Michael Porter is something of a godfather with regards to modern business strategy process.
He published what became known as the Porter’s Five Forces tool in the Harvard Business Review in 1979 and is still widely used as a tool to understand where you stand in a planned or suggested business situation.
Like the chess-player, using Porter’s methods in a situation means you are working strategically rather than reactively, your eye on a future position so that you fully understand where any move you make could leave you.
It’s a way of testing the viability of a new concept on paper before a dollar is spent in development. As a business strategy process tool, it’s invaluable.
- THE FIVE FORCES BROKEN DOWN
To break it down, we assume that there are five important forces that determine competitive power in a business situation, which make it an ideal part of the Business Strategy Process. These are:
Supplier Power: Do they hold all the cards?
Can they suddenly drive their prices up since their product is scarcer/better than others’? Or do they make it hard for you to change to a competitor if you want to?
Buyer Power: Can they hold you to ransom with your pricing? Is their collective
power strong and are you afraid of losing them so you do what they ask?
Competitive Rivalry: Do you have lots and are they any good? Do your customers see you all as one and the same or does anyone stand out? Do you compete on service, loyalty or price?
Threat of Substitution: Does your business have the Buffett “moat”? How easily and likely is something to come along to knock you off your perch – think Kodak or Blockbuster’s previous dominance in now defunct industries.
Threat of New Entry: Are there barriers to entry to do what you do? It’s hard to build a nuclear power plant but any idiot can try to sell something over the phone. What do you have in place to ensure you keep your spot should some upstart come along trying to usurp you? How safe are you key products from emulation or “improvement?”
BUSINESS STRATEGY PROCESS “REAL WORLD” EXAMPLE
I used to work in the recruitment game – and I did quite well but I decided 50 hour weeks and being the boss wasn’t what I wanted any more. Instead I wanted to write for a living, combining creative work with freelance pieces to supplement my income.
My Porter Strategy might have looked like this:
Supplier Power: Since my pieces are bought for publication, let’s say I’m a supplier and this is a Buyer’s market. Things are more crowded my end of things and my peers and I are more likely to have our percentages squeezed.
Buyer Power: Can they hold you to ransom with your pricing? Hell yes!
Is their collective power strong? Hell yes!
And are you afraid of losing them so you do what they ask? Hmmmm – it varies but enough for me to say yes, sometimes.
Competitive Rivalry: Do you have lots and are they any good? Yes to the first question, the second I’m sure you know yourself. In fact anyone who’s bought a Kindle Vanity Published book that’s full of spelling mistakes and badly in need of an editor will wonder why some people bother. Others are of course, simply fantastic.
Threat of Substitution: Although I’ve read about journalists being phased out by automation in the future, as long as there is internet there will be blogs and as long as there are people to read them they will be monetised. Likewise novel-writing (like most creative areas) could be automated at its most basic level (formula fiction for instance) but not across the board I don’t think.
Threat of New Entry: There will always be someone looking to take your place I think. The trick is to find your voice/niche and the readership should follow you (at least that’s what I’m told – we are yet to see if my oracle is correct.
You see how, as a paper exercise to run through all the various options this can uncover items that could otherwise be costly. After all, I’m an upstart looking to join a mature, competitive industry in which I have little experience.
Having completed this Yair Hamami business strategy process analysis, I would advise “past me” to ensure I had enough money in the bank to anticipate a slow start towards creating a liveable income from writing.