When you sit down with your accountant to strategically review your business plan: everybody needs to call the elephant in the room – blind spots. The process of business planning, monitoring and updating strategy can potentially become a group love-fest unless you have some critical high level thinking that is attempting to stretch the boundaries.
As a business: all of your threats originate from 5 key forces that impact your business. And understanding the five competitive forces that shape strategy will allow your business plan to anticipate and plan a way to combat these 5 forces.
1. Competitive rivalry
These are the competitors in your business that you deal with every day. The other operators in the marketplace that bid for the same work that you are bidding on. The people you are poaching clients from and the other operators in the marketplace that clients are looking to if they want to leave your business.
Competitive rivalry is the most common on the 5 forces that people consider. As business and tax accountants our competitors range from Big 4 accounting firms to micro accountants who are working part-time from home.
So, understanding and defining down the true competitors in your marketplace is the next step. While “everybody” can be a competitor drilling down to the 5 most likely competitors in your market will give you a focus for your strategy and business plan.
2. Supplier power
If you are highly exposed to one supplier your business can be at risk. The supplier may simply choose to move “downstream” and enter your market. Alternatively, if you are deeply reliant on a single supplier the power of that supplier to raise prices and the impact of those prices to your business should be considered.
As part of your strategy consider the impact of supplier power. While it might make sense to have one single supplier – the strategic benefit of maintaining a few suppliers might outweigh the immediate financial benefit of one supplier. Alternatively, you might want to consider legal protection to stop a supplier entering your market.
3. Buyer power
Likewise, a low number of customers can make you very exposed to the power that the buyers have on your business. And in Perth – with the prevalence of massive multi-national mining companies – it is simply not practical to say “have more than one client”.
However, understanding the power that your clients have in controlling your business can impact your future strategy. If your sole client is say, Coles – focus on the amount of branded product as opposed to white label product. f your sole client is BHP consider strategies to have a presence across multiple mine-sites or multiple types of services to the one asset.
The structuring of a business to attract the right contract, from the right customer, as the right price requires skill and foresight. And the business planning session with your accountant is the perfect time to assess the business and financial risk of making that decision.
4. Threat of substitutes
Every business customer has an alternate product they can use. A person who loves steak can purchase chicken if steak is not available. A business that is finding their external accountants too slow could employ more qualified internal accounting staff to do the tasks instead of going to a competitor.
Sometimes owners who are looking at their business plans simply focus on their own “turf” too much and are not looking at their deeper markets. IBM was initially reluctant to make computers as they were manufacturers of punch card machines. And, by drafting and detailing the substitute products that customers can use, will allow a business plan to cover the more relevant and disruptive risks that can face the founders.
5. Threat of new entry
Many businesses have a barrier to entry. Medical practitioners have barriers to their market by only allowing highly qualified people to practice medicine. And a ship builder has a barrier to entering their market by the massive infrastructure needed to build ships. Farmers have barriers because of the limited land that can be used for farming.
Analysing and considering the different ways to enter a market can help a business plan become more strategy. Some barriers are government regulated barriers which are perceived as a strong barrier but can be overcome – like the taxi industry and Uber. Alternatively, some barriers to entry considered by the high capital infrastructure needed is not necessarily a barrier for global organisations.
If your business plan documents and considers the protective moats that your business enjoys you can then plan a strategy around taking advantage of those moats. A pharmacist has a guaranteed right to trade in a certain area and can potentially create a wellness centre. Only a law firm can prepare a will and they can use that position to become appointed as professional executors.
These 5 forces are not a Westcourt innovation. They are the “Porter’s Five Forces” and created by Harvard Professor Michale Porter. And they form a great basis and tool that Westcourt commonly employs when helping businesses prepare and consider business planning. And if a business is structurally weak the Porter’s 5 forces model can identify those weak points and help a business, with their accountants guiding the process, move into a stronger position.
At Westcourt the business planning process is critical to a family business that wants to grow and become stronger. The creation of a family business that can continue on without key reliance on the founder is what is needed to create a saleable business – to either the next generation or to an outsider. Our focus on family businesses, and the governance needed to make a family business great – is our single focus. And because we created a business we understand the difficulties and emotions associated with starting a business, to the stage where the business is a well governed system driven business that is not reliant on a few people. So, if you want to look critically at what your doing – or if your accountants are simply lacking a bit of commercial expertise – why not give us a call.