BASIC ECONOMICS FOR BUSINESS OWNERS

(Michael Porter - HBR)

All Businesses are affected by both internal forces and external ones. Businesses may fail due to internal forces (which we will cover in our training on (Organizational Structure). Nonetheless, often business fail as a result of external forces. There are five external forces that shape the strategy a business owner ought to adopt and that affect the bottom line:

  1. Threat of new comers

  2. Bargaining power of your suppliers

  3. Bargaining power of buyers

  4. Threat of substitutes

  5. Rivalry between competitors

Threat of new comers

How easy it is for new competitors to enter the market you are in and operate in the demography that you are in?

It is rather lengthy and requires lots of capital to launch a new airline so threat of new comers is marginal but if you own a clothing store on main street then the threat of new competitors is very high. You meet that threat by differentiating your products / services from new or old competitors.

Bargaining Power of your Suppliers

Are you in an industry dominated by a few suppliers, that is an oligopoly?

If you are computer manufacturers then the chip makers yield a great of power over you since there so few of them around the world. But if you a hotel / motel your cleaning supply suppliers have very little bargaining power over you.

Bargain Power of your Buyer

Are your buyers highly organized cascaded businesses or are they individuals?

If your only or biggest buyer is Walmart then Walmart can throw its weight around and force you to outsource or loose money. But if you own for instance a wireless phone store then your buyers are individuals that have very little bargain power over your business.

Threat of Substitutes

Is it easy or not for your customers to switch to buying an alternative product?

A good example is the restaurant industry. When the price of going out to eat go up consumers may switch to more home cooking time in addition to ordering from Home Chef for instance. The most important strategy is not to fall asleep at the wheel like Kodak did, like Blockbuster Video Rental did, and Radio Shack did. Keep in mind that new technology may make it easier for new competitors to enter the market, operate with lower costs, and put out a great substitute to your products or services.

Rivalry between Competitors

Are you in an industry in which rivalry between competitors is intense?

If you are in an industry where competition between rivals is intense such as the computer (pc & laptop) industry, the best strategy to your survival is to think fast and faster than your competitors in rolling new products and/or services.

Data Mining Insights and Adaptive Organizational Structure

These tools can help businesses map out strategies to fight both internal and external forces and survive. We look forward to work collaboratively with our clients to devise the right strategies for their businesses to thrive.

In addition to publicly disclosed financial statement documents, the collection and analyses of relevant data can shed additional light on the five forces mentioned above. For instance, Yellow Cab companies can use published FHV-pickup data to assess the strengths and weaknesses of the Uber/ Lyf / Via / Ndriver operating in the major cities.

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