Five Forces

Where Does Your Business Fit In?

Think about your business.  Where does it fit into its space?

How does your business operate relative to your competitors, suppliers, customers, etc.  Who are your competitors?  Do you even have suppliers?  Well, of course you do, but have you thought about it?  Who holds the power?

There’s a simple framework that I want to introduce to you today.  It was developed by Michael Porter at Harvard Business School.  He is the guru of business strategy and has developed a number of frameworks for looking at how businesses are positioned and how they can use that position to develop good strategy.

So here is Michael Porter’s Five Forces model.

Five ForcesThe model is meant to show the five primary forces that affect how much power your business holds in the position it’s in.  Simply put, the strength of each of the five forces determines how much power your business has in achieving its own success or failure.  It’s a way of looking at how your business fits in and determining if you’re in an attractive spot or not.  If not, then you might look at positioning your business differently.  But the point is, that if you don’t know how you fit in, then you can’t understand the industry dynamics that will either lead you to victory or defeat.

So here are the five forces.

  1. Buyer Bargaining Power—this is how much power your customers have in their relationship with you.  If they can easily control your pricing, or your product placement, then their bargaining power is said to be high.  If they have very little control then their power is said to be low.
  2. Intensity of Rivalry—This is all about the existing competition.  How much competition is there?  Is it really competitive, or is everyone in a slightly different niche or geographic location?  Intense rivalry drives up supply and can strongly impact pricing.
  3. Threat of New Entrants—What barriers are there that would keep new people from doing exactly what you are?  If there aren’t any, then there’s always a threat of new entrants.  It’s up to you to gauge how much of a threat that really is.
  4. Threat of New Substitutes—This is a lot like new entrants and competition, but it’s also different.  Every product or service has other products or services that could replace them.  Just like portable CD players were all but replaced by MP3 players like iPods.  If the manufacturers of CD players were only focused on other people making CD players, then they completely missed the threat of Apple’s iPod when it came out.
  5. Supplier Bargaining Power—This is a lot like customer bargaining power.  You have suppliers.  Even if you’re a service company, someone provides your internet access and other resources.  If you have a website that makes its money from affiliate marketing, then Amazon may be one of your suppliers.  How much power do they have in the relationship and how much do you have?  If you’re the small website with links to Amazon, then they have a lot of power, and could shut off that source of revenue without a second thought.

Each of these forces has the potential to derail your business.  But that’s not to say that if you don’t hold the power, then your business is destined for failure.  Every business has to find a balance.  But to find that, they need to understand where they fit in within their industry.

This model isn’t all encompassing.  It doesn’t take into account the constant change that takes place in the world.  But what it does do is give you a way to think about your business and who holds the power to help is succeed or fail.  If you ignore these forces, then you stand a high risk of being wiped out completely without much notice.  If you’re aware of them and constantly monitor them, then you can see the trends in your industry that might affect you, and be proactive to come out on top.

Over the next week, I’m going to talk about each of these five forces in more detail.  I’ll give examples and help you see how you can figure out where you fit in, and how you can use that information to your advantage.

The businesses that thrive in this changing world are the ones who are aware.  They are the ones who pay attention to the world.  They are the ones who understand where they fit in today, and where they could fit in tomorrow.

So where do you fit in?

 

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