If you're considering creating a business or diversifying into a new market, you'll doubtless do research to establish the commercial viability of doing so. Michael Porter, Professor at Harvard Business School, author of 20 books and the most cited on the subjects of business and economics, developed a framework known as the Five Forces. It's a really useful analysis tool used to determine the competitive intensity and the corresponding attractiveness of a market. Ultimately, it's a means of assessing the level of risk versus reward and the likely level of profitability. Detailed below are the five individual forces within the model.
Competitive Rivalry. The internal rivalry relates to the supply and demand for products and services. Being the first to market with a product or service sounds like an attractive proposition, with just one supplier and plenty of potential interest. However, there could be a good deal of marketing and awareness raising required to really educate people about your value proposition and build traction. This could be costly and time consuming but with clear differentiation, profits could be maximised with no perceived alternatives. Recognising the profit potential, other established businesses might pivot and enter the same market, providing unwanted competition. Profitability may be eroded if they attempt to gain market share through an aggressive pricing strategy. Less skilled players, selling on price rather than value, will continually lower prices and encourage a "race to the bottom". The most successful businesses in this scenario will maintain market share and profitability through continually iterating, adding value and promoting their key differentiators. Amazon is a particularly good example of a business that has continually improved every aspect of its e-commerce customer journey from increasing its product range, offering alternative payment methods, providing comprehensive reviews, support for sellers, delivery arrangements and complaint handling. It's diversified into cloud computing, digital streaming and artificial intelligence and is considered to be one of the Big Five companies in the US alongside Apple, Microsoft, Facebook and Google.
Ease of Market Entry. The ease of market entry determines how many suppliers will be competing with you to offer similar products and services. High initial startup costs, specialist training and certification, technical expertise and regulatory compliance will all discourage new entrants and at the same time protect incumbents. Owning intellectual property including patents protects your competitive advantage. Economies of scale, highly developed sales channels and any secured exclusivity deals will also act as barriers to entry by companies wanting market share.
Ease of Substitution. How easily people can substitute your product or service with another will influence the attractiveness of the market. Does your company have any direct or indirect competition i.e. are your competitors able to offer an identical or similar product or service? Companies are becoming much better at influencing the ease of substitution using a "carrot and stick" approach, the former rewarding loyalty and encouraging retention while the latter penalises the customer financially or makes it very inconvenient for them to leave. Broadband providers, for example, offer an introductory price to attract new customers but then lock them into lengthy contracts with early termination charges. A customer relationship management (CRM) software company might not be particularly helpful if you wanted to migrate your data to another provider, potentially causing a real operational headache.
Supplier Power. Suppliers will be wanting to put up their prices. The fewer suppliers there are and the more specialised or niche their products and services, the more control over pricing they'll have. You need to, wherever possible, have access to a number of suppliers to reduce that dependency. Being reliant on a small number of suppliers can have both financial and operational impacts. For many years Apple relied on external suppliers for its CPUs and this will likely have increased costs and affected the timeframe for new product launches. From 2020 they removed this supply chain problem, designing and manufacturing their own "Apple Silicon" in house, reducing costs and reducing the time to market for desktops, laptops and other devices. Operating a franchise will usually involve you buying centrally from a strictly controlled product range and adhering to internal procedures. Are your suppliers' prices creeping upwards and you're unable to pass on these costs to your own customers? Taking into account the cost and inconvenience of moving, what can you do to mitigate this?
Buyer Power. Buyers will try to reduce your prices and the fewer of them you have, the more they're able to negotiate strongly and drive them down. The greater the amount they spend with you, the more price becomes an issue unless you're able to demonstrate that the value you add exceeds this. You can influence this in many ways such as effective product differentiation, developing greater customer loyalty through improved customer service, building strong personal relationships and becoming a "one stop shop" where people benefit from the convenience of using you for all their requirements. Brand loyalty is hugely important in this too and companies are becoming much better at using influencer marketing and other forms of social proof to grow it to the point that price is far less of a consideration.
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