Porter (2008) summarized five forces which commonly affect financial strategy and competition within the marketplace. Once we remove human factors (personal conflict, for example), these forces account for the vast majority of underlying causes in business failure.I believe that once we remove human factors (personal conflict, for example), these forces account for the vast majority of underlying causes in business failure.
Understanding the existence of these forces — and yes most of them are common sense — will be key to understanding your market and how to establish your microbusiness in it. I’ll talk more in another post about the differences in evaluation between “small” and “micro” business settings, because there are some key changes in mindset that need to be discussed.
Threat of new entrants
The ubiquitous threat of new competition into the marketplace is one of the only consistent features in business. However, this threat is not one which companies should find stifling or paralyzing. Rather, successful business planners should welcome the challenge as an opportunity to solidify their space in the market by focusing on refining their products and services to strengthen their niche and deepen their core offerings (Porter, 2008). By creating lifetime customers, focusing on customer service as a “product”, and focusing on creative twists on core products, companies will survive and thrive in the competitive marketplace (Zane, 2011).
Bargaining power of suppliers
Businesses which rely on others to procure resources, raw goods, or component parts must account for these in their business plan. Who will supply the company, when, where, how, et cetera. While suppliers of raw goods and component pieces can certainly hold sway over factory production regardless of brand, the value of emerging markets cannot be understated – there will always be another supplier willing to gain an advantage against their competitors. For this very reason, the bargaining power of suppliers is somewhat self-mitigating: suppliers are also affected by the same five forces described by Porter (2008). Indeed, the suppliers utilized by various brands are themselves wary of their own competition, vulnerable to the threat of new suppliers entering the market, and to the threat of alternative resources being discovered elsewhere in the marketplace.
Rivalry among existing competitors
A strong business plan will address not only competition between the new company and its competitors, but will consider the implications of competition between those competitors themselves. Every marketplace thrives on rivalry amongst and between competitors, and a business which has a strong plan to differentiate itself will thrive on that chaos as well. Simply put, a company’s products and brands should strive to be some of the best in its respective marketplace, whether due to quality, availability, price point, or some other differentiation. A strong business plan enables a customer base who know what they want, and are willing to pay for the quality that they have come to expect (Porter, 2008).
Bargaining power of employees
The bargaining power of employees is only viewed as a threat by companies who are already at risk for dissatisfied workers. Rather than focusing on ways to avoid the threat of employee union bargain, successful businesses will focus on listening to their employees, making them feel valued, and building a team of individuals who truly desire to see the business succeed. This can be accomplished in many ways, but at its core the business must seek to give control to, and create leaders among, their employees (Porter, 2008). Every business which seeks to employ others MUST have, as part of its comprehensive business plan, a strategy for ensuring the safety and wellbeing of its employees.
Threat of substitute/alternative products/services
Every business planner knows that there can be no substitute for quality and performance. Where longevity, serviceability, and the competitive edge are concerned, no ‘alternative’ product will outlast a high caliber original. Adopting this strategy as part of a business plan will yield a business which is resilient and able to stand up to the test of competitors’ products, and as a result they have little to fear in substitute or alternative merchandise. Cheap alternatives will always exist to high-quality name-brand products, but lack of quality control, poor workmanship, and early failure will bring customers back time after time (Porter, 2008). Knowing which of these approaches (cheap and “alternative”, or high quality and high price) is the best for the given market will be the ultimate determinant for whether a business plan fails or succeeds. Performing an in depth feasibility analysis in order to determine the needs of the market and therefore the best niche to occupy within that market is imperative, so as to ensure that the business ends up on the right side of that equation.
Porter, M. (2008) The Five Competitive Forces that Shape Strategy. Harvard Business Review, 86(1), 78-93
Zane, Chris. (2011). Reinventing the wheel: the science of creating lifetime customers. BenBella Books, Inc. Dallas, TX.