Once you’ve figured out what you’re going to do and why, the next question to consider is the environment in which you plan to operate and the nature of the industry in which you will compete – or, if you prefer, “where” your new venture will be. Despite what the people who run the “Subway” chain seem to think, there’s no point in opening a new sandwich shop if there are 27 other sandwich shops in a three-block radius. It’s also fair to say that the way you would operate a company if there is only one place you can get your raw material will be different than it would be if you can get your materials from 27 retail stores in your neighborhood and 2,700 different websites; your strategy will also vary a bit depending on the number of customers you can obtain, the number of other products that can do exactly the same thing yours can, and how easy it is for a new competitor to break into your industry. As always, there’s no law that says you have to consider any of these factors before you launch a new business – but there are several laws of economics that confirm what will happen to you if you do…
We’ve already talked about SWOT analyses in this space; that time-honored acronym for Strengths, Weaknesses, Opportunities and Threats – and I continue to maintain that there’s nothing wrong with performing this analysis on a regular basis, assuming that you remember that SWOT is an acronym and not a magic spell that will reveal all of life’s mysteries to you. Most of the time, however, you’re going to need something a little more specific, and a good place to start is the Five Forces analysis invented by Dr. Michael Porter, from Harvard Business School. Five Forces is just that: five critical pieces of the strategic picture that you will need to at least consider before starting operations: Competitors, suppliers, customers, possible substitute products, and new entrants into the industry. Obvious, you might thing – until you’ve lived in a city that has three Subway locations in a three-block area, or for that matter, seven coffee houses and three coffee-and-pastry shops in a three-block by two-block area…
Competition is the factor most people consider. If your town has only 5,000 people in it, and only 10% of them need your product, opening a business with enough capacity to serve more than 500 people is going to cause trouble – and if there are already three other businesses that can serve 700 people each, there’s going to be cutthroat competition even before you open your doors. If you can outperform the existing competition, either on price or by offering a better product, then the amount of competition isn’t as important – but you still can’t ignore it. Customer power is also commonly considered – if your customers have ten other choices for where to obtain your product, they have greater power over you than they would if you were the only option in town. But there are other factors, such as how important your product is to daily life, the relative quality and utility of your product, the state of the economy, and so on. It serves no purpose to run a business unless there is someone who wants to pay for the product or service you are offering…
In fact, one of the most common issues I saw during my time as a consultant was people who had failed to consider how, exactly, their new enterprise would result in customers giving them money. Supplier power is an issue, especially if you use something rare, exotic, or expensive; the more suppliers you can find, the better off you will be. Substitute products are anything that can do the same job your product does (a pizza is a substitute for a hamburger, for example); if the substitute is superior in either price or quality, there’s a real danger that customers will buy it instead of your product. And new entries into an industry can completely change the equation – competition, supplier, customer and substitute issues can all be impacted by a new entrant to the market. Before you start operations, you will have to examine all of these issues in depth – because only then will you be able to tell if you business can survive in the first place…
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