Porter’s Five Forces

Power of Buyers

The ability of your customers to forego purchasing your product can decrease your business’s pricing power.  Luxury goods are prime example of this concept.  If the economy is not doing so hot people do not have the disposable income to buy your product at the price you expect. On the other hand, if you are fortunate enough that your company is the only company that sells water in the Sahara Desert your buyers have no power.

Power of Suppliers

So you’re in the business of making French Fries, but you only use potatoes that are grown by Farmer Lindsay because she grows the best potatoes. Your customers can tell the difference and you have a line out the door.  Lindsay raises her prices because she knows her potatoes are awesome. Consequently, you increase your prices and your line shrinks. If you rely on another company to make your product or service available, you are at the mercy of that company. If you build widgets and you work with Company X who is the only company that makes a critical component of your widget your suppliers hold the power.

Competitive Rivalry

Other companies are out there trying to gain market share whether you like it or not.  That is how markets work.  The world we live in today is cut throat.  Look at what is happening to all the retail stores competing with Amazon who thought it was a wild idea that customers would buy things online.  Who knew, what a crazy thought, Right? If you think competition does not apply to you, think again.

Threat of Substitution

Some products or services have no substitutes while others have many.  An example of a product with no substitutes could be a specific part designed to withstand extreme conditions on a Space X Rocket.  Good luck finding a replacement after your rocket disintegrates.  On the other hand, if you are looking to change cell phone carriers you have several to consider.  Be mindful that the cost of switching is a critical factor in choosing a substitute.  Changing cell phone carriers is a pain by design. If it is easy for a customer to switch to something similar or better for cheaper they will. I will stick with AT&T for now.

Threat of New Entry

Disruption has been the word of the past few years.  Lyft, Harry’s Razors, Postmates, and Stitch Fix are just a few of the disruptors that we have seen in recent years.  Technology has allowed companies to start from nothing and get to the top quickly.  This website cost me less than $100 thanks, WordPress.  If you don’t have a mote or the walls to your castle are low you might be floating in the Hudson River without a paddle.  (The source of the Hudson river has some intense paddles, you need one.)