Monday, 1 August 2016

The 'Five Forces' of entrepreneurship

image via iStock
by Marcus Powe, RMIT's Entrepreneur-in-Residence 

Professor Michael Porter created a sensation when he showed the Five Forces Model to the world. No one had really thought about the power of these forces and put them together in such a remarkable way.

Well, they were way back when. I have found using the Five Forces Model in conjunction with the learning curve, industry value chain and adoption curve - to name a few - there is something that most miss, to their peril, when learning the Five Forces Model for the first time.

You must be clear of your position.

The Five Pillars

Where are you?

Are you about to enter the market, are you in the market or about to leave? Without the clarity of your position and intention, the Five Forces is just an interesting way to kill time. When you know where you are, only then can you make the decision to enter, stay or leave. It is only then can you determine whether the market, segment or niche is either attractive or unattractive.

You may know the forces.

1. Competitors
2. Customers
3. Suppliers
4. Substitutes
5. New entrants

The most dangerous, exciting and opportunistic of the forces from the entrepreneur’s perspective are the substitutes.

Substitutes are often created from the driving forces I have discussed in previous posts. The enterprising mindset should be observing the impacts of the driving forces as they create and destroy opportunities and industries. Are you fighting change or going with the flow, reactive or proactive?

The threat of substitutes means how many products in your market can serve as a substitute for your product. A simple example of this is butter and margarine, two different products that are very interchangeable.

The ease with which consumers can substitute your product for another will increase the threat of additional substitutes. If there are many alternative products that can be substituted for your product, and your product is relatively more expensive, it will become harder and harder for you to keep this price point without a Unique Selling Proposition (something that makes your product stand apart from all the substitutes in the market).

You may be asking yourself what makes a market attractive? Then again, you might ask yourself from which perspective?

Little or moderate competition
High barriers to entry to keep the competition out
Few substitute products or services
Buyer and supplier power is low.

You know the old saying; an attractive market usually makes an entrepreneur happy. We need to be happy; after all, happiness is a positive cash flow.