Competition Analysis for Product Managers
Michael Porter has shared in his work- ” How competitive forces shape Strategy?” He shares that Competition is narrowly viewed by Product Managers.
We have observed that Product Managers are hardly building features considering direct competitors in mind or not even analysing other competitive forces. Porter has given the following five external forces that Product Managers should be aware of & analyze to craft a position in the market that is less vulnerable to attack. Here are the five competitive forces:
- The threat of New entrants: In 2010, HDFC securities and ICICI securities were leading in the stock broking industry but they did not focus on entry barriers and failed to analyse the threat of new entrants like Zerodha. This led to disruption in the market and today, Zerodha is the No.1 Stock broking platform in India followed by its imitator – Upstox.
- Bargaining power of suppliers: The bargaining power of suppliers is a relatively weak force in the marketplace for Apple’s products. The bargaining position of suppliers is weakened by the high number of potential suppliers for Apple and the ample amount of supply. Apple is free to choose from among a large number of potential suppliers for parts for its products. The industries of its parts suppliers, such as the manufacturers of computer processors, are themselves highly competitive. The switching cost for Apple to exchange one supplier for another is relatively low and not a significant obstacle. Plus, Apple is a major customer for most of its parts suppliers, and, therefore, its suppliers are very reluctant to risk losing the company’s business. This strengthens Apple’s position in negotiating with suppliers, while conversely weakening their positions. The bargaining power of parts suppliers is not a major consideration for either Apple or its major competitors.
- Bargaining Power of Buyers: In the Amazon Porter Five Forces Analysis the bargaining power of the customers can be explained as:
- The bargaining power depends on a large number of factors like the concentration and size of purchase, product differentiation, switching costs etc. We will look at Amazon’s e-commerce, streaming and cloud service businesses from all these aspects.
- In the e-commerce business, the customers can be widely varying. Due to the large pool of products on the website, the size of purchases can be small to large. However, due to the large volume of customers, there is no major buying power and losing a few customers doesn’t cost them much. Furthermore, there are no switching costs if the customer wants to opt for a substitute or a competitor. The products are largely undifferentiated, and they are not offered in a niche category, which provides additional buying power to the consumers. However, there is scope for backward integration as well, i.e. consumers buying products directly from the sellers instead of using the Amazon platform. Hence, overall the bargaining power of customers is a strong force for the e-commerce business. However, the AWS business is largely B2B and caters to large businesses and the size of purchase can be in millions of dollars, and that too on a subscription basis.
Hence, the customers have considerable buying power in this regard.
4. Threat of Substitutes: Below are the threats of substitute products in Porter’s Five Forces analysis of Amazon:
The e-commerce business faces medium to high threats in terms of the availability of substitutes. Customers who prefer to try out the products before purchase may prefer offline stores.
Further, the customers may also prefer to buy from independent brand websites which pull customers by providing exclusive site or app discounts. Coming to the streaming business, the major substitutes include movies in theatres or any other mode of entertainment for that matter and hence, it can be deduced that the threat of substitutes is high.
Moreover, when it comes to the e-commerce business, there is no cost of switching to a substitute if we ignore the minor transportation cost they might accrue for purchasing from offline stores. Similarly, for the streaming business as well, there are multiple media potential customers can switch to as a source of entertainment with minimal to no switching costs. Hence, largely the threat of substitutes is high in the businesses Amazon is in.
Reference: Amazon Five Forces Analysis
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Learning:
- All the Competitive forces must be analyzed to craft a strong position in the Market.