To arrive at a strategic goal and plan, we must understand our industry and ourselves. In this video, we'll learn how to analyze an industry. In the 1980s, Harvard Business School professor Michael Porter devised the Five Forces. Many others have added to them or otherwise altered them, but Porter's is still the gold standard for evaluating industries. Porter wrote these five forces can derive end constraint, profitability for competitors within an industry. The threat of new entrants, competitive rivalry, supplier power, buyer power, and the threat of substitutes. Take a look at this chart. Remember, prices are what we charge our customers, and costs are our expenses, what we pay for goods and services that support the products and services we supply to our customers. If it's easy for a new competitor to join the industry, profits are constrained for all players because prices are constrained. If you think of your industry like a sandbox, a shallow box, partly filled with sand, that children play in, you don't want anyone coming into play in your sandbox if they're going to reduce your profitability. I was worked for a company that had a unique product line for 60 years because it was a difficult product to produce and provide to customers. They were practically no competitors, and therefore, we were able to charge a very high price. A competitor in an adjacent product line devised a new, easier way to produce and provide the product. The quality was nearly equal and for a large percentage of the customer base, the quality was not terribly relevant. When I heard about this competitor's intention to sell their product in five of our markets to test the potential, I suggested to leadership that we drop the price in those five markets. I wanted to make, trying to get in and play in our sandbox very uncomfortable. I wanted to put them on notice that we would fight for every inch of space, but no one agreed with me. My colleague said, "We own that market." No one can do it as well as we do. They'll give up soon. Customers won't like their products anyway. We created that market. It's ours. In some way, that product and the high prices charged were a part of their self-identity. In the first week in those five markets, our sales dropped 20 percent, and it only got worse from there. It took me nearly six weeks to convince the team we needed to lower the price, and by then the competitor had expanded to every market in which we competed. At that point, lowering the price would serve only to reduce our margins and diminish the quality halo that a higher price can create in the minds of those customers who were looking for quality. You can see, if it's easy to get into an industry, the threat of entry is high. Prices usually are constrained. In my case, the team did not feel threatened until too late. If rivalry between competitors is high, each will be forced to either lower their prices or differentiate, which tends to cost more money. If the suppliers to the industry have high power, they can raise their prices, which serves to raise the costs to industry participants. Understanding and managing your supply chain has become a source of competitive advantage, as was made clear during the pandemic. Companies put a lot of effort into understanding their customers and their competitors, and they should. But don't forget to also figure out how to best manage your suppliers. When customers have high power, they can push for lower prices. They can ask for things like bundled products, free training, or supplies, and those things raise our costs. Or they might require a long selling period with lots of hand-holding that is personal attention, leading to a high investment in marketing and sales to capture and keep them. A substitute is a product or service that can meet the customer's needs in a completely different way than the current market participant's products and services. For example, email became a substitute for fax machines. You can see, looking at this chart, that the forces on an industry push prices down and costs up, constraining profits. Your job is to assess each force and ask yourself, "What capabilities does my company have that others do not?" What capabilities can be developed that others cannot, that might shift a force in our favor? How can we alter the power of one or more forces to increase our company's profits over the industry's average profitability?
