The framework that shows you where you actually have power - and where you're kidding yourself.
When I ask business owners about their competition, I usually get a list of company names. "There's Joe's place down the street, that big chain that moved in last year, and a couple of online options."
Fair enough. But here's what 20 years of strategy work has taught me: your direct competitors are often the least important competitive force you face.
The real question isn't "who are my competitors?" It's "where do I have power, and where am I vulnerable?"
Michael Porter figured this out in the 1970s, and it's still the most useful competitive framework I know.
The Five Forces (And Why They Matter More Than Your Competitor List)
Porter identified five forces that determine how much profit potential exists in any competitive situation:
- 1. Rivalry among existing competitors (the obvious one)
- 2. Threat of new entrants (who might jump in?)
- 3. Bargaining power of suppliers (who do you depend on?)
- 4. Bargaining power of buyers (how much power do your customers have?)
- 5. Threat of substitutes (what else could solve your customers' problem?)
Let's dig into each one - because I promise at least one of these is more important to your business than you realize.
- 1. Rivalry Among Existing Competitors
This is where everyone focuses. How intense is the competition in your market?
High rivalry when: Lots of similar competitors. Slow industry growth (you're fighting for the same pie). High fixed costs (everyone's desperate to fill capacity). Products are hard to differentiate. Low switching costs for customers.
What to do about it: If rivalry is intense, you need differentiation. Competing on price alone is a death spiral. What can you offer that others can't?
- 2. Threat of New Entrants
How easy is it for new competitors to enter your market?
Low barriers (easy to enter): Doesn't require much capital to start. No special expertise needed. Customers don't face switching costs. No patents, licenses, or regulations blocking entry.
What to do about it: If barriers are low, you need to create your own. Build customer relationships so strong that switching feels painful. Create expertise that takes years to develop. Lock in suppliers or locations.
Real example: A successful coffee shop owner I worked with wasn't worried about Starbucks. She was worried about how easy it would be for anyone with a lease and an espresso machine to open up nearby. Her solution? She became the gathering place for local business networking. She wasn't selling coffee anymore - she was selling community. That's much harder to replicate.
- 3. Bargaining Power of Suppliers
How much power do the people you buy from have over you?
Suppliers have power when: There are few alternatives. What they sell is unique or differentiated. Switching costs are high. They could realistically start competing with you directly.
What to do about it: Diversify your supplier base. Build relationships so you're not just a transaction. Consider integrating backwards (doing yourself what you currently outsource) if a supplier has too much power.
Real example: A manufacturing client had 80% of a critical component coming from one supplier. Seemed fine until that supplier started raising prices 15% annually. They had no leverage. Now they have three qualified suppliers, and guess what? Prices stabilized.
- 4. Bargaining Power of Buyers
How much power do your customers have?
Buyers have power when: There are few buyers and lots of sellers. Your product is undifferentiated. Switching costs are low. They could realistically do what you do themselves. Your product is a significant part of their costs.
What to do about it: Differentiate. Reduce switching costs for new customers while increasing them for existing ones (through service, integration, relationships). Diversify your customer base so no single customer has too much power.
Warning sign: If you have a customer who represents more than 25% of your revenue, you have a bargaining power problem. They may not be exercising it now, but they could.
- 5. Threat of Substitutes
What else could solve your customer's problem - even if it looks nothing like your product?
This is the force people miss most often. You're not just competing with similar products. You're competing with anything that solves the same problem.
Examples: Movie theaters don't just compete with each other - they compete with streaming services, video games, and "going out to dinner" as a date night option. Gyms don't just compete with other gyms - they compete with Peloton, running outdoors, and the couch. Accountants don't just compete with other accountants - they compete with TurboTax and "I'll figure it out myself."
What to do about it: Understand what problem you're really solving. Then make sure your value is clear compared to all the alternatives, not just the obvious competitors.
Putting It Together
Here's a simple exercise: Rate each force from 1-5 (1 = weak force, 5 = strong force).
Competitive rivalry
Threat of new entrants
Supplier power
Buyer power
Threat of substitutes
Interpreting your score: Any force rated 4 or 5? That's where your strategic attention should focus. All forces low? You're in a structurally attractive position. Protect it. All forces high? You're in a tough market. You need significant differentiation or a niche strategy.
The Insight That Changed How I Think About Competition
Porter's most important insight isn't the five forces themselves. It's this:
The collective strength of these forces determines profit potential.
If all five forces are strong, even the best-run businesses will struggle to be highly profitable. If the forces are weak, even average businesses can do well.
This means sometimes the most strategic thing you can do isn't "try harder." It's reposition into a space where the forces are more favorable.
That might mean: Serving a different customer segment. Adding a service component that reduces substitution threats. Specializing in a niche where there are fewer competitors. Building switching costs into your offering.
One More Thing
Your competitive position isn't fixed. Every strategic decision you make either strengthens or weakens your position against these five forces.
Building customer loyalty? Reduces buyer power. Creating proprietary processes? Raises barriers to entry. Developing supplier relationships? Reduces their power. Differentiating your offering? Reduces rivalry intensity.
Think of strategy not as one big decision, but as hundreds of small decisions that gradually shift these forces in your favor.
This is part of a series on strategic frameworks that actually work for small and medium businesses. Next up: Why your strategy must match your environment (TUNA Analysis).
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