5 Competitive Forces a Small Business Should Never Ignore

Image courtesy of www.crumblicious.co.uk

Do you feel oblivious to your competitors? Do you want a simple but proven way to look at where you stand and what’s going on around you? Here I demystify a classic marketing model and show you how to apply it to your small business right away.

Porter’s 5 Forces

A man called Michael Porter once devised a classic marketing model based on his idea of the 5 forces in a competitive environment. In simple terms, this gives us a checklist of the 5 market forces that can make or break a business. Being aware of what they are, how they work in your industry and how you react to them, is the key to maintaining and growing your market share and staying one step ahead of your competitors.

This is a tool that is used by big businesses at the strategic level and can be a detailed an in-depth process. In essence, it’s a tool to find out where you stand in your current market or a market that you’re planning to move into. This article isn’t about blinding you with the science and theory behind it: it’s about translating it into realistic actions for you, as a small business owner.

I’m going to take you through the process using the example of a cake making business, which I’ll call ‘Claire’s Cakes’ (creative huh?!)

Claire’s Cakes is a home based cake making business, run by Claire Smith who creates bespoke celebration cakes for weddings, birthdays and other special occasions.

A Summary of the 5 Forces

There are 5 forces of competition for you to think about:

1. Threat of new entrants – how easy is it for people to enter your market?
2. Threat of substitutes – how easily can customers find a different way of doing what you do?
3. Rivalry – how many competitors and what are their capabilities?
4. Buyer power – how easily can buyers drive prices down?
5. Supplier power – how easily can suppliers drive prices up?

The Model in Practice

I’m now going to take each in turn and explain how Claire’s Cakes could apply it and devise a marketing strategy accordingly:

1. Threat of new entrants – it’s relatively easy for someone to set up on their own if they know how to bake and decorate cakes, have done and photographed them for friends and family and have lots of happy customers who are willing to recommend them. Also, a lot of people set up this type of business from home and in their spare time and there are courses available to learn extra skills needed. All in all, the threat of new entrants is high, so Claire’s Cakes needs to find a way to differentiate and maintain loyalty from happy customers
2. Threat of substitutes – an example of a substitute for Claire’s celebration cakes are those that you can buy from the supermarket, cupcakes or home made efforts. Equally, people can opt for other desserts or ice cream with sparklers for a birthday, for instance. Substitution is easy in this market, unless you have something totally unique to offer involving skills that others don’t have
3. Rivalry – there are a lot of people that make celebration cakes in Claire’s local area. However, few of them have the level of skill that she has, so rivalry is low when it comes to achieving the quality of cakes that she creates and the level of personal service she offers
4. Buyer power – because of the substitutes available, customers may believe they have the power to drive down prices. However, if Claire concentrates on adding value and letting people know why she’s the best option, then the perceived value goes up and people will happily pay more. Also, by concentrating on selling direct to consumers as opposed to supplying cafes, for instance, power is maintained further as she has more customers buying fewer cakes
5. Supplier power – the amount of money Claire makes on each cake depends a lot on the cost of making them. Ingredients, equipment, premises, electricity, etc can all vary in price. Claire works from a separate room at home, so has no rent to pay. However, she can’t control ingredient costs or electricity bills. All she can do is shop around and allow a healthy margin to account for unexpected increases

So you can see that by looking at your competitive environment and being aware of what’s happening around you can give you a great deal of power to make the right decisions. Use this information to inform what you sell, who you sell to and how you convince them to buy from you and you’ll keep hold of that elusive market share.  That’s what marketing is all about!

What next?

Now go and look at the forces in your market or the next market you want to dominate. How can you stand out and get the upper hand?

Let me know how you get on or what you thought of this article in the comments below.

Until next time…