A business’s goal is to generate profit. However, as the business owner or manager, you do not have absolute control over how much profit is generated. Hence, it is your job to find ways to understand your business’s environment (both external and internal) and create strategic plans to beat the market and stand atop the industry.
One of the stepping stones that will help you gain a competitive advantage is understanding your external environment. Undeniably, knowledge about your internal environment is also essential, but you have power over it as the owner or manager. Compared to your external environment, you do not have power over it. Hence, you must play right to rise atop.
Without further ado, Ripple VAs presents you with Michael Porter’s Five (5) Forces Model. It is a strategy framework that will help you identify and analyze five significant forces that affect your business’s profitability regardless of your industry.
Competitive Rivalry
You must look out for your competitors. If there are more competitors, more people are fighting for market shares; hence, there will be a threat to your business’s profitability. To gain a competitive advantage against your competitors, you can either apply the following strategies: cost leadership, differentiation, or focus.
To be a cost leader in your industry is to achieve efficient production. If you can efficiently produce your products, you will likely lessen the cost but have market-level or better-quality products at the average market price. In layperson’s terms, if you have less cost but sell it at market price, you will profit more than your competitor.
On the other hand, differentiation focuses on providing unique products in the market. Let your brand be your strength. If customers choose your products over the other because of the unique qualities your product provides, you can charge a higher price.
Focus focuses on providing products created for a specific purpose. This strategy is through providing a niche product that competitors cannot easily replicate because it needs experts or is protected by a trademark.
The threat of new entrants
Look out for the profitability of the industry you are in. When people find your industry profitable, they will likely try to enter it.
That is why it is crucial to understand the industry you are entering before establishing a business. An industry that needs fewer regulations, time, and money to enter means high competitors; hence, it is not ideal. An industry with substantial entry barriers (i.e., specific technical requirements, must secure an exclusive right from the authority, etc.) gives your business greater power and control over the market; hence, it is ideal.
Power of Suppliers
You must also keep a lookout for your suppliers. Suppliers can also affect your ability to generate profit.
If you cannot easily replace your supplier, your supplier can control your price. If you can easily replace your current supplier because there are plenty in the market and it takes less cause to do so, you can negotiate the price against your supplier.
Understanding this force will help you create safeguards to counter your supplier if you cannot replace it quickly and create strategies to make favorable deals with suppliers abundant in the market.
Power of Buyers
Your buyers can also influence your profitability aside from the fact that they are directly related to the generation of it.
You should realize that if your business depends on a small and more powerful business client, your customer has more power over price and other deals. In this situation, you are actively finding your customers, and if you find one, you are willing to create deals favorable for them just to generate revenue.
You have the upper hand if your business has many smaller independent customers. In this situation, your customers are the ones aiming to get your products regardless of how much you priced them. This should be one of your goals. However, this can only be achieved if your brand wins the trust of your buyers.
Power of Substitute
Sometimes, owners do not thoroughly consider substitute products or services and how they affect the business.
You do not have the power if your business offers a product with many close substitutes. If you change the price or deal unfavorable to the customers, they can easily opt for the substitute rather than pursue buying your products.
Contrary to that, if your product does not have a close substitute in the market, you have more power, primarily if your product alone can provide specific benefits that your customer desires.
