The Five Forces of Small Business Strategy
Small business success requires discipline and guidelines around these five sectors.
Return on Investment (or “ROI”) measures the gain or loss generated on an investment relative to the amount of money invested.[1] Another way of looking at ROI is that it shows how profitable a business is. Experts on corporate strategy have long discussed how businesses should look at themselves strategically; to understand the levers that drive ROI and implement policies that can maximize it. One of the most influential strategic analyses is called the Five Forces Analysis that was pioneered by Professor Michael Porter of the Harvard Business School in the late 1970’s. According to Professor Porter and his disciples, there are five market-related forces that drive ROI, but, for the analysis to make sense, it is important in the first instance for a business to understand what it does, the product or service lines it has, and its target market. 1. What Does Your Business Do? At one level this should be an easy question to answer, i.e. my business is an oil company, a radio station, a clothing manufacturer, an online magazine, etc. But, on another level, defining one’s business for purposes of identifying the specific market being targeted, is, sometimes, not so simple. One commentator pointed out, for example, that one of the biggest mistakes made by Oil industry executives in the 1960s was thinking of their industry merely as an extraction industry (i.e. taking oil or coal out of the ground) rather than as an energy industry, a much broader vision of their businesses that might have motivated them into considering developing alternative forms of energy like solar, wind, etc.[2] More recently, some apparel manufacturers are thinking of themselves more as technology companies as they pioneer ways of integrating smart technology into clothing and accessories. Understanding what one’s business actually does and the markets it really serves, will, in turn, help define the business’s product lines and target markets and make it more possible to identify the levers that can drive ROI. 2. Leverage Over New Entrants and Barriers to Entry The more difficult it is to enter a market, the more leverage the players already in the market have over determining the price of their goods and services, which can drive up their ROI. For example, an enterprise that makes clothing that is relatively easy to make is likely going to have less control over pricing as competitors enter its market. To maximize ROI in such a market environment, a party would, among other things, need to better differentiate its product by making it superior to others and/or more difficult to duplicate and/or channeling more resources into marketing to build greater brand loyalty. In a word, a business will need to be knowledgeable about the barriers to entry that exist, or that could be erected, to discourage competitors from entering the target market. 3. Availability of Substitutes Another force that can drive or depress ROI is the availability of substitutes for an enterprise’s products or services. For example, Burger King is not so free substantially to raise the price of its hamburgers because, if it does, customers may readily switch to MacDonald’s or Wendy’s. On the other hand, a drug manufacturer, which may be the only source of a given medication, is more likely to have leverage over its customers in terms of being able to raise prices because of the unavailability of reasonable substitutes. 4. Bargaining- Bargaining Power of Customers
- Bargaining Power of Suppliers
