Competitors and suppliers

Supplier power is the ability of suppliers to raise prices or set the terms of supply (1), which is strong when there are few suppliers or the input is essential to the buying firm (1).

One way is to differentiate its product — making it distinct from rivals through better quality, branding or customer service. Because customers then choose the product for reasons other than price, the business can retain market share without entering a damaging price war, and demand becomes more price-inelastic. This protects both sales and the profit margin when rivals cut prices.

The first force is competitive rivalry. The fast-food market has many similar restaurants competing for the same customers, so rivalry is high. This forces the restaurant to compete hard on price, promotions and menu choice, which can squeeze its profit margins and means it must keep refreshing its offer to retain customers.

The second force is threat of substitutes. Customers can easily eat at a café, buy a supermarket meal deal or cook at home — all substitutes for fast food. Because these alternatives are readily available, the restaurant cannot raise prices too far without losing customers to them.

Together these forces make the market competitive and limit pricing freedom, so the restaurant must focus on value, speed and brand to succeed.

A key supplier provides the components a manufacturer needs to produce its goods, so the relationship with that supplier directly affects cost, quality and the ability to produce at all.

A strong relationship can secure reliable supply. If the supplier prioritises this manufacturer, deliveries arrive on time and in full, keeping the production line running and avoiding the stock-outs that would otherwise lose orders and damage the firm's reputation with its own customers. This is especially important if the manufacturer uses just-in-time production, where there is little buffer stock to fall back on.

A strong relationship can also improve cost and quality. A trusted, long-term partner may offer better prices and payment terms, and may work with the manufacturer to improve component quality or develop new parts. Higher input quality means fewer defects in the finished product, reducing waste and protecting the brand.

However, the importance of any single relationship depends on the manufacturer's situation. If it relies on only one supplier, the relationship matters enormously but also creates dependence and supply-chain risk; if it has several suppliers, no single relationship is as critical, though good relations still help.

Therefore building a strong supplier relationship is important because it secures reliable, good-value, quality inputs — but it is most valuable where the manufacturer is dependent on that supplier, and it should be balanced against the risk of over-dependence on one firm.

The retailer's choice of response will shape whether it survives the new competition, and the best option depends on its strengths and objectives.

The case for competing on price (matching the rivals). Cutting prices to match the online firms directly addresses the threat: many customers are price-sensitive, so failing to compete on price risks losing market share quickly. If the retailer can cut its own costs — for example by improving efficiency or negotiating better supplier terms — it could remain profitable while defending sales. This response is fast and easy for customers to understand.

However, competing on price has serious drawbacks. A price war with low-cost online rivals is one the retailer is unlikely to win: online firms typically have lower overheads (no expensive stores), so they can sustain low prices longer. Matching them would erode the retailer's margins and may simply hasten its decline.

The case for differentiation. Instead, the retailer could differentiate — competing on what online rivals struggle to offer: an excellent in-store experience, personal service, the ability to try on clothes, expert styling advice and immediate availability. This builds brand loyalty and makes demand less price-sensitive, so customers choose the retailer for reasons other than price. Differentiation plays to the strengths of a physical retailer rather than fighting on the rivals' terms. Its drawback is that it takes time and investment, and may not retain the most price-driven customers.

Judgement (criterion). The best response depends on where the retailer's competitive advantage lies and what its customers value most. Because it cannot easily out-cut online firms with lower cost structures, attempting to win on price alone is likely to fail. Differentiation — combined with an online presence of its own and selective, sustainable price competitiveness — is the stronger long-term strategy, because it competes where the retailer can win rather than where it is weakest. The most defensible conclusion is therefore that the retailer should primarily differentiate, using its store experience and service to build loyalty, rather than be drawn into an unwinnable price war — though it must still keep prices broadly competitive to retain price-conscious shoppers.

A business operates among rivals, and what those rivals do — their prices, products and marketing — clearly affects it. But how far a business should let competitors drive its strategy, rather than following its own plan, depends on the situation.

The case that strategy should be driven by competitors. Ignoring rivals is dangerous. If a competitor cuts prices, launches a better product or floods the market with advertising, a business that does not respond risks losing market share, especially where products are similar and customers switch easily. Tools such as Porter's five forces show that competitive rivalry — and related forces like new entrants and substitutes — fundamentally shape how profitable a market is, so a sensible strategy must take rivals' likely actions into account. Being competitor-aware also keeps a firm efficient and innovative, because it is constantly benchmarked against the best in the market. In fast-moving, fiercely contested markets, reacting quickly to competitors can be essential to survival.

The case that strategy should not be driven mainly by competitors. Constantly reacting to rivals can be a trap. A business that simply copies or chases competitors loses its own distinctiveness and gets dragged into damaging price wars it may not win, eroding margins. A stronger approach is often to be customer-driven and resource-driven: focus on understanding customers' needs, building a clear point of differentiation, and exploiting the firm's own strengths. Many of the most successful firms set the agenda rather than follow it — they innovate and create new markets, leaving rivals to react to them. A business should also be driven by its own objectives, finances and capabilities, and by the wider environment (the economy, technology, regulation), not by rivals alone.

Weighing it up (criterion). How far competitors should drive strategy depends on the market structure and the firm's competitive position. In a highly competitive market with similar products and price-sensitive customers, rivals' actions must heavily influence strategy — failing to respond is fatal. In a market where the firm has a strong, differentiated position or where it can innovate and lead, it should be driven more by its own vision and customers than by reacting to rivals.

Judgement. A business's strategy should be informed by competitors but not dictated by them. Awareness of rivals — through five forces analysis and monitoring their moves — is essential, and in cut-throat markets it must shape much of what a firm does. But the most successful strategy is usually proactive rather than reactive: built on a clear understanding of customers, a distinctive offer and the firm's own strengths, with competitor actions as one important input among several (customers, objectives, finance, the external environment). So competitors should significantly influence strategy, but they should not be the single driving force — that role belongs to the firm's own purpose and its customers.