While out running recently I got thinking about Michael E. Porter's Five Forces Model (why not).
The model focuses on 5 factors (forces) that determine an industry’s profitability.
Porter teaches that it is the intensity of these five forces that ultimately drives competition and profitability — not whether an industry is emerging or mature, high-tech or low-tech, regulated or unregulated.
If the forces are intense (airlines) almost no one earns attractive profitability. If the forces are not intense(soft drinks) then the industry earns attractive profits.
Porter believed understanding the five competitive forces was the key to developing business strategy.
Porter’s Five Forces:
- Competitive rivalry: How intense is the competition?
- Bargaining power of suppliers: How much power do suppliers have over their customers?
- Bargaining power of customers: How much power do customers have?
- Threat of new entrants: How easy or difficult is it for competitors to join the marketplace?
- Threat of substitute products or services: How easy is it for customers to switch from one business's product or service to that of another?
For me, this model serves as a checklist against which to test the ultimate effectiveness of a business strategy***.
To be effective (a.k.a., worthwhile) your strategy will move the power from others to you.
How Effective is Your Business Strategy? Take This Test and See for Yourself.
- Will your strategy lessen competitive rivalry?
- Will your strategy move power from your supplier to you?
- Will your strategy move power from your customers to you?
- Will your strategy make it more difficult for new competitors to emerge?
- Will your strategy make it more difficult for your customers to switch to a competitor?
***A business strategy is a long-term plan of action designed to achieve a particular goal or set of goals.
I share small business tips and lessons that I've learned from 40 years of business experience in both starting and running companies.
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Thanks for reading, seriously, I mean it.