Today we finish analyzing Rich’s hypothetical root beer business with Porter’s Five Forces Model. Yesterday we examined the impact of industry competitors, suppliers, and buyers.
This category deals with the threat of substitute products or services.
Q: Is there a feature of your root beer that will compel consumers to drink yours over other soft drinks?
A: GRB includes vitamins and minerals, and tastes great! (+)
Q: Can your customers drink something other than root beer?
A: Yes. There are gallons of other options. (-)
Although this seems to even out, it’s not quite as cut-and-dried as that. The truth is there are thousands of substitutes for your product: other root beer, other soda, juice, milk, water, or even nothing at all. Because of the weight of this negative aspect, the overall score for this force is negative as well. (-)
How difficult is it to enter the space? Do you have an advantage over the competition? Once in, how do you plan to keep others out? Of all the factors to consider, this is the most important. I call it “Barriers to Entry.” Also, when I draw the model I include another box: “Channel.” I always pay particular attention to the power of the distribution channel, or lack thereof. The following questions will help you understand the concept more fully.
Q: Can anyone make root beer?
Q: How expensive is it for someone else to enter the GRB space?
A: Not expensive at all. (-)
Q: Is it expensive for your buyers to switch from GRB to another brand?
A: No. The store just has to clear the shelf and replace my brand with my competitors’ product. (-)
Q: Do you have access to an established distribution channel?
A: Yes, I have an exclusive agreement with all distribution channels in my target region. In fact, my brother-in-law controls the beverage distribution for all the food chains in my area. (+)
The overall score for this force is a negative. (-) But you must take into consideration your exclusive channel agreement. The power of this positive may be enough to convince you to enter anyway.
On your whiteboard diagram, write a “+” next to Potential Entrants.
Tallying up the overall scores, we come up with a grand score of 2 positive, 3 negative. Do these results mean you should avoid the venture? Not necessarily. The information you’ve gained from this exercise is a valuable assessment of the competitive landscape–you know where you are vulnerable, where you need to apply focus, and what your strengths are. You now have a wide variety of things to consider. Perhaps your assessment ended up all negatives except for one area: but if that one area is powerful enough, your idea may still be worth the effort!
I have colleagues who have made millions on a venture that scored all negatives. They had to work very hard and very long before they were able to make a profit, but they did it! If you look at your whiteboard and see a plethora of pluses scattered across the boxes, it’s indicative of a wave! It will be easier and faster to get the venture up and running. Conversely, the more negatives you have, the more time it will take to make a profit.
Porter’s Points – The Five Forces Model
- The Five Forces Model is fast. Use it during your idea stage to test what you plan.
- Just because an idea scores mostly negatives doesn’t make it a bad idea. Negatives mean you will have to work harder, smarter, and longer. Decide if you are up to it; if not, test some other ideas to find a wave.
- Use the Five Forces Model with the Competitive Matrix in the next section to really get a grip on your market and make plans for success.
Now that you know how powerful, yet simple, this model is, try using it to analyze your own business idea.