Five Competitive Forces

1. Five Competitive Forces that Shape Strategy
Since 1922, The Harvard Business Review has been published as a monthly digest of research-based articles written
specifically for high ranking business practitioners.
It is an esteemed publication and is revered by the icons of global business management and is highly regarded as
being quite authoritative in scope by the leaders in the fields of academic research as well as upper level managers,
executives, and management consultants of a wide array of major industries.
Its worldwide English-language circulation is 240,000, and there are 11 licensed editions of the magazine, including
two Chinese-language editions, a German edition, a Brazilian (Portuguese-language) edition, and an English-
language South Asia edition.
In its January 2008 Special Edition issue, which I had the pleasure of reading on a long flight recently, there is an
article that speaks of how a business, any business, can increase profitability if they understand the role of
competition in its strategic approach. The article, The Five Competitive Forces That Shape Strategy,is written by
renowned Harvard business expert, Professor Michael E. Porter. Dr. Porter's credentials are unsurpassed and is
widely recognized as a leading authority on competitive strategy and the competitiveness and economic
development.
Real Estate, being a business industry, most assuredly can benefit fromthe understanding and implementation of the
precepts Porter details in the article.
Porter's basis for the article is that a business that is aware of the "five forces" will be much better suited to
understand the structure of its industry and can create a position for itself that is more profitable and less vulnerable
to attack.
In looking at the Five Competitive Forces That Shape Strategy we can see how appropriate these strategies are from
the perspective of a real estate professional.
In understanding his theory, it can be concluded that the National Association of Realtors may not be working in the
best interest of the real estate industry. As the NAR is NOT the real estate industry, it is quite odd that a trade
association or lobbying unit of an industry is defining the national policy and procedural strategy of the real estate
business. In its ongoing attempt to fulfill its stated core purpose of helping its "members become more profitable and
successful", NAR seems to believe that the best course of action for establishing its mission is to stifle or eliminate
competition for its rank and file members.
This may prove to not be the best plan. The job of the business strategist is to understand and cope with competition,
not seek to eliminate it.
Eliminating rivals is a risky strategy. A profit windfall from removing today's competitors often attracts new

2. competitors and backlash from customers and suppliers. The competition in the real estate industry that is sparked
by new arrivals like Zillow, Redfin, Trulia and the like can actually help profitability for all involved.
The strongest competitive force or forces determine the profitability of an industry and become the most important
to strategy formulation. The most salient force, however, is not always obvious.
Let's take a look at how the Five Competitive Forces That Shape Strategy can impact the real estate industry as we
know it today.
Threat of Entry
Porter makes an excellent point relative to how competition can increase the success and profitability of an industry.
If you have to become better at what you do to stave off being overtaken by competition, the consumer truly
benefits. The diversification and implementation of technologies forces you to up your game. New entrants to an
industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of
investment necessary to compete. Particularly when new entrants are diversifying from other markets, they can
leverage existing capabilities and cash flows to shake up competition, as Pepsi did when it entered the bottled water
industry, Microsoft did when it began to offer internet browsers, and Apple did when it entered the music
distribution business.
The Power of Suppliers
Renamed in our business to read the Power of Sellers, details how the entity that is in control of the "product" is not
reliant on the industry to drive its revenue. This is very important when you realize in an up or down market, it is the
Seller who has the sole power to set market prices and to set the level of inventory of a product.
The Power of Buyers
As can be expected, the Buyer is the antithesis of the Seller. There is no such thing as a low ball offer. No reason for
anyone to think that. The Buyer is exerting their power in the transaction just as the Seller exerts theirs by setting the
price. It's business people!! Buyers can capture more value by forcing down prices, demanding better quality or
more service (thereby driving up costs), and generally playing industry participants off against one another, all at the
expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry
participants, especially if they are price sensitive, using their clout primarily to pressure price reductions.
The Threat of Substitutes
When the threat of substitutes is high, industry profitability suffers. Substitute products or services limit an
industry's profit potential by placing a ceiling on prices. If an industry does not distance itself from substitutes
through product performance, marketing, or other means, it will suffer in terms of profitability, and often growth
potential. It's not competition that hurts business but rather the perceived threat. If you find Redfin or any of a
number of newcomers to the industry to be a threat then you are looking at things the wrong way. What you must

3. realize is that the obsolescence and perceived antiquity of the current real estate industry business model has made
the industry ripe for the invasion of substitution and of course, advancement. A substitute performs the same or a
similar function as an industry's product by a different or better means.
Rivalry Among Existing Competitors
Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers
profits directly from an industry to its customers. If it were just a matter of offering a cheaper service or product then
perhaps the Redfin's of the world would indeed be a problem for the existing real estate industry business model.
However in reviewing what Redfin, Zillow and many new entrants to the business offer the consumer, there are
many features, and amenities afforded a consumer that are valuable far in excess of just price.
Competition on dimensions other than price, on product features, support services, delivery time, or brand image, for
instance, is less likely to erode profitability because it improves customer value. Rivalry can be positive sum, or
actually increase the average profitability of an industry, when each competitor aims to serve the needs of different
customer segments, with different mixes of price, products, services, features, or brand identities. Such competition
can not only support higher average profitability but also expand the industry, as the needs of more customer groups
are better met. Since the entry of new competitors or substitutes is not solely based upon price, then their entry
should be applauded and heralded, not met with disquietude.
You are licensed by the state, you are an independent contractor under a broker, or you may be a broker. Why is the
NAR running your business and telling you how to conduct your affairs? They are a lobbying organization whose
interests may not necessarily mirror your own.
If the NAR does not have your business plan, should you be managing your affairs according to what they say?
I often get responses wherein agents across the Country want to debate substantiated fact with rhetoric opinion. This
time, the facts may be hard to debate. They definitely can not be refuted.
The subject of this post, Dr. Porter's article the Five Competitive Forces That Shape Strategy, deserves much more
study and attention than I can write here. I urge you to read his article in its entirety and try your best to comprehend
and implement the precepts he describes to meet the challenge of today's real estate business model.
It may very well be the catalyst that allows you to turn from conventional wisdom and embrace the future of real
estate.

4. How to Perform a Professional Analysis of Your Competition.
If you are in the beginning stages of setting up a business, one of the first things you want to do is conduct
a competition analysis. Studying the competition can pay enormous dividends and save you a ton of time
by reviewing their literature to see how they present themselves and what their public image looks like.
Most often, a business's literature will set forth mission statements as well as identifying their specialty
services or products. Conducting competitive analysis involves two and sometimes three major activities
on your part as follows:
1. Play the role of the customer with money. Call the competition in your area and talk to a representative
of the company and ask them questions as if you are a potential customer who is shopping around for
information. You want to use the 5WH formula (who, what, where, when, why and how—see my other
article on the power of the 5WH formula) to ask intelligent questions to get answers about the strength
and weakness of your competition. One of the most important things you must accomplish is to get the
organization to send you their complete sales or information package that describes their products and/or
services. The reason this is so important is that their literature will save you a TON of time designing
your own and re-thinking everything from the ground up.
Why reinvent the wheel? Just get a wheel! And the best way to do this is to get your competitors literature
in your hands sooner rather than later. Your competitions literature will also speak volumes about their
public image and give you an idea and general cost figure of what it will take to develop your own
literature which will be used to compete against them in the market place. Make sure you pay attention to
how phone calls are answered,processed and how fast the information you request is sent to you. Can you
beat their communication systems and do it better? How do their business cards look? These little things
will give you a tremendous amount of insight into your own strengths and weaknesses and help you
determine if you can compete with them or not and whether you will compete on price or service.
2. Call competitors outside your area—you want to call business similar to yours in markets where you
will not be considered a threat when asking questions. Calling into other states can be extremely
beneficial when speaking to key-man personnel about their business. When you call long distance
competitors, your approach should be more straight foreword and you should tell the business owner or
manager that you are thinking of setting up a similar business in your area and you are interested in their
advice. Most of the time business owners or managers are more than happy to give you their input about
the ups and downs of the industry, the business as a whole and give you a TON of free information. Be
careful to not spend to much time asking questions though, you want to limit your phone call to 10 or 15
minutes max. One way to be highly effective at these phone call inquiries is to have 10-20 questions pre-
thought out and written on a piece of paper so you can go through them bang, bang, bang. This way, you

5. look more professional and if you ever need to call again, they will recognize you are a pro and probably
take your call. If you are an idiot on the call they probably won't take your calls again. The key is not to
waste time.
3. Last but not least, you can do in-field competition analysis by either telemarketing to prospective
customers and asking them if they are familiar with your competition, ever done business with them, etc.
By doing this, you are also prequalifying potential customers who have not done business with your
competition and you may discover an open door for a sale. Additionally, when you are out making sales
calls, you can employ the same technology when talking to people and you can find out what they like or
dislike about your competition. Once again, you may discover a door to a sale by identifying your point
of differentiation with your competition.