Five forces for a market

For a designer like me, the biggest question while contemplating a venture is, where to start? How do I analyze whether my idea is worth a shot considering similar products, competition (both local and global), current business environment etc. My research into this threw up Michael E. Porter and his seminal work - “Competitive Strategy”. The current Bishop William Lawrence University Professor at The Institute for Strategy and Competitiveness, based at the Harvard Business School, Mr. Porter is thought of as the foremost word in competitive strategy. 

His book is an exhaustive work that lays barren how an enterprise (social or otherwise) can analyze its industry and competition in a systematic manner. His 5 Forces framework, can be a tool that can help would be entrepreneurs to analyze the industry that they intend to enter.

 Image courtesy : http://en.wikipedia.org/wiki/Porter_five_forces_analysis

This simple concept can be used to decide whether to enter a certain market with a certain product. It forces us to ask the following questions –

1.     How easy is the industry for other competitors to enter?

If your product is not patent-able or can be easily copied by others, then it may not be wise to proceed. If your industry is less capital intensive or low tech, it may be easy for many others to enter and set shop.

2.     How much bargaining power do suppliers have? 

If your enterprise or product is dependent on a single or few suppliers, then you run the risk of being under the price power of your suppliers. They may look to use it to their advantage, by charging you higher, driving your costs upward.

3.     How much bargaining power do buyers have? 

Here we need to analyze not just availability similar products, but also existence of rules or laws that can enable governments to put a cap on the price to charge.  In general, the lesser the bargaining power of a buyer, the better. This implies you will be able to set a price for your product without it being eroded by competition or law.

4.     Threat of substitutes? 

Here we should look to analyze whether our product can be substituted by other products that address the same need. If so how easily? Some products like cement have almost no substitute. Others, like matchboxes, can have multiple, like gas lighters, electric lighters etc. In general, a good product should not be easily substitutable.

5.     And finally, how competitive is the industry? 

More the competition, tougher the climb. This also means greater resistance to your product, smaller market and eventually lesser profits. The general thumb rule is to avoid entering an industry that has large competition.

Social enterprises are in the end businesses too. And Porter’s 5 forces, could be the first step in deciding whether the environment is conducive for such an enterprise. But is there a new 6^th Force? In 1990's a 6th force was proposed - "complementary products". If petrol cost rises, the automobile industry may suffer as fewer people look to buy cars and opt more for public transport. So the automobile industry might be healthily nor unhealthily dependent on the complementary product petrol. If many of today's cutting edge innovations and products are dependent on the omni present internet, is the 6th force - Inter-connectivity? Food for thought.