In any industry there are common forces at play which affect each and every business within it. By considering these forces at play for a particular industry, we can get a quick overview of the level of difficulty in operating a new or existing business within it. As we will see, some industries are tougher than others. The five forces that effectively shape profitability and strategy are:
- Barriers to entry
- Power for Suppliers
- Power for Customers
- Alternative or attractive substitutes
- Price wars and competition
An ideal industry to operate an existing business within would look like this:
High barriers to entry – difficult for a start-up business to enter the niche your business is operating in; little threat from newcomers entering and ‘taking a slice of the pie’. This may be due to a requirement for high levels of capital, or specialised knowledge for example.
Low power for customers – minimal opportunities for customers to drive down prices or increase service/product ‘free add-ons’ (for example where the product or service given does not match what is promised, opening the opportunity for the customer to demand ‘free extras’ or discounts).
Low power for suppliers – multiple suppliers to choose from, therefore leaving little opportunity for your supplier(s) to increase costs or change conditions.
Few alternatives or attractive substitutes – little opportunity for customers to ‘shop around’ and obtain the same or similar product or service from an alternative provider. Infrequent or non-existent price wars – only ‘friendly’ competition, if any, existing amongst businesses supplying the same or similar product or service.
It is worth thinking about where these forces are now for your business, and where these forces may be in the short term and long term future. Once thought has been given to this question, then it may be worth exploring further, for example:
Can you –
• Raise barriers to entry (make it more difficult for other existing businesses or start-ups entering your particular niche). For example, by putting time and effort into further developing your product or service, this may lead to increase costs to competing businesses looking to copy your product or service.
• Reduce the power of the customer (A clear example of this is when Apple began making operating systems that talk to each other but not to other operating systems; iphones requiring only an Apple charger, and only talking to other Apple products.)
• Not be dependant on a small numbers of suppliers, or making agreements that tie you down to certain suppliers.
• Get into the ‘substitute business’ for an existing product or service. For example, if your product or services is becoming increasingly digitised (going online perhaps), then explore this avenue of diversifying.
Remember Blockbuster Videos? They went bust simply because they digitised movies too little too late. If you’re operating, or considering operating overseas, bear in mind that the structure of one industry in one country may be vastly different from that same industry in another country. For example, the wine industry in Australia consists of less than 2500 wineries and a little over 6000 grape growers, whereas in France there are around 27,000 wineries and about 110,000 grape growers.
There may be a sixth force at play in some industries and circumstances….
The Sixth Force
The Complement: This is where a different product or service from a different business exists that adds value to the original product or service when used together. For example; peanut butter and jam – consumers typically use them together, and so sales are lifted through this complement alone. Therefore, in this case, potential competitors are actually complementing each other. Interestingly, Apple brought the two sides of this sixth force under one roof; creating both the original AND the complement when they entered the entered the phone market. When Apple entered the phone market, phones were often free on contract, prices were very low. They started with a $400 phone. How did they get the consumer to pay such a high price for a substitute product? How do you get people to buy lots of really expensive peanut butter? Give them lots of really cheap jam! Apple gave 99c songs on itunes and lots of free apps. The attraction of so many cheap complementary products that went along with the expensive original product (the phone) soon won Apple a large chunk of the phone market.
In light of this successful strategy, can your business create an attractive complement? Can your business identify potentially complementary products or services already out there?