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How Not to Start from Zero for New Startups

How Not to Start from Zero for New Startups

Looking to start a business but are unfamiliar with the potential profitability in the industry, and don’t really want to start everything from zero?

This simple tool is the perfect one for you to start with — Porter’s Five Forces Model. It is an effective tool to evaluate the existing market.

And if sometimes you are asked to analyze a market and identify its major competitors but you are struggling on where to begin; or, if you are looking to raise your company’s competitiveness in the industry, the Porter’s Five Forces Models could then be your remedy.

What exactly are the Porter’s Five Forces?

The Porter’s Five Forces Model is named after Michael E. Porter, an economist. He proposed the model in his 1979 book Competitive Strategy. While there are different names for the five forces to different experts, they are essentially the same. Generally, the five forces are as follows:

    1. Threat of Substitution

    It concerns the availability of substitutes products or services from the competitors. Porter’s definition of substitute good in the model refers to a good in another industry. The goods or services are substitutes if they can be used in place of one another. This force is affected by various factors including the cost for customers to switch to a substitute, buyer’s propensity to substitute and price-performance of substitutes.

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    2. Threat of Established Rivals

    It considers the strength of the rivalry present in the current industry.There are a number of possible factors including number of competitors, pace of market growth and diversity of competition.

    3. Threat of New Entrants

    It refers to the potential threat posed by newcomers in the industry. It is also known as the barriers to entry as it measures the vitality of new entrants in an industry. Capital costs, branding of existing competitors and requirement of proprietary technology or patents are the major factors influencing the force.

    4. Bargaining Power of Suppliers

    It concerns the ease for suppliers or factor of production to raise prices. For example, the number of possible suppliers and whether they produce homogenous or differentiated products can influence the price to a great extent.

    5. Bargaining Power of Customers

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    It considers the ease for customers to push for a lower price. To illustrate, it is more likely for customers to demand a lower price if they purchase a large amount of goods or services. Number of customers and brand name strength also affect the bargaining power of customers.

    The first three forces are from horizontal competition while the remaining are from vertical competition.

    What’s good about the Porter’s Five Forces?

    Every owner and stakeholder of a business has a question in common: how to maximise the profitability?

    By evaluating the industry using the model, we can grasp a clearer picture of the overall environment of the industry. In fact, the model can also be applied to have a better understanding of the current major competitors. Identifying their strengths and weaknesses allows us to devise a better strategy to further boost our competitiveness.

    We can also evaluate the potential of our business by comparing us with other competitors to see if the market has been saturated or not.

    On the other hand, the model tells us on what aspect we are better. Thus, we can put more effort to expand our competitive advantage in order to always stay ahead of the counterparts.

    Besides, after analysing the current and potential future states of the five competitive forces, we can seek to manipulate the forces in our favour. Adjusting the strategy can change the impact of competitive forces on the organization. A proper shift in direction can lead the company to a bright future.

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    Anything challenging about the Porter’s Five Forces?

    Despite that Porter’s model may be applied to a lot of good use, it is a little too ideal to look at the industry. The model provides directions to evaluate an industry but such analysis is based on a perfect market assumption. In reality, the market is seldom if not never in such ideal conditions so it is impossible to perfectly evaluate an industry with this model. Instead, the model is only applicable to simple market structures.

    Morever, the model overlooks a sixth force – Complementors. Complementors refer to those who sell products and services that are best used in conjunction with a product or service from a competitor. Intel and Apple are a good example which they are in fierce competition yet there is obvious reliance of each other in the industry. Taking the sixth force in account makes the model more well-rounded.

    Lastly, the model also overlooks the technology component in today’s business world. As the model was proposed back in 1979, influencing power of technology was almost negligible compared to nowadays. Disregarding the technological aspect may render the whole analysis inaccurate. Hence, the factors in digitalisation or globalisation is usually added into the model now.

    When’s the best time to apply the model?

    When is a good time to make the best use of the Porter’s Five Forces Model? For business startups, it is unwise for entrepreneurs to start a company before exploring the profitability of a new entrants in the industry. In that case, the model can come in handy to analyse the market before putting in effort and investment.

    Also, the model can be a good tool for an operating businessto fine-tune its strategies for better growth. It is especially useful when the business is experiencing stagnant progress and has no clues where goes wrong. The model may provide the answer for the dissatisfaction.

    Here we demonstrate how the Porter’s Five Forces Model can be used to evaluate a business. Two world-renowned business, Facebook and Nike, are chosen.

    Example 1: Facebook

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    The social networking market is significantly competitive and is constantly under rapid changes. Due to frequent introduction of new technologies, Facebook has to cope with the situation by continuous innovation and adaption to the ever-changing environment. Besides, the social networking market is unlike other market for its ease to enter the industry.

    Consequently, increased number of competitors intensifies the competition further, making the Threat of New Entrants and Established Rivals greater. Lastly, as the mobile market is emerging while the switching cost for users from computer to mobile is low, the Threat of Substitution is also great.

    Example 2: Nike

    The Threat of Established Rivalry is the major worry for Nike, as there is established as well as upcoming counterparts in the market. The low barrier to entry also poses a big threat to Nike as the large number of competitors will significantly impact the profitability. If Nike is unable to adapt to the customers’ trends, the growth can be severely impacted or even recorded in negative digits.

    Besides, the Bargaining Power of Customers is also worth consideration as the wholesaler can request for greater discounts for their tremendous demands.

    Featured photo credit: Flaticon via flaticon.com

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    Jeffrey Lau

    Editor. Sport Lover. Animal Lover.

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    Last Updated on June 13, 2019

    15 Best Entrepreneurs Books to Start Reading Now to Be Successful

    15 Best Entrepreneurs Books to Start Reading Now to Be Successful

    Knowledge is power, and you’re going to need a lot of it if you’re going to be able to steer your business to success.

    Without further ado, let’s take a look at the 15 best entrepreneurs books to get inspirations about success and grow your business.

    1. Think and Grow Rich by Napoleon Hill

      This book has been dubbed the Granddaddy of All Motivational Literature, and it was actually the first book that gave a prescription of what it takes to be a winner.

      Napoleon Hill draws from the stories of millionaires like Henry Ford, Andrew Carnegie, and Thomas Edison to illustrate the principles he put forth.

      Get the book here!

      2. The Lean Startup by Eric Reis

        A lot of startups end up failing, but many of these failures are actually avoidable. The Lean Startup provides a different approach that is now being adopted all over the world and changing the way that companies are developed and products are being launched.

        In The Lean Startup, Eric Reis describes what is required for a company to penetrate the fog of uncertainty in order to discover a path to a sustainable and successful business.

        Get the book here!

        3. The E-Myth Revisited by Michael E. Gerber

          In a revised edition of the 150,000-copy bestseller, The E-Myth, Michael Gerber refutes some of the myths that surround starting your own business and shows just how commonplace assumptions can end up getting in the way of being able to run a successful business.

          Gerber succeeds in walking the reader through the steps that occur in the life of a business, from infancy, through the pains of growing as an adolescent, to the perspective of the mature entrepreneur.

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          Get the book here!

          4. Rework by Jason Fried

            Most of the business books that you get today will give you the same advice: draft a business plan, study the competition, look for investors, and all that.

            However, Rework shows you a more effective, easier and faster means of succeeding when running a business. By reading it, you’ll be able to know why some plans are harmful, why you don’t really need to get investors, and why you’re better of shutting out your competition.

            Get the book here!

            5. How to Win Friends and Influence People by Dale Carnegie

              This is one of the most successful motivational books in history, selling well over 15 million copies since it was released in 1936. The book is timeless, and it appeals to businesses, self-help startups, and general readers.

              Carnegie believes that a lot of successes come from an ability to communicate rather than having brilliant insights. In his book, he teaches how to value others and make them feel appreciated and loved.

              Get the book here!

              6. Outliers: The Story of Success by Malcolm Gladwell

                Through this amazing book, Malcolm Gladwell is able to take the reader on an intellectual journey through the world of ‘outliers’. He asks the question of what truly differentiates high-achievers.

                His answer to this question is that we tend to pay too much attention to what successful people are like, and less attention to where they are actually from.

                Get the book here!

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                7. Rich Dad, Poor Dad by Robert T. Kiyosaki

                  This is the best personal finance book ever written. It tells the story of Kiyosaki and his two fathers; his real father, and that of his best friend (his rich dad), as well as how the two men helped him shape his opinions on money and investing.

                  It refutes the myth that you need to earn high to become rich, and it distinguishes between working for money and having money work for you.

                  Get the book here!

                  8. The Ascent of Money: The Financial History of the World by Niall Ferguson

                    Niall Ferguson, in this book, follows the money to tell the story behind the evolution of the word’s financial system, from the beginning way back in ancient Mesopotamia to the latest occurrences in what he had dubbed Planet Finance.

                    Fergusson also reveals financial history as the backstory behind our very own history, with an argument that the evolution of debt and credit is as significant as the history of technological innovation and the rise of civilization.

                    Get the book here!

                    9. Liar’s Poker by Michael Lewis

                      Michael Lewis landed a job at Salomon Brothers after getting out of the London School of Economics and Princeton within three years, he had risen to the rank of bond salesman, making millions for the firm and cashing out steadily.

                      Liar’s Poker is the amalgamation of these years — a look behind the scenes at one of the most turbulent times in American business. His book is Lewis’s account of an era where greed and gluttony were the order of the day.

                      Get the book here!

                      10. Drive: The Surprising Truth about What Motivates Us by Michael H. Pink

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                        A lot of people see money as the best motivator. Michael pink says it’s a mistake.

                        In this provocative book, he asserts that the secret to high performance anywhere is the need to direct our lives, to learn and create, and to do better by our world and ourselves.

                        Get the book here!

                        11. Getting Things Done: The Art of Stress-Free Productivity by David Allen

                          Outdated methods don’t work in today’s world. In this book, Allen shares some awesome methods for stress-free performance that he has shared with thousands of people all over the world.

                          His premise? That productivity is proportional to your ability to relax.

                          Get the book here!

                          12. The 7 Habits of Highly Effective People by Stephen R. Covey

                            In this book, Stephen Covey presents a holistic approach for overcoming both professional and personal issues. With insights and anecdotes, Covey presents a way to live with integrity fairness, service and dignity.

                            Get the book here!

                            13. The 4-Hour Workweek: Escape the 9-5, Live Anywhere, and Join the New Rich by Tim Ferriss

                              In this book, Ferriss dishes on the tips he has learned from studying the New Rich, a subculture of people who did away with the deferred life plan and mastered time and mobility to developed luxury lifestyles for themselves.

                              If you’re looking to make your way in this revolutionary new world, this here is your compass.

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                              Get the book here!

                              14. Delivering Happiness: A Path to Profits, Passion, and Purpose by Tony Hsieh

                                The CEO of Zappos shows how a unique kind of corporate identity can help deliver a huge difference in the way results are being achieved — by creating a company that values and delivers happiness.

                                Get the book here!

                                15. Losing My Virginity: How I Survived, Had Fun, and Made a Fortune Doing Business My Way by Richard Branson

                                  From Virgin Atlantic Airways, Virgin Records and V2 to Virgin Cola, Virgin Megastores and a wide array of other companies, Richard Branson is the rockstar billionaire that a lot of us want to be.

                                  Branson, however, did business by following a simple philosophy:

                                  “Oh, screw it, let’s do it”

                                  Losing My Virginity is an unusual, borderline outrageous autobiography of one of the greatest business geniuses in the world. Branson and his friends named their business “Virgin” because that was what they were — virgins at the game.

                                  Since then, he’s written his success rules, creating a global business that has no headquarters, no management structure no corporate identity as it were.

                                  Get the book here!

                                  More Inspirations for Entrepreneurs

                                  Featured photo credit: rawpixel via unsplash.com

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