knock-on effect on the pricing of your own products.
3. Threat of New Entrants: A company is always under threat of new entrants to the industry. If the cost to entry is lower, the threat is larger.
4. Threat of Substitutes: The more of the same product that there is on the market, the harder it will be for a business to stand out from the competition.
5. Customer Power: If the market is large enough, customers will have more power over deals and pricing. 

With these models, business owners will be able to understand their competition.

The Importance of Understanding Business Strategy