So you have an idea for a product or service, awesome. You have told all of your closest friends your thoughts and they are encouraging – or discouraging, depending on the person, great.
Now … take a step back.
It is often the hardest thing to look objectively at your own idea, especially if the fruition translates into riches and success. The key starting point for any venture is the time spent looking through the organized lens of objectivity.
Thankfully, this doesn’t take reinventing the wheel.
Porter’s Five Forces Model is a good place to begin. These are four forces (Bargaining power of suppliers, bargaining power of customers, the threat of new entrants, threat of substitute products) contributing to the competitiveness (#5) within any given industry.
Each individual force affects your proposed product or service differently, and not in the way that seems so obvious.
For example’s sake, let’s say you want to start a personalized shipping service. In this service, the care taken with each package is just as important as the package contents. For businesses, the package would be more professional, and for private shipping, it would be more personal.
At first glance, there are some obvious major competitors within the shipping industry. FedEx has been shipping goods since 1971 and has virtually pioneered the shipping industry worldwide. Their systems are almost flawless and streamlined down to the minute, from sorting to take-off. Other competitors like the U.S. Postal Service and DHL are also fierce, especially DHL, which has been the only company to directly challenge FedEx.
1. Bargaining Power of Suppliers
Is defined as the ability of the suppliers of raw materials, components, labor, and services to exert influence over your idea and proposed company. In this case, the prices of boxes, tape, stamps, and other materials used for personalization will cost much more than it would for a larger supplier. The ability of the supplier to leverage prices over smaller firms is much greater than for larger companies. This requires that you transfer the cost to your customer.
2. Bargaining Power of Customers
Ranges from price sensitivity to the availability of substitute products. Simply put, the customers can decide to go somewhere else if your product or service does not fulfill their need. In the case of shipping, if the cost of your service outweighs the desire to personalize it. In most cases, the cost would the primary focus.
3. The Threat of Substitute Products
Is complicated. At first glance, it seems easy to define, but what it actually means is the existence of products outside the realm of the common product. Simply put, if someone would rather drive the package to the person, that is considered a substitute product. In the case of a personalized service, the simple consideration of price can act as a substitute in that the need for a lower price outweighs the desire for a personalized package.
4. The Threat of New Entrants
Is the threat of more companies entering into an industry. The more profitable an industry, the more competitors will enter into the market. This measure is very important because it gives a quick snapshot of that industry. The most attractive market is one which entry barriers are high and exit barriers are low (few firms can enter and non-performing firms can exit easily). In the case of shipping, the competition is fierce and the barriers to entry are considered high. For personalized packages, the only hope of success would be to develop a niche that caters to a smaller percentage who expects to pay a higher price.
5. Competitiveness Within an Industry
Weighed against the factors described above the likelihood of your great idea would be dependent on the ability of the service to find that niche, or corner, which fills a specific need. We see that in this simple example what once was a broad idea based on an initial desire has been weighed and pared down into something which may work … but probably won’t.
Though this was a simple comparison, it is important to remember that just because one business idea won’t work that doesn’t mean another won’t. Edison worked through thousands of failures before he had one success. Take pride in the fact your mind works towards something larger than yourself, and try again.
Joseph Baker’s business experience in management spans more than 15 years. A leader of development and management teams, he also implemented budget reductions professionally and as an independent contractor. Joseph led strategic planning and systems of implementation for nine organizations, public and private, and worked extensively with small businesses. He holds a Bachelor of Science in Marketing from Indiana University’s Kelley School of Business, and an MBA from Kellogg School of Management.