If you’ve read Part I of Setting up Shop, you’ve likely wrapped your head around social media and being online by now—from a business perspective. Hopefully, you’ve also taken the time to go in there and—ahem—clean some stuff up online. After that, if you’re still gung-ho on quitting your day-job and going solo, you’ve also likely given some thought as to the details, such as what to do with all that cash you’re going to be raking in. So, what else is there left to talk about? Lots!
However, for today, lets focus on Mr. Porter. No, Porter isn’t my sister’s best-friend’s cousin (twice removed). Mr. Porter is a US professor at Harvard Business School. He is also a very well-known strategist and famous for his five forces, which AU also analyzes in depth in many of its courses. These forces, or factors, are what we should all keep in mind as we begin any new business adventure—whether that venture means selling lemonade on the side of the street or going fully global with our cat sweater knitting side gig.
Bargaining Power of Suppliers
If you need products or parts, you need to take heed. Unless you manufacture your own raw materials for your products or services, you need others. Those others, the suppliers, have to be treated nicely—especially if there aren’t that many out there.
When supplies are limited (or raw materials are scarce) suppliers can easily raise their prices and renegotiate any previously agreed upon terms and conditions. You need them, they don’t necessarily need you. This applies to everyone no matter who they are, even Walmart. Forging bad relationships with your suppliers will likely result in higher costs (which translates to lower profit margins), delays in receiving required inputs, or even not receiving them at all. Obviously, this wouldn’t be a smart game to play; the consequences can be devastating, so be nice.
Bargaining Power of Buyers
Long gone are the days where buyers were left at the mercy of the proprietor. We no longer take our horse and buggy to go into town, walk into the general store, and try to stay on the shopkeeper’s good side in fear he would price-gouge us. Consumers now have most of the power. This didn’t change very long ago; it only became reality when the Internet became mainstream. Even as recently as the 1990s, buyers had to deal with, “this is the price, take it or leave it.” Thankfully (for us shoppers) we can now take their business elsewhere if we don’t like the price or the terms. Remember, though, you’re starting a business—you’re on the other side of the fence now, which means you cannot afford to take that stance. While the customer isn’t always right, you need to be prepared to turn a blind eye once in a while and pick your battles. If not, then you need to be prepared for your customers to drop you like a hot potato.
The Threat of Substitutes
The bargaining power of your buyers, subsequently, plays into the threat of any substitute products. If buyers are able to easily switch your product or service for someone else’s, with little cost involved, you could be in big trouble. Hence, the need to come up with something special and sparkly, that no one can copy easily.
While the Internet has seen product and service ideas taking off in the blink of an eye, especially with options like crowdfunding and start-up incubators, any idea can easily be replicated in the blink of an eye too. Take Poo-Pourri® for example! Yes, I went there, but, seriously—it’s the million dollar product idea; it solves a universal problem! However, I’m not sure how full their cash register is. Their product is quite pricey, and, if you do a simple online search, you can see for yourself that many were quick to copy this concept too, new and old brands alike, such as Mask®, Squatty Potty’s Unicorn Gold Toilet Spray®, Air Wick’s V.I.Poo®, Aesop’s Post-Poo®, and so on. So, what’s to keep me from running to the bath, er, to the cheaper brand?
Barriers to Entry and the Threat of New Entrants
This will show you how easy it is to get into the game, but don’t start celebrating just yet if it seems extremely doable. Chances are, others have thought of your idea too—and if they haven’t, they will. You gave them the idea, which means they can get into the game just as easily as you were able to. Therefore, there’s another side to this game that you must be willing to play as well. Those already in the boxing ring must continuously try to keep the newbies out. Tactics on how to do this are numerous; entire textbooks have been written about corporate sabotage, So make sure you do your homework.
Competition and Rivalry
This factor is the main and final influence, when deciding whether to move forward with your bright idea. Obviously, when rivalry is high, there will be many competitors in the ring fighting for the cash. You need to be especially vigilant for those which have an excessive cost associated with exiting the ring. They’re not going anywhere because they have too much to lose should they decide to quit; it’s better for them to stay in the game. Additionally, industries which have many competitors have little customer loyalty; buyers have many options to choose from. Therefore, you need to know that what you have to offer is unique to the market and unique compared to others.
Obviously, there are quite a lot of decisions to make before running to the local radio station to inquire about advertising costs. But fear not, there’s more to come in Part III.