Month: February 2022

Michael Porter’s five forces. The incumbent’s strengths

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What other barriers to entry might you face, the advantages the incumbent has over you when you start out and how might you counter them. Economies of scale in purchasing. The incumbent will have the advantage that they can spread their fixed costs over higher volumes lowering their production costs. Because of their purchasing power they will be able to command lower prices from suppliers. To overcome this disadvantage, you need to reduce one of the other forces, the bargaining power of suppliers. As much as possible use standard parts that can be obtained from multiple sources. Take advantage of special offers, providing there are not shelf-life issues. Befriend the salesperson managing your account. They are often on bonus programs that are triggered by meeting or exceeding a quota. Your demand maybe small but it could be enough to make a difference on whether the salesperson gets her/his bonus. Now is the time to negotiate a discount. Most public companies report quarterly results and there can be a drive to capture sales before the quarter …

Michael Porter’s five forces and the Entrepreneur Part 1. The competitive element

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As an entrepreneur you instinctively understand that you are going to face competition from the day you start business. As part of your planning, you have identified your competitors, you understand their product offerings, you know their price points. You have compared your product to theirs and have assessed the comparative merits of each. Back in 1979 Michael Porter articulated forces other than your competitors that influence not only an individual company’s success but also the profitability of an entire industry. To help understand what this forces are, let’s take a look at the airline industry. Most people know that airlines operate on low profit margins when times are good and lose money when times are bad. Sadly, for airlines the bad times outlast the good times. Every economic shock, every oil price hike, even each new virus outbreak destroys their profitability. Why should this be? Why have few, if any airlines, managed to maintain a long-term reasonable return on their invested capital. (ROIC). The reason can be explained by Porter’s five forces. The most …