Whether you’re just starting out or running an established operation, odds aren’t in your favor. Over 70% of small businesses fail before reaching their 10th birthday. Will your business be around in ten years?
Businesses fail for all sorts of reasons. In the beginning, getting beyond the startup phase is no small feat. Businesses face cash-flow problems or fail because of poor budget planning. Companies succumb to stronger competitors and customers have no incentive to remain loyal.
Depressing, sure, but it doesn’t have to be that way. Any business owner faces uncertainty: will you go the distance? Will you set yourself up for a long career?
Below, we’ll look at longevity through the lens of Porter’s Five Forces, a concept developed by Harvard Business School professor Michael Porter, to assess the various forces that determine longevity.
Keep reading to learn how to create a bullet-proof, evergreen business strategy.
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Surviving the Supplier Power Struggle
Suppliers have a huge impact on your business. The goods and services they provide impact the quality, availability, and price of the final product you sell to customers.
As such, procurement must focus on developing an airtight supplier strategy. Strong suppliers can raise prices, which in turn affects your company’s ability to stay competitive and achieve profitability.
Supplier power is high when the buyer hasn’t educated themselves on the market landscape or isn’t particularly price-sensitive. When the buyer spends more time researching other suppliers and developing a review process that looks at a variety of bids, sets definitive quality standards.
Suppliers have more power when:
- There are high switching costs associated with changing suppliers.
- There are too many buyers—the supplier doesn’t need your business.
- The product is unique — there aren’t any close competitors.
- Supplier has a high level of expertise.
A winning procurement strategy depends on the strength of your partnerships. While opting for the cheapest solution seems like the natural instinct, a discount vendor is going to give you a discount product and discount relationships.
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Given the importance of suppliers, companies need to create and maintain positive relationships with their vendors. That means relationships should be viewed as a two-way street, both parties must work together to reduce production costs and find the best raw materials for every job.
Consistent Evaluation Process
How do you review your suppliers? It’s about more than just price. A winning procurement strategy depends on the strength of your partnerships. While opting for the cheapest solution seems like the natural instinct, a discount vendor is going to give you discount quality products and relationships.
What happens when a contract goes away? Will you scramble to find a new supplier? Are you regularly reviewing potential back-up vendors? Have an evaluation system in place so that you’re regularly reviewing the quality of goods and service, whether shipments arrive on time, how well the vendor communicates, and so on.
Restoring the Balance
When supplier power is too strong, buyers will seek to restore the power balance. If a product’s demand is high enough, then a company might work to develop their own solution, or find alternate ways to produce the end product at risk.
There’s no easy answer for dealing with a situation where one company holds all the cards. Future-proofing may involve product redesign or diversifying your product line.
Don’t Let Customers Have Total Control
Strong buyers can pressure companies to lower prices, improve quality, and offer a higher level of service.
Considering buyer power is just as important as looking at supplier power. How much power do your customers have over your business? If one big client goes away are you in trouble?
Going back to the Porter definition of “power of customers” this specifically deals with the ability that customers have to drive prices down.
The smaller your customer base, the more power they have. AKA: they have more bargaining power and hold the cards when it comes to driving prices down.
To prevent this from happening, there are a few things you can do:
- Review pricing — Stay updated on market trends and make sure your prices are in line with what the competition is charging.
- Diversify your offerings — If you only sell one product, it will be difficult to retain customers or get them to spend more money. Always be innovating — and seek to develop solutions that speak to a wider demographic.
- Focus on attracting new business — A few big clients may give you more business than you need, but you can’t bet on a relationship lasting forever. Companies close, tastes change, and competitors offer solutions that might work better. As such, it’s important that you always fill the pipeline with new leads and develop a strategy for nurturing new relationships while maintaining old ones.
Focus on Great Service
Brand loyalty can help you prepare for the future. Make sure you’re putting more stock in the customer experience arena—you’ll need to figure out what makes a customer loyal to a brand.
On a base level be sure you’re:
- Providing clear communication details so customers can get in touch easily.
- Answering questions — both in your web content and over the phone, chat, etc.
- Listening to customers—take feedback seriously—can product/service be improved?
- Developing new products/features.
To prevent buyers from organizing against you, consider applying a customized approach to service. You’ll see this concept come up quite often in the realm of customer experience — you’re offering something unique, which makes customers feel appreciated.
Markets change, technology evolves. Those business leaders who can keep up will be the most successful. Great service isn’t enough, staying on top of the latest trends and continuing to evolve means you’ll have the ability to provide better products and more streamlined solutions.
Competitor Rivalry Can Hurt Your Bottom Line
When rivalry among competitors is high, it drives down prices and increases the costs associated with doing business. You have too many companies competing for a limited pool of customers.
Rivalry ramps up under the following circumstances:
- Slow industry growth
- High fixed costs
- High exit barriers
- Multiple rivals are committed to the business
- There are multiple companies with similar offerings—both in terms of price and qualities
The problem is multiple competitors with few differences between them. When there’s too much competition, firms can’t exercise much control over the price of goods and services.
This means buyers and suppliers hold all of the cards and you’ll be feeling the squeeze from both directions. The best way to prevent this problem? Be unique! Listen to customers and keep up with trends so you can come up with better ways to cater to your audience.
Protecting Against New Entra
A company’s staying power also has to do with the potential for new entrants to sweep in and compete for your customers. If your industry has low barriers to entry, your company’s position may be compromised as others enter the space.When analyzing your company for threats of new entrants, consider the following:
- Profitability doesn’t require economies of scale
- It’s easy to find suppliers and distribution channels
- Products are not differentiated
- There’s little brand-recognition
- Low customer switching costs
- Little cost advantage
Protecting your business is a multi-effort process. Having proprietary technology is one way to ensure that new entrants won’t simply offer your customers the same solution with a fresher coat of paint and a lower price point.
Minimize the Threat of Substitutions
The threat of substitutions is a term that refers to the availability of products that a customer can purchase instead of your product. A substitute product offers a similar set of benefits, and the availability of too many similar products makes an industry more competitive.
As we mention in the video, software companies are known for high turnover. We, of course, have to keep this in mind as we consider our long-term goals.
In our case, we’ll always need to explore new features and new ways to bring value to our existing customer base. With software, there’s always a whole slew of substitutes that customers can select.
In this case, the cost of switching providers must be high—they’ll lose something by moving elsewhere, whether that’s the uptime it takes to get started with a new tool, the learning curve, or the costs of a contract with another provider.
Without a differentiating factor, buyers set the price—it’s easier to move between providers, and businesses lose control. When you have something that not everyone can provide and a strong brand, it determines the ability for customers to switch to a different solution.
Build a Lasting Business: Review the Full Picture
As you can see, these five separate forces are closely connected. Suppliers determine the cost, customers determine the cost, competitors determine the cost —- it gets a bit repetitive.
Best-case scenario, both your customers and suppliers will have weak bargaining power, there are few substitutes, and you’ve got a competitive advantage.
While that sounds like it all boils down to luck, the factors that impact a business’ longevity rely on specialized knowledge, the ability to embrace change, and continuing to provide a high level of quality and service to customers.
Finally, companies must manage their finances responsibly if they plan on sticking around for the long haul. ProcurementExpress.com offers automated PO processing and easy-to-use budgeting tools that help you stay on track and plan ahead. Sign up for your free demo and we’ll help you get started.
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