To start a business, a strategic thinking is needed, a business strategy is needed. It’s not that one would think of any business in any market and think that they would be successful if they start a business. So how do we know that one has right business strategy and how do we determine if a particular business would be successful or not?
Many say one needs to know the market. If someone knows a market for a particular business, they can enter into that market with their business idea and be successful. But how difficult it is to gain information about the market? One can hire experts who can gain every possible information about the market. One can apply themselves to know every information to study the market properly. But is that enough to say that yes one can do business in a market and be successful as well?
So again, how do we know if a particular business is right for someone to pursue or not or someone has a right business strategy for their business idea to enter into a market and be successful as well. How do we know that?
In fact, one needs to know several factors about a particular business and an industry that they are entering into. It’s not one factor. It’s not just market or competition. There are several factors one needs to know to decide whether their business idea would be successful in the market or not or if they have a right strategy for their business or not.
At high level, one needs to know if they have an entrepreneur edge in the market or not. Do they have a product that gives them an advantage in that market compared to the others who are already doing business in that market. Plus, one would need to know what trade-offs they have to make in the market, what they could gain and what they could give away. Further, one needs to know where they are positioning themselves in the market. These are important factors at a high level.
When I say if your business has an entrepreneurial edge or not, what do I mean by that? I mean does your business address a gap in the market that has been ignored by other businesses? Let’s say you have identified a gap in a used car sales market, for instance. So there are some businesses in the market that are selling only new cars, while there are other businesses who are selling all types of used cars. But no one is selling high-end, high-class, premium quality used cars that attracts certain group of customers that prefer premium but doesn’t want to pay for new cars. So, the entrepreneurial edge is about addressing a particular gap in the market that is not addressed by other businesses.
When I say that a business needs to make a trade-off, which means if you are entering in a market and you are positioning your business which caters to low-end, price-sensitive customers, than it means you cannot cater to high-end premium buyers that are willing to spend more money. For example, this happens in airline industry where trade-offs are often on whether an airline caters to people who are looking to save money on their frequent travel and they don’t care if an airline charges them extra for bags or not. They don’t care if the airline is offering them services with premium features such as food and drinks with everything included in the price or not. Because that is mostly preferred by the premium high-end customers who are willing to spend extra bucks for their comfort while some people might be okay to just spend less money to quickly get from one place to another place. So, you are making a trade-off in this situation where you are only able to cater certain group of people and not certain other group of people.
When I say that if you have a unique position in the market for your business or not, what I mean by that is that whether you have a product or a range of products that dominates in particular segment in the market. For example you are in a business of selling a designer handbag. So, in the designer handbag category, where do you stand? Is your product attractive to customers? Does the Product offers all the utilities that customer desires? What does it offer to the customer? All these several factors determines if your product will be successful in that category or not and your business as a result of that will be successful or not.
Many are able to determine if they have an entrepreneurial edge in the market or not, they know how they are positioned in the market and they know what trade-offs they are making in the market when they enter with their business idea. But how do we apply a particular approach to any business model, any business idea and decide if it is right business idea with right strategy or does one even have a strategy or one needs to make a strategy to proceed with the business idea?
This can be decided by a five forces theory that was designed by Michael Porter. In the five forces theory, the focus is on five different forces that almost affects every businesses. What are these forces?
First force is a threat of new entrant in the market. When one starts a business or one has an established business, then how likely there is a threat of someone new entering in the market and competing with you? Because if it happens easily, then it can affect your bottom line and your revenues. But it depends on what type of business one has. If one has a business of just building an app which offers some services to the customers on mobile phones, then somebody else can come into the market and build similar app and offer the same services. So, threat of new entrant in such market is very high, whereas for some other market it could be low.
Now, another force is power of suppliers that affects businesses. How much power a supplier could have in your market for your business to operate? How much control they have on prices? Can they jack up prices so high that turns your profits into losses? This could happen if there is a supplier monopoly. Let’s say if you have just one supplier whom you rely on and that supplier increases price and then your business would suffer very heavily, whereas if you are relying on commodities that can be supplied by any supplier, locally, domestically or internationally, then your threat of supplier is much lower comparatively. So, your ability to address threat of suppliers determines whether you have a strategy that can address this issue or not.
Similarly, there is a power of buyers. How much buyers control the market? If buyers are price sensitive, and they’re not willing to buy your product beyond a certain price, then you cannot sell your product at higher price to make profits. Thus, you have to sell your products at a lower price and sometimes you cannot even cover your costs. So, it depends how much buyers also control the market. So, this is a another force that affects any business.
Another force that can affect any business is a threat of substitutes. Is there any alternative that customer has which does the same job and saves them money so they don’t want to spend money on your product? For example, if I want to buy a car, but I’m okay to use public transportation, which is a substitute. If I have a good public transportation in my area, then I may not want to buy a car. So, if anyone is in a car sales business, then this has to be considered to determine if a strong substitute is available to the customers that they cater to.
Now, fifth force is rivalry among the competitors. Who are the existing players in the market? How many are there? And how much they control the market? Can they control prices so much collectively? Do they have a union? Could they collectively control prices such that your business experiences less profits. If there is highly competitive market which operates on commodities such as vegetables or fruits, then its essential to know how much group of businesses collectively can control the prices? If they control the prices, then you cannot increase your prices to make profit for yourself and as a result, your business might suffer.
Now, if you have analysed your market considering these five forces and came up with a strategy, a business plan or a business model that addresses all the issues identified from the analysis of these five forces, then you could say that your business idea would be successful or you have a business strategy to enter in a market and be successful.