The market forrces
Entrepreneurs begin with an idea to solve a major problem or to meet a market needs. An idea must be translated into a vision or a statement that expresses the aspirations and direction of a startup. The vision is also the foundation where entrepreneurs develop a business model to describe the rationale of how startup is making money. By manipulate the components of the business model, entrepreneurs can create a long term strategy for the startup to compete, to survive and grow it into an enterprise in the global market.
Every market is dictated by the law of supply and demand. Excess demand causes prices to rise and excess supply cause them to fall. A business strategy is a long term plan designed to achieve particular goals for the company. It is based on a market analysis that defines the actions company must take to achieve long-term goals. To build a strategy, entrepreneur must understand the market forces that impact the supply and demand.
Basically, there are five forces that impact a company’s ability to compete and entrepreneur must analyze these forces carefully before entering the market. By understand these forces, entrepreneur can position startup to achieve competitive advantage and ensure its survival and growth.
1) The New Entrants force: If the market is highly profitable, it will attract more new companies to come and do business. If it is easy to enter the market, these new entrants will compete thus reduce the profits of everyone in the market. Unless these new entrances can be blocked, profit will decrease until it reaches zero. The best strategy to deal with new entrants is to create barriers so they cannot enter and compete. In technology industry, the most popular barrier is patent for proprietary products. By having their technology protected by a patent, it prevents new entrants from enter and do similar product. Another strategy often used in Biotechnology or Nanotechnology is to set up high levels of investment in specific assets (Laboratories, equipments etc.) that stop others from entering since it is too expensive. Some companies keep prices very low to make it unattractive to new entrants.
2) The Rivalry Force: Even they can prevent new entrants from entering the market but competition among existing companies also happens. Each company is trying to gain a competitive advantage over the others. To understand rivalry forces, entrepreneur must answer the questions: Who are my competitors? What are their strategies? What strengths do they have? What are their weaknesses? What can I do better to gain advantage over them? By collect information and know how to deal with rivalry competitors, entrepreneurs can assure that the startup will survive.
3) The Substitute Force: In every market, there are similar products that can satisfy the same need of customers. These similar things prevent entrepreneurs from set price higher and limit their profit. If someone has similar product at lower price, customers may be willing to buy from them than from you (For example: Cheaper mobile phones, cheaper laptops, low priced services). Entrepreneurs must know where are these similar products? Who made them? What are their strategies? What strengths do they have? Why their products are cheaper? What can I do better to gain advantage over them? By having this information, entrepreneur can adjust the strategy to deal with them.
4) The Customer Force: A big customer always has power to demand lower prices or special terms. For example government may buy more but demand lower prices. Large companies can ask for special discounts else they may buy from your competitors. How to deal with this customer force should be part of the strategy to make sure startup will still be profitable and achieve the long term goals. The common practice is NOT hurry to approach big customers in the beginning. This is often contradicting with business strategy that suggests company go to the largest market possible. Business theory is based on existing business, NOT startup. Startup should determine the Total available market (the largest market or largest customers). The Served available market (what they can reach) and the Target market (What they can do business with NOW). By starting small with a lot of customers, startup can improve the products, make sure that they get the profit to survive then gradually move to the next market to ensure the startup could grow before approach the large market with large sales but low profit.
5) The Supplier Force: If startup is depending on special suppliers, they can fix their prices in a way that reduce startup’s profit. (For example, if you sell laptop using Intel chips, Intel can set the price that you cannot bargain with them.) Therefore entrepreneurs must have a plan to reduce the dependency on a single supplier by use several suppliers to reduce or eliminate this risk.
Entrepreneurs must understand these forces that influence the market in order to develop a strategy that deal with them effectively. It is critical for entrepreneurs to analyze the market, the industry, and the competitors to understand their advantages as well as disadvantages. In the industrial age, business theory suggests that company to lower price to capture the market first by eliminate competitors than raise price later. This theory favors large companies (the big will beat the small) as companies getting into price wars, only competitors who have high financial strength will win. By doing market analysis, entrepreneurs can identify the financial strength of competitors early enough to avoid a price war.
However, in the information age, speed is an advantage that favors small companies that move fast (the fast will beat the slow) and companies that have the latest technology often win. For example, Apple destroyed all the big music companies, MP3 device companies, and recording device companies by having the best MP3 device with download technology: The iPod and iTunes.
In general, knowledge of the five forces competition analysis will help entrepreneurs to develop strategies that exploit any weaknesses of the competitors, or enter a market ignored by them; by anticipate competitor responses to your strategic actions and identify the best approach and timing to deploy your counter strategy. Every entrepreneur must have answers to the following questions before building a business strategy: Who are the customers? What are the customers’ needs and does our startup have the solution? Is the demand growing? Are new competitors coming in? Who are these new competitors? Are there indirect competitors who also are able to fulfill the same need? Can our startup scale up production to compete with them? Does startup have good distribution network to reach them? Does startup established brand-name yet? What are the strengths and weaknesses of our competitors?
By getting all data to answer these questions, entrepreneurs will gain in-depth insights into the market to validate your business model and build a better strategy to ensure that startup can survive and grow bigger. By identifying competitors in the target market, entrepreneurs will gain an understanding of the market that will help them to compete successfully. It is possible to decide NOT to enter the market, if it is intensely competitive. Without such analysis and a strategy, entrepreneur might be surprises when enter the market and find themselves in trouble that they cannot get out.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
