The 5 Forces Every Business Must Overcome
Do you know the 5 forces every business owner must account for to become profitable?
Chances are that you know one or two of the forces, but can you name all 5?
According to Michael Porter from the Harvard Business School there are 5 forces that affect profitability in any industry. Knowing what these 5 forces are can help you decide things such as whether or not to enter a new market, where to shift resources to maximize profits and developing competitive strategies in your industry.
Let's start with identifying the five forces and then talk about what it takes to account for them.
The five forces include:
Number One: Rivals
Unless you're the first and only one in your marketplace, every business is going to deal with rivals, and that's a good thing. Because it means that there is a demand in your marketplace big enough to support multiple businesses competing to fill that demand. The problem occurs when you are on the short side of filling the demand. Profits suffer and your ability to compete is compromised due to the sheer number of competitors that you face.
So what's the solution?
You could niche down and solve a problem for a more targeted segment of the market. So going from car salesperson to luxury car specialist would be one example of ow to accomplish this. Or if you're a realtor, you could specialize in luxury retirement homes for those clients who are leaving the work force to start a new chapter in their lives.
But there's another thing that you can do. You can develop your "only" factor.
What's an only factor, you ask?
It's something you can say about your product or service that "only" you can provide - a competitive advantage that differentiates you from your rivals and sets you apart. It's specific, it's something that your prospects want and it's something only you can deliver or promise.
It shouldn't be something that any other company could say just by taking your company name out and substituting their name in. For example, if you provide computer services for small businesses and you say something like
"Here at ABC company, we provide state of the art technology to keep our servers up to date and running 99% of the time so that you never have to worry about downtime or your website being offline."
If you can replace the "ABC company" and replace it with another company name and still have the sentence make sense, then that promise is probably not your only factor. An only factor is unique to you and your company and the more thought you put into it the better you will be able to differentiate yourself from your competitors.
Number 2: The negotiating power of customers
This can be a real problem and seriously cut into your profits if you're not careful. From dealing with price shoppers to listening to prospects who are always looking for a deal or some reason to drop your prices, negotiating with customers about your product or service can be energy draining and unproductive.
Wouldn't it be great if you could only interact with the cream of the crop as far as prospects go? You know the ones I'm talking about- they don't haggle over every nickle and dime on their invoice- they actually pay the invoice on time or in full- they appreciate the fact that they are dealing with a professional and they look at any exchange of money as an investment and not an expense.
The key to working with only the best prospects is to make sure that you have an abundance of prospects to work with. Once you have more prospects than you can handle, you can afford to be more choosy about who you work with. Ideally you'd want a waiting list of people who want to work with you, thus ensuring that you're only working with high quality prospects who you want to work with.
The key to working with only the best prospects is to make sure that you have an abundance of prospects to work with!
Number 3: The negotiating power of suppliers
I recently received an email from someone who was lamenting about the fact that Facebook shut her ads down. Without any explanation beforehand, and after having them run for almost a year without any problems, one day they just stopped. And unfortunately it took a lot of time and energy to get them back online. All tolled this business person had to wait a little over 2 weeks for things to be resolved.
Now if you're spending $5 -$10 dollars per day on Facebook ads, this two week period may not affect you if you have other sources to generate leads. If your ad spend is $5000 to $10000 per day, you could be in serious trouble if this is your main source of lead generation.
And once you get your ads back up and running, whose to say that it won't/can't happen again.
So what's the solution to this?
Own the race course.
What does this mean?
It's a phrase I learned from another marketer, James Shramko. Basically the idea is that if you own the race course, then no one can take away what you already own. Let me give you an example. If you are advertising on Google, Facebook, Pinterest, Twitter, etc., then you do not own the race course. You are at the mercy of each of these advertising giants, and their goals and your goals might not match up.
Sure, you can drive leads to these web properties, and even retarget those visitors, but this is a temporary fix at best. If you're getting leads from Facebook and retargeting them, you can only advertise to them on Facebook. You can't market to them on any of the other channels. Same with Google. If you retarget your prospects on Google's platform, you can't take those same leads and market to them on Facebook or Pinterest- you have to stay on Google's platform.
The solution to this is to own your own first party data. That way you can keep track of who visits your website and you can retarget them on any platform that you'd like. It's like having a permanent cookie dropped on those who visit your website- one that won't expire in 30 days and one that you can take with you so that you can market to them on any channel you'd like.
And because these prospects are so targeted (they've visited your website already) you will spend far less in advertising costs than those who are not targeting this way. That means you can spend a lot more when advertising to your prospects.
If you want to learn more about how to own your race course then check out a video that I did here.
Number 4: New entries into the market place
If you're familiar with businesses like Blockbuster, Borders Books and Music, Radio shack, Toys 'R' Us, the Limited and Payless Shoes (to name a few), then you'll know that these businesses couldn't compete with their online competitors and went out of business. Now, some of this may have been unavoidable, because new technology gave birth to new business practices that some of the Big Box stores just could not compete with.
But what can you do if you're not a Big Box business owner but you still want to compete with the new entries into the market place?
First, you want to develop a relationship with your prospects. Make it difficult for anyone new in your marketplace to take your customers. Make sure that your customers/prospects know, like and trust you to the point where they wouldn't even consider doing business with anyone else.
The other thing that you can do is to make it nearly impossible for any "new kid on the block" to have the same reach as you. In other words, if you've got the solutions to the other forces dialed in, meaning that you have an "only" factor, you have a waiting list of premium prospects waiting to do business with you, and you own your data, its going to be very difficult to compete against you.
Especially if you can spend more on marketing to your prospects than your competitors can, knowing that you will make a greater profit (because your prospects are more targeted).
Number 5 - Alternatives (also known as knock offs, rip offs and also rans)
At the risk of sounding like a broken record, if you've got the first 4 forces under control, then you won't have to worry about any alternatives. Because a cheap alternative should not be able to compete with your only factor, a waiting list of hungry buyers, the fact that you can spend more money on advertising to attract the best prospects and that you own the racecourse.
And if your prospects do fall for a cheap imitation of what you do, then they probably weren't your best prospects in the first place. For example, if my wife and I are in the mood for a good steak dinner, and we call to get a reservation at the best steak house in town, I'm not going to suddenly want to go to McDonald's to satisfy my desire for steak. When you identify the 5 forces in your market place and account for them in your business, your prospects will not want to go to the McDonald's of your marketplace either.
If you'd like to learn more about how to find and identify your perfect prospect, then check out this recent video where I covered exactly how to do that.