I read an article that took me back to my undergraduate economic/business studies at Bentley University (College when I was there).
Well took me back to the feelings I had as an undergraduate.
Allow me to take you back.
Take you back 10+ years ago to young me sitting in my first Microeconomics class - a class that would yield my lowest grade in my academic career to date might I add. What I remember most about this course were the conversations and the breakdowns between what the book said and how we could apply in real life. I loved this course but I seriously struggled, so much so that the professor actually said I should consider a major change.
But I stuck with it. I knew, even though I didn’t always get the material at the time, that it was important to know about the incentives that motivated how firms interact with each other and how people interact with firms. Fast forward to now and I’m teaching college courses, mostly economics and finance, including designing original economics courses for business programs. Take that Freshman-Bentley-Econ-Professor-Who-Didn’t-Believe-In-Me! It’s being pragmatic in understanding what motivates people and making everyday economics a skill set that I rely on everyday. Getting to the heart of causality and creating strategies that have real impacts for people and firms.
Why did I share that with you?!
It’s because of Michael Porter. This article reaffirmed the mission that I have for myself and for Disruptive Strategy. Basically when I grow up (professionally) I want to be in a similar position to him. Porter is a strategist, economist, and professor that has done an amazing amount of work touting the benefits of competitive systems to get and keep economies moving and growing.
Reading this article made me feel like that undergraduate that had a world of possibilities in front of them. It helped me remember that the skills and the tools that I’ve been sharpening over the last decade not only have value but are needed by people and firms because it’s more than what simple Google searches and templates can provide.
One of my favorite systems of his is the Porter 5 Forces Model and I wanted to share it with you. Since its inception strategic consultants, planners, and advisors have been using this system as a basis to create strategy for firms of all sizes. The kicker is that it’s based in pretty topical economic theory - remember the things that “shift” a supply and demand curve, or how markets find equilibrium, or better still price elasticity of demand??
Yup, it all comes from there!
Here’s what you need to know about the 5 Forces Model to be a better strategist:
There are 5 Forces that drive companies in competitive markets:
- The threat of available substitutes
- Amount of buyers and their bargaining power
- Amount of sellers and their bargaining power
- Rivalry/competition within a market - number of existing players
- Barriers to enter a market
When bringing a product or service to market you have to consider the available substitutes. How much do they cost? How close is the experience to your product or service? What might differentiate you or how can you increase your value/perceived value? There are lots of tablets out on the market now but, why do people choose to buy an iPad? Why might someone choose Google’s Nexus 7? How can you position yourself to be perceived as a niche product or service?
Can the buyers work together to have an affect on a market? What kind of information are you providing for your buyers? What is the collective experience of your consumer? Do you have a product or service that allows for multiple points of entry at differing price levels? Is the experience so streamlined that consumers can always expect a certain experience? Are you building stakeholders or are just banking on perceived obsolescence? Think your cable company. Odds are if you call complain and leave their prices won’t need to change because there are more than enough subscribers willing and able to pay the prices that they ask for. But, if you everyone in your town/city cut the cord and subscribed to Hulu and Netflix then the cable company might have to listen to the concerns of the consumer.
Can you benefit from pitting sellers/vendors/distributors against each other for your business? Can you diversify the way you collect your inputs? Are there any suppliers that would help you grow your economies of scale - reducing your average costs over the long term. When you enter a market or are thinking about making your product unique it’s crucial to consider your supply chain. If there are any hiccups or if you choose cheap over value then that might have an effect on the quality or consistency of your own products.
Rivalries between existing firms
It’s important to assess where other firms are in your market. What kind of market is it? There will be big differences between how you approach an oligopolistic market vs something where there is a bit more competition. It’s also important to monitor how the market behaves. What I mean by that is keeping track of how things are marketed or how fast products/services change. An example would be Apple’s iPads and iPhones. It used to be that those were launched about annually but because technology is changing so fast it’s moved up to about a 10 month release time for new stuff or at least updates to existing stuff. When doing your branding or positioning seeing what the currents are doing will help you better utilize whatever resources you have available. Nothing worse than marketing in a place where no one is looking. So identify your markets and who consumers as well as firms identify themselves.
Barriers to entry
What will it take to enter a market or just start a business? What are the costs or investment necessary to be a competitor? Are there any obstacles as far as availability of resources to get you going? What are tax liabilities or government policies that need to be taken into consideration? Nothing worse than being in business for a while then getting slammed with a tax bill that you weren’t even close to being prepared for. Are there distribution channels available for what you are doing or do you have to create your own? You might be in business already and need some help gaining some scope on growing - so it’s important that you understand the questions to ask to get the best information to overcome barriers.
I know went over these 5 Forces really fast and it’s a lot of questions to ask or even try to answer. There's a benefit though in even starting to think about this stuff. When you start to think about these forces and answers these questions some really neat stuff happens. You start to get really clear on what sets you apart in your market. You start to see what your (real) competitive landscape looks like and you start to see how you can continue to add value to people's lives.
I just realized how long this post is going, so if you are still with me - you are awesome! Awesome and exactly the kind of person I want being part of this community. I want to do more on creating strategy and using the 5 Forces Model so if you have questions on application or making this more pragmatic please shoot them along by signing up for the Disruptive Strategy Newsletter!