The Effect of Competition on Existing Companies

By Raditya Ananta Nugroho

Porter discusses his views on how markets work and how companies react to changes in it.
Companies change how they face these problems depending on their market and he proposes ideas on
what affects these changes; the five basic forces. These forces will shape the strategies of varying
firms - how they act accordingly when competition arrives. This is relevant to economics as
conditions of any market change every day, from entry of firms to pricing. Hence, it is important to
know what the new and existing firms should and would do when these changes occur. In this essay, I
will discuss how Porter’s ideas are still applicable to internet companies today. I will focus on GoJek,
an internet company in Indonesia and how the five forces affect them, but mainly two of the five, the
threat of new entry and buyer power.

New entries only threaten existing companies if they can overcome all the six barriers before
entering the market. To minimize risk, companies enter without investing a lot and this will put them
at a cost disadvantage. To overcome this barrier, they must come in the market at a large scale, which
most companies would not do as it is very risky. This is also discussed in the third barrier which states
that large capital is needed when first entering a market to advertise. However, even if they do have
capital, the fourth barrier states that cost disadvantages are independent of size, since existing
companies will already have an experience curve. While three of the barriers I’ve discussed focuses
mainly on capital needed, the rest are not. The first of the three is product differentiation; customers
will want to buy products from the existing companies as they feel safer with them. Next is access to
distribution channels. This is very hard for the ‘new boys’ to do since they must replace existing
companies’ products in supermarkets, for example. The last barrier is government policies, which
focuses mainly on regulated industries.

According to Porter, the buyer group is powerful when they can ensure that the suppliers must
do something for the group to keep buying their products. For example, when the buyer group
concentrated and buy products in bulk, that ensures that products will always be in stock. Another is
when the product demanded has substitutes and buyers can just choose which company to buy from.

Gojek is a company that provides ride-hailing like Uber and Grab, but also with other varied
services, like food delivery, cleaning services to massages. Gojek does not really have problems with
entries of new companies in the market. With Gojek, one of the barriers of entry, the economies of
scale, don’t apply. As the market of Gojek is online and they don’t necessarily sell products, cost of
production is minimized. Having said that, they still need to provide capital for research. However, it
mainly being a ride-hailing service, the most important barrier is product differentiation. Since safety
is most important, a new company will most probably have a hard time finding customers since they
are accustomed to the safety of Gojek.
 In this market, the buyers are powerful. Gojek had two competing companies, Grab and Uber.
As they are also existing companies and safety is ensured, buyers can choose between these three
services, with an exception to loyal customers. In fact, Gojek now only has one competitor left –
Grab. Grab took over Uber strategized differently and decided to focus on areas outside South East
Asia, as Grab and Gojek were founded there. Gojek and Grab must promote their services for them to
be able to keep their customers satisfied.

In conclusion, Porter’s ideas can be connected to online companies such as Gojek. While
some of his ideas might not be applicable to these companies, there are more ideas that are than not.
He mentions the strategies existing companies have to take with the five forces, and Gojek have
always been doing them.

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