Dealing with the Five Forces?

‘There are forces which impact on your competitiveness. Here’s how they work and what you can do about them.’
Issue date : 27 March 2009

Read more

- Advertisement -

‘There are forces which impact on your competitiveness.
Here’s how they work and what you can do about them.’

Ever heard of Michael E Porter and the Five Forces model he developed to better understand what makes an industry tick? You should be using it to continuously review and reformulate your business strategy. It’s not rocket science, just plain common sense.

Porter is recognised as the father of the modern strategy field and the world’s most influential thinker on management and competitiveness. He’s based at Harvard Business School where in 2001, together with the university, he created the Institute for Strategy and Competitiveness dedicated to furthering his work. His Five Forces impact on industry competitiveness and the business’s ability to prosper. Let’s have a look at how each of these works in farming and how they might affect your business.

- Advertisement -

Force 1: the threat of new entrants
How easy is it for others to enter your line of business?
How much capital is required? If it’s billions of rand for a new sugar mill and irrigated cane fields, entry’s not so easy. If it’s a shade house or two to produce quick-growing nursery plants, it’s another matter entirely.
Are the distribution channels sewn up or easily accessible? If you have an established relationship with a supermarket chain, new entrants are going to find it tough to break in. If you’re only supplying the municipal markets, to which every Tom, Dick and Harry has access, it’s a different thing entirely.
Are you in a hi-tech business with a steep learning curve? Consider for example the difference between producing flowers for export or carrots in the back garden for sale at the town market.

Force 2: the threat of substitutes
How easily can your product be substituted with another?
Producers of artificial sweeteners worried the cane and beet producers. The product hasn’t become the threat once anticipated, but the risk is always there.
What about the fast-growing range of fruit juice products and blends taking market share from milk? A reasonable high risk perhaps, but then what about yoghurt and cheeses? Are there substitutes for these currently on the horizon?
What about the competition between plant, animal and artificial fibres? If you’re in the wool or cotton industry, how are you going to compete with the range of substitutes available?

Force 3: bargaining power with suppliers
How strongly placed are you in negotiating with your suppliers? Bigger is definitely better. If you’re a small operator, can you become part of a cooperative buying group to leverage your joint buying power?
If you’re small-fry, long-term and loyal relationships with your key suppliers will help. You’ll gain advantage over the “butterfly buyers” who flit from one supplier to another for the flimsiest of reasons.
Keep your switching costs down. Avoid getting locked into long-term contracts with onerous cancellation clauses.
Highly successful industry members have influence way beyond their own businesses and in negotiating with suppliers. If you’re not one of these, become one.

Force 4: bargaining power with buyers
Farmers generally get the short end of the stick. The concentration of buying power in the hands of a few supermarkets is difficult to deal with, but there are ways to fight back. Get bigger. If you can’t do it on your own, do it cooperatively with your fellow farmers. The days of one-man-band farmers each trying to do their own thing is over.
If you can’t be the biggest, be the best. Food retailers might not admit it, but more important than price are the big three – reliability, consistency of supply and quality.
If you can deliver on these, you can beat the big guys.

Force 5: internal rivalry amongst existing companies
There may be farmers who can go at it alone without the need for cooperation and collaboration with other members of their industry, but there aren’t many.
While there will always be competition between producers of the same product, don’t let this degenerate into destructive competition which destroys value.

Getting to work:
1. Do a Porterian analysis of the business and industry you’re in.
2. Identify the areas where you’re most vulnerable.
3. Develop strategies to counter these weaknesses.
4. Implement them.
For more information, e-mail Peter Hughes at jphughe[email protected] or call (013) 745 7303.     |fw