You are at your desk, trying to work through the last touches — or maybe the first ones? 😉 — of your product strategy for this year. It’s a difficult and energy-consuming exercise. There are a lot of people to rally across your organization and feedback to capture and consider. You are looking for an edge this year. Your competition has made interesting bets and you feel concerned that it might impact your position. The more you look into your competition, the more you unearth information, making it difficult to make sense of anything. This process is dreadful.
In this article, I would like to walk you through what is a classic business school tool to conduct a competitive analysis. I have used it recently to do a competitive analysis for my organization which fed into our product strategy and is influencing some of the decisions we will make for new products.
This tool is Porter’s Five Forces.
The Five Forces is a framework developed by Harvard Business School professor Michael Porter in 1979. Although quite old, it is still very relevant and powerful too. The framework is designed to help organizations understand the competitive forces at play in their industry. It identifies five forces that determine the level of competition in an industry. The forces are:
- The intensity of the competition in the industry
- The threat of new entrants in the industry
- The threat of a substitute product
- The power of suppliers
- The power of buyers
I believe that Porter’s Five Forces is a handy competitive analysis model that you should add to your PM toolbox.
This framework is a straightforward approach to thinking through the competitive landscape that your product — and your organization — operate in. It will help you understand your position within this landscape. When working on a product strategy, it is easy to overlook the influence of your competitors on your chances of winning.
I have found that using a tool like Porter’s Five Forces pushes us to think outside of the day-to-day world of a PM. It offers a different perspective to understand the dynamics in your industry that will directly influence your product position. Do I have a compelling value proposition for my customers? Is it different enough or are all my competitors going to market with the same offer as mine? Am I at risk of getting pushed into a corner by one of my suppliers? Or am I at the mercy of my customers?
These are all good questions that Porter’s framework will help you answer.
Documenting your perspectives and assumptions on the five forces will help you make more informed decisions and anticipate potential changes in the competitive landscape. This should result in a more robust product strategy.
Now let’s take a look at each of the five forces. For each force, I will provide some guiding questions. Your goal is to inform each force and think through potential recommendations in reaction to the force.
1. Intensity of Existing Competition
The first force looks at the existing competitors in the industry and their ability to overpower your product and company. Specifically, it looks at the number of competitors and equivalent products. The higher the number is, the more choice a finite set of potential customers has, the lower the competitive power of your company.
Here are some questions to guide you through this step (I will offer some sample questions for each force):
- How many competitors are there currently in your industry?
- How established are they? Have they been in this market for a long time?
- Compared to your organization, how big are these competitors? How much market share do they have?
- How many customers are there for each competitor?
- Is your industry growing, stagnating, or shrinking?
2. Threat of New Entrants
While the first force looks at existing competitors, the second looks at the potential for new competitors to arrive. This evaluates the typical barriers to entry for your industry. Depending on your industry, barriers to entry may be financial (high cost), legal (laws and regulations, contracts), or operational (attracting customers, building the technology).
The higher these obstacles are in your industry, the more strengths incumbents have. Vice versa, the lower the barriers to entry, the easier it is to displace established companies.
- Are there legal barriers that would prevent someone from entering the space? How regulated is your industry?
- How long is the contractual cycle to establish the relationships you need?
- Do you have any IP or patents that are critical to success?
- Are there significant technological, financial, or logistical barriers?
3. Threat of Substitute Products
The third force evaluates the potential for substitute products. A substitute is a product or service that can be used in place of yours; not from a direct competitor but from an alternative to what your customers are trying to achieve.
Imagine it’s Friday night and you and your friends are trying to decide what to do. In this scenario, the bowling alley is a substitute for the movie theater. Although the movie theater has direct competitors (different brands), the bowling alley is a substitute for entertainment needs and both compete for your time.
If few or no substitute products threaten your product or services, you will have more power over the terms you want to offer. The opposite is true. If there are many substitute products, your power and position are weakened.
- Can other products or services be used in place of yours or your competitors?
- Are customer behaviors changing? For instance, is your offer in response to some macro trend?
- How volatile is the demand in your industry?
- What is the cost of switching between products?
- Can your customer’s needs be addressed by something different?
4. Power of Suppliers
The fourth force that Porter identifies is the power suppliers have over you and for instance the ability for them to drive up your costs. A few factors influence the power suppliers might have such as the criticality of the services they provide, the number of suppliers available, the uniqueness or customization of the services you need, or the costs of switching suppliers.
All of these will define the dependency you might have on a supplier and therefore the power they have over you.
You should also consider the different types of suppliers you interact with. For instance, you should consider your data suppliers, your tech vendors, or your current and potential partners.
- Do you rely on specific tech companies to build or deliver your product?
- Do you have critical partnerships in place for some of your products? How big are those partners compared to your organization?
- Are there companies that provide critical data to you?
- What’s the size of your current suppliers? How many are there in the industry?
- How critical are the services your suppliers provide?
- How costly or easy would it be to switch suppliers?
5. Power of Buyers
The final force to be considered is the ability of your customers to impose their terms. In this case too, a few factors define how much power a buyer might have. For instance, how big a customer is compared to you, how many potential customers are in the industry, or how high your client acquisition costs are.
This can drive your price down or result in you having to concede to more favorable terms for your customers. It can differ based on how many customer segments you serve, and each segment can have a different power over you.
- How many potential buyers are there in your industry? Is it growing?
- How many of those buyers do you have today?
- What is the total value of a contract? How significant is this value for your company?
- How big are your buyers compared to you?
- How critical is your product for your buyers?
Would a template help you think through those forces?
Look no further! Go check out these simple slides (it helps me to have some visuals to think through ideas, so I thought I’d share the ones I’ve created).
Each of these forces should be evaluated separately and as a whole. Based on this competitive analysis, try to derive some recommendations. How should you adapt your product or services to best respond to these forces? Does considering these forces have any impact on your roadmap and what you might be considering prioritizing this year? Is there an opportunity to add some differentiation in your product strategy that would help you stand out from your competitors?
There are a lot of possible options you can consider and new assumptions you can evaluate. I found that Porter’s framework helps think through different angles that might not come obviously to mind. When I did this exercise last month, it helped me take a step back from our current strategy and roadmap. It pushed me to take a deeper consideration of my competitive landscape.
Things can quickly evolve. In the space of a few months, your competition might have launched a new product or new entrants might be trying to disrupt your market. These can have a significant impact on your strategy and should be evaluated to assess the best response.
Applying this model helped me recommend a specific approach to partners we should consider compared to others. It also allowed me to propose new areas of differentiation.
My recommendation is to document your analysis and then run it by a few of your peers to get some additional perspectives and suggestions. Also, in my view, this should be a living analysis. As I said before, a market can rapidly change, and your assumptions and conclusions should be re-evaluated accordingly.
Defining and updating your product strategy can be a dreadful activity for a PM. Porter’s Five Forces is a useful tool for analyzing competition, a key component of a good product strategy. You can now confidently think through and analyze the current competition in your industry, the threat of new entrants, the power of your suppliers, the power of your buyers, and the threat of substitute products.
In this article, we looked at how with a thorough analysis of these five forces, you can make better decisions by understanding the competitive forces in your landscape and anticipating potential changes.
A robust product strategy considers the challenges and opportunities at hand, defines a decided approach to go after these, and finally informs a set of actions your team needs to take (if you are interested in looking further into product strategy, check this framework out).
The competitive dynamics can unfold interesting opportunities to differentiate your product or strengthen your current position. It is worth spending time conducting this analysis. Use this information to make informed decisions about your product strategy and position your product for success in the marketplace.
I hope this gave you enough information to go ahead and try it on your product. Let me know your thoughts and comments.