Implementing successful transformation will set your company apart from the competition. However, only about a third of businesses globally say their company is doing a good job preparing for change, according to the McKinsey Quarterly. There are several strategies used to help organizations better prepare for change; including setting ambitious goals, having a highly involved CEO and implementing good communication initiatives. Communicating transformation plans in a positive way is also important. Employees are more likely to get on board with this approach, improving your chances of success.
Creating a Successful Transformation
Your initiatives for transformation change will vary, based on your company’s goals. Some companies seek to move from good performance to exceptional performance. Other companies might be interested in completing a merger or acquisition. Or, your organization might want to enter an entirely new market. Regardless of your ambitions, the first step in any transformation plan is setting clear goals for your company. While this may seem obvious, organizations do not get this right as often as they would like. Research has shown that when asked what they would differently if they were able to do the transformation over again, almost half responded that they would set clearer targets. Companies that create clear goals are more likely to experience a successful transformation.
Engaging Employees
If both managers and employees aren’t engaged in the transformation plan, experiencing success will become difficult. In fact, research shows that when employees are on board, companies experience much better transformation results. The company’s CEO also needs to be highly visible and engaged with employees. When a leader is highly involved, employees are more likely to feel motivated and stay energized during the transformation process.
The stage at which you engage employees is also important. The earlier employees are engaged, the better. However, despite statistics, only a small portion of organizations are using this approach. Approximately only 38 percent of companies are engaging employees early in the transformation process.
Effective Communication
Companies also need to ensure that communication about transformation is clear and effective. When talking with employees, focus on building on existing success, rather than fixing and overhauling problem areas. Doing this keeps the focus positive and builds a more successful environment for transformation. The McKinsey Quarterly found that getting employees to take ownership of change is one of the most difficult tasks. Investing the time to motivate your employees has a large impact on your organization’s ability to transform.
Work diligently with employees on all levels by using a variety of tactics. Companies can engage and energize the organization through ongoing communications and involvement such as short-term wins, celebration of successes and symbolic actions. Another tactic that has been found to foster in success in transformations is establishing clear executive sponsorship and conducting ongoing monitoring to hold people accountable for impact. Companies can also mobilize a senior team to model desired changes or deploy resources to carry out effort and build required skills. Organizing transformation into a clear structure made up of readily understandable sections is yet another tactic that can be used. Other companies use the tactic of reinforcing and embedding change by using performance target and incentives. Some companies focus efforts on both corporate performance and corporate health while others create and communicate an emotionally compelling narrative about transformation which is often called the “change story.” Organizations should not use only one tactic but rather use a variety of them on all different levels and throughout different stages of the transformation. Successful companies tend to use more than three times as many tactics as unsuccessful companies. Giving employees specific goals will create accountability and ownership and assist in a successful outcome. This will also increase your employees’ ability to get on board with your company’s goals.
Moving Towards Success
Companies that successfully implement organizational change don’t use a single process. Instead, these organizations use many different processes to achieve the desired outcome. Get employee input when creating the organization’s plan. This will minimize resistance to important changes and better anticipate which initiatives employees respond to most positively. This approach will also help bridge the gap between management and staff when rolling out new initiatives.
Also, give your company enough time to plan organizational change. On average, organizations are spending an average of six months in the planning stages. During this time, make sure to set clear and inspirational goals to ensure you’re on the right track to successful change. Using strategies that have helped other organizations succeed in the past will assist in moving your company towards meeting its goals.
Resource:
“Creating Organizational Transformations.” The McKinsey Quarterly, July 2008.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at (770) 399-9512 or by email.
Wednesday, March 9, 2011
Thursday, February 24, 2011
Anticipate your Competitor’s Next Move
If you want to increase your company’s success, it’s important to fine tune your understanding of competitors. These key players have a large impact on your ability to win market share and boost revenue potential. Acquiring new skills to help you think like your competitors will help you anticipate your competitor’s next move.
Focus on Strategy
A competitor of similar assets and size might have strategies like your own organization. The McKinsey Quarterly calls this "symmetric competition." However, if your competitors have different market positions, assets and resources, you won’t react identically to the market conditions. This is called "asymmetrical competition" and your strategies are likely to be different in this situation. In order to understand your competitor’s strategies, identify if your largest competitors are symmetric or asymmetric competitors.
For example, McDonald's and Burger King are leading competitors in the market. However, when responding to the backlash from obesity, the companies select two very different strategies. McDonald's created a variety of new healthier products to address the concerns of consumers and the government. Smaller fast food organizations, like Burger King, however, choose to shift marketing focus to less conscious consumers. Since they didn’t hold as strong of a market position as McDonald's, the organization’s strategy was different.
Resource Based Strategy View
Companies should evaluate their competitors’ strategies by using a resource-based view of strategy. Resources generally have three categories; tangible assets, which include physical assets or technology, intangible assets which are a company’s brand and reputation among consumers and market position. A company’s ability to exploit opportunities better than you also plays a role in their strategy.
For example, think about Microsoft and Sony in the video game consol market. Each company is working towards dominating the next video console game system. Both organizations are looking to replace consumer electronic devises, such as the DVD player and MP3 player. However, each company’s strategy is different, based on which products they currently offer consumers. For example, Sony’s existing business includes consumer electronics. Therefore, the importance of establishing Sony’s new console as a living room hub is important to the company’s existing product lines. Since Microsoft has products in the software business, it’s critical to establish their console as a digital living room hub with software to protect the company’s existing business. Each company shapes their strategy to preserve existing products and revenue streams.
Get into a Competitor’s Mind
Anticipate your competitor’s next strategic move by thinking like a corporate decision maker. These decisions don’t always align with corporate objectives, so you need to take a new approach to anticipate strategy. You must first understand who will make the decisions and how that person’s objectives and incentives play a role in those decisions. Owners and top managers are usually the people who make the decisions. Frontline managers, however, are usually more heavily influenced by pricing and service decisions.
Owner’s decisions might be controlled by values, relationships or family history with the business. Top-level management decisions, however, might be influenced by business style. For example, top-level managers might favor experimentation in a new market and more operation accountability. By studying decisions made by top executives in the past, you will anticipate decisions patterns.
General manager decisions, however, are different. For example, let’s say the organization wants to replace an existing product with a new and improved version. If the existing product is still performing well, a general manager might not want to take the risk. He might want to continue enjoying the rewards of the existing product’s performance. His strategy might include waiting to introduce the new product until the well-performing product’s sales start to decline.
Reshape your Views
Once you understand your competitor’s strategy options, it’s important to understand how the organization would evaluate these options. Hold brainstorming sessions, where strategists pretend to be the organization making the competitor’s decisions. Use information from your frontline employees, study the competitor’s blogs, learn about current promotions or sales tactics to shape your decisions. When possible, establish information sharing agreements with your business partners. For example, suppliers might give you a heads up if a competitor price adjustment is scheduled. Based on this exercise, your company can make reasonable forecasts of what the competitor will do in the market conditions given their resources. Then, you can evaluate what your competitor actually does. If the organization does something different than you forecasted, study the decision for future strategy decisions.
In the current business environment, companies need to be more aware than ever of their competitor’s strategies for decision making. Accurately anticipating your competitor’s next move will assist in making better decisions and getting an edge in the marketplace. As a result, you have fewer surprises from competitors and more opportunities to grow your business.
Resource
Hugh Courtney, John T. Horn and Jayanti Kar. "Getting into your Competitor’s Head." The McKinsey Quarterly, 2009.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Thursday, November 11, 2010
Managing Employees for Results
Leaders set the culture in an organization. Employees look to leaders to guide and set an example for the company. Your success as a manager is highly dependent on your ability to understand employees. Having these skills will positively affect employees and improve performance and culture of an organization, according to the McKinsey Quarterly.
Lead with Confidence
The McKinsey Quarterly recommends using a strategy called “fake-it-until-you-make-it.” This means you need to make business and employee decisions despite your doubts. Use the best information available and move forward quickly. Having higher confidence will allow you to become a better manager and show employees that you’re a leader worth following. If employees sense low-confidence in decisions, they will start to doubt you too. Confidence is contagious. Employees will also become more confident in the company.
Also, don’t waiver on your decisions. Make a swift and definitive decision. Managers who delay and wafer from one decision to the next lose valuable employee respect. Choose a yes, no or I don’t know response and stick to it. Also, empower employees to make confident decisions.
Share the Credit
A manager usually gets most of the credit when a project goes well. It’s important to share credit with employees. Doing this will build moral and trust with your team. Managers who don’t share credit face hostile employees who simply aren’t motivated on the next project. Nothing is worse then not getting credit for a job well done.
Err on the side of giving employees more credit than they deserve. This will make your team admire your generosity and create a higher level of motivation. It’s a win-win situation.
Accept Blame
A good manager should always take responsibility for the team’s faults; even if a single team member was primarily to blame. This reinforces that the manager is in charge. The organization can be confident that the manager is leading the team, even in bad times. A study conducted by the University of Michigan found that managers who take responsibly for issues are perceived as more competent, likeable and powerful than managers who deny responsibilities. Employees will also have a higher level of respect for managers who share the blame, which increases employee morale.
Managers must also take immediate control of situations and make the necessary actions to correct all issues. A good manager will communicate what was learned from the problem. They will also implement and announce process changes to ensure the situation doesn’t occur again.
Forge Strong Employee Relationships
Effective managers need to forge strong relationships with employees. Create an environment where employees feel safe talking about new ideas and strategies. Employees should also be able to make mistakes without facing harsh punishment or criticism.
Managers who lead by fear don’t experience long-term gains. A manager must create a safe environment for employees to grow and prosper with the company. It is also important for employees to feel about safe about reporting issues and mistakes whether they are their own errors or other employees. One study conducted by the Harvard Business School found that nurses who fear their managers are less likely to report drug errors. Invest time in building a relationship with each employee to ensure they feel comfortable and safe in the working environment.
Protect your Employees
Create a positive team environment by letting employees know you’re on their side. The most effective managers create ways to minimize the emotional load of employees and protect them from negativity from other managers. Doing this will protect your team from a high stress environment and encourage them to take new risks to grow the company.
Managers also need to protect employees’ time. Getting rid of unnecessary meetings and tasks will free up employee time to focus on more important tasks.
Extend Gratitude to Employees
Employees appreciate compensation and other monetary rewards. However, a reward that is highly underused and doesn’t cost anything is a simple thank you. Projects need to end with a thank you when things go well. Even if the project doesn’t go as planned, thanking an employee for a job well done is still appreciated. The next time an employee tackles a difficult project; they will feel appreciated and work harder.
The most successful managers aren’t just focused on getting more out of each employee. Instead, they focus on building a culture where each employee wants to make valuable contributions. Employees are often a reflection of management. Managers need to evaluate how their own weaknesses are affecting the team. Focus on what is feels like to work for you. Changing your approach to managing employees will naturally boost the success of your team and the organization.
Resource
Robert I. Sutton. “Why Good Bosses Tune in to Their People.” McKinsey Quarterly, August 2010.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Lead with Confidence
The McKinsey Quarterly recommends using a strategy called “fake-it-until-you-make-it.” This means you need to make business and employee decisions despite your doubts. Use the best information available and move forward quickly. Having higher confidence will allow you to become a better manager and show employees that you’re a leader worth following. If employees sense low-confidence in decisions, they will start to doubt you too. Confidence is contagious. Employees will also become more confident in the company.
Also, don’t waiver on your decisions. Make a swift and definitive decision. Managers who delay and wafer from one decision to the next lose valuable employee respect. Choose a yes, no or I don’t know response and stick to it. Also, empower employees to make confident decisions.
Share the Credit
A manager usually gets most of the credit when a project goes well. It’s important to share credit with employees. Doing this will build moral and trust with your team. Managers who don’t share credit face hostile employees who simply aren’t motivated on the next project. Nothing is worse then not getting credit for a job well done.
Err on the side of giving employees more credit than they deserve. This will make your team admire your generosity and create a higher level of motivation. It’s a win-win situation.
Accept Blame
A good manager should always take responsibility for the team’s faults; even if a single team member was primarily to blame. This reinforces that the manager is in charge. The organization can be confident that the manager is leading the team, even in bad times. A study conducted by the University of Michigan found that managers who take responsibly for issues are perceived as more competent, likeable and powerful than managers who deny responsibilities. Employees will also have a higher level of respect for managers who share the blame, which increases employee morale.
Managers must also take immediate control of situations and make the necessary actions to correct all issues. A good manager will communicate what was learned from the problem. They will also implement and announce process changes to ensure the situation doesn’t occur again.
Forge Strong Employee Relationships
Effective managers need to forge strong relationships with employees. Create an environment where employees feel safe talking about new ideas and strategies. Employees should also be able to make mistakes without facing harsh punishment or criticism.
Managers who lead by fear don’t experience long-term gains. A manager must create a safe environment for employees to grow and prosper with the company. It is also important for employees to feel about safe about reporting issues and mistakes whether they are their own errors or other employees. One study conducted by the Harvard Business School found that nurses who fear their managers are less likely to report drug errors. Invest time in building a relationship with each employee to ensure they feel comfortable and safe in the working environment.
Protect your Employees
Create a positive team environment by letting employees know you’re on their side. The most effective managers create ways to minimize the emotional load of employees and protect them from negativity from other managers. Doing this will protect your team from a high stress environment and encourage them to take new risks to grow the company.
Managers also need to protect employees’ time. Getting rid of unnecessary meetings and tasks will free up employee time to focus on more important tasks.
Extend Gratitude to Employees
Employees appreciate compensation and other monetary rewards. However, a reward that is highly underused and doesn’t cost anything is a simple thank you. Projects need to end with a thank you when things go well. Even if the project doesn’t go as planned, thanking an employee for a job well done is still appreciated. The next time an employee tackles a difficult project; they will feel appreciated and work harder.
The most successful managers aren’t just focused on getting more out of each employee. Instead, they focus on building a culture where each employee wants to make valuable contributions. Employees are often a reflection of management. Managers need to evaluate how their own weaknesses are affecting the team. Focus on what is feels like to work for you. Changing your approach to managing employees will naturally boost the success of your team and the organization.
Resource
Robert I. Sutton. “Why Good Bosses Tune in to Their People.” McKinsey Quarterly, August 2010.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Monday, September 20, 2010
Rebound in a Poor Economy: Find Hidden Opportunities
For many companies, the weak economy is presenting some of the toughest struggles in the company’s history. On top of decreasing sales, organizations are left to battle inflation, exchange rate issues and regulation shifts. CEOs and executive teams are working hard to create the most solid strategies by putting their heads down and working diligently. However, according to the Harvard Business Review, this strategy simply isn’t enough to survive in today’s marketplace.
Executives need to brainstorm fresh new strategies to tap into hidden opportunities. They need to expand thinking to include broader and more creative approaches to business. Even in the most challenging market conditions, there are still untapped opportunities. Finding these opportunities is a little like striking gold; it allows you to prosper during difficult times. The Harvard Business Review studied companies that struggled with difficult market conditions. The study found there are several attributes successful companies have in common.
Missing the Best Opportunities
Some companies are overlooking some of the most valuable opportunities. The most effective way to find these opportunities is reviewing real time data. Share data trends throughout the organization. Encourage the management team to generate creative ideas for finding new opportunities based on the trends.
Front line employees are also valuable for uncovering new opportunities. These employees are in contact with customers every day. The employees are listening to the customer’s product needs every day and can anticipate new trends in the market. When you combine employee feedback with real time data, executives have an opportunity to identify some valuable trends.
For example, a retail store can anticipate which items are selling and which aren’t. Employees may share what customers are asking for when visiting the store. The organization can boost production on the best selling items and cut back on items that aren’t successful, allocating resources and time better.
Reward High Performance
Some organizations are moving away from traditional bonus structures. However, results from study conducted by the Harvard Business Review indicate that these organizations should reconsider. The strategy behind discontinuing bonuses is that it fosters teamwork. This strategy appears to hamper productivity and long-term success. Companies need to reward employees for a job well-done. A bonus structure or pay increases are the easiest way to accomplish this.
Create measurable goals for employees. Employees who meet and exceed these goals should be rewarded. The company should also tie rewards to long-term performance. By recognizing long-term performance for employee’s contributions, it will train staff to think about the long-term implications of actions.
Update Core Values
A company’s core values need to be updated to strengthen the organization. Values need to focus on recognizing employee leadership, ownership for results, teamwork, creativity and integrity. Most companies hang core value posters throughout the company. This is fine, however, it’s even more important for executives and managers to live and breathe the values. Leadership must act as an example to create the right company culture.
Promote employees based on their ability to demonstrate the company’s core values. Performance reviews should weave core values into the evaluation. When human resource departments interview new job candidates, select individuals with a track record of acting in accordance with the company’s core values. This will create a culture that is true to the organization’s most basic goals. Employees who aren’t willing to accept and incorporate the company’s values into daily activities should be reconsidered.
Create High-Impact Conversations
Executives and managers spend approximately 75 percent of their time in business discussions. Leading effective discussions will assist in strengthening the company. Conversations need to have execution requirements, deciding which actions need to be taken to accomplish success.
Each manager has a specialty. For example, a manager who is excellent in leading conversations on strategy may struggle with effective execution conversations. Give managers the skills needed to develop in all types of conversations and experience the best results.
Avoid Getting too Comfortable
It’s easy to get stuck in a business rut. When the economy is struggling, however, you simply can’t afford to do this. Some employees and managers will cling to safe strategies. Among your management team, you need some people willing to explore new territory, brainstorm new ideas and pioneer new strategies. Having these key players will assist in keeping your company stable and growing during difficult times.
Stick to Core Values
When the economy is struggling, leaders often go into panic mode, rushing around to put out fires. Leaders must be involved in solving these problems, but it shouldn’t consume all of their time. Organization leaders need to be focused on building and guiding the company’s core values. A leader must be willing to walk away from an attractive opportunity when it isn’t a good fit for the company’s core values. A leader can accomplish this by hiring plenty of creative talent to look for new opportunities that are a good fit for the organization. This will keep your company relevant in the current economic condition and boost performance.
Resources
Donald Sull. “Are you Ready to Rebound?” The Harvard Business Review, 2010.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Executives need to brainstorm fresh new strategies to tap into hidden opportunities. They need to expand thinking to include broader and more creative approaches to business. Even in the most challenging market conditions, there are still untapped opportunities. Finding these opportunities is a little like striking gold; it allows you to prosper during difficult times. The Harvard Business Review studied companies that struggled with difficult market conditions. The study found there are several attributes successful companies have in common.
Missing the Best Opportunities
Some companies are overlooking some of the most valuable opportunities. The most effective way to find these opportunities is reviewing real time data. Share data trends throughout the organization. Encourage the management team to generate creative ideas for finding new opportunities based on the trends.
Front line employees are also valuable for uncovering new opportunities. These employees are in contact with customers every day. The employees are listening to the customer’s product needs every day and can anticipate new trends in the market. When you combine employee feedback with real time data, executives have an opportunity to identify some valuable trends.
For example, a retail store can anticipate which items are selling and which aren’t. Employees may share what customers are asking for when visiting the store. The organization can boost production on the best selling items and cut back on items that aren’t successful, allocating resources and time better.
Reward High Performance
Some organizations are moving away from traditional bonus structures. However, results from study conducted by the Harvard Business Review indicate that these organizations should reconsider. The strategy behind discontinuing bonuses is that it fosters teamwork. This strategy appears to hamper productivity and long-term success. Companies need to reward employees for a job well-done. A bonus structure or pay increases are the easiest way to accomplish this.
Create measurable goals for employees. Employees who meet and exceed these goals should be rewarded. The company should also tie rewards to long-term performance. By recognizing long-term performance for employee’s contributions, it will train staff to think about the long-term implications of actions.
Update Core Values
A company’s core values need to be updated to strengthen the organization. Values need to focus on recognizing employee leadership, ownership for results, teamwork, creativity and integrity. Most companies hang core value posters throughout the company. This is fine, however, it’s even more important for executives and managers to live and breathe the values. Leadership must act as an example to create the right company culture.
Promote employees based on their ability to demonstrate the company’s core values. Performance reviews should weave core values into the evaluation. When human resource departments interview new job candidates, select individuals with a track record of acting in accordance with the company’s core values. This will create a culture that is true to the organization’s most basic goals. Employees who aren’t willing to accept and incorporate the company’s values into daily activities should be reconsidered.
Create High-Impact Conversations
Executives and managers spend approximately 75 percent of their time in business discussions. Leading effective discussions will assist in strengthening the company. Conversations need to have execution requirements, deciding which actions need to be taken to accomplish success.
Each manager has a specialty. For example, a manager who is excellent in leading conversations on strategy may struggle with effective execution conversations. Give managers the skills needed to develop in all types of conversations and experience the best results.
Avoid Getting too Comfortable
It’s easy to get stuck in a business rut. When the economy is struggling, however, you simply can’t afford to do this. Some employees and managers will cling to safe strategies. Among your management team, you need some people willing to explore new territory, brainstorm new ideas and pioneer new strategies. Having these key players will assist in keeping your company stable and growing during difficult times.
Stick to Core Values
When the economy is struggling, leaders often go into panic mode, rushing around to put out fires. Leaders must be involved in solving these problems, but it shouldn’t consume all of their time. Organization leaders need to be focused on building and guiding the company’s core values. A leader must be willing to walk away from an attractive opportunity when it isn’t a good fit for the company’s core values. A leader can accomplish this by hiring plenty of creative talent to look for new opportunities that are a good fit for the organization. This will keep your company relevant in the current economic condition and boost performance.
Resources
Donald Sull. “Are you Ready to Rebound?” The Harvard Business Review, 2010.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Anticipate Competitors More Effectively
Successful businesses are able to accurately identify the most threatening competitors. Having this ability allows your company to defend its place in the market. However, many managers make the error of overlooking some of the most threatening competition. According to the Harvard Business Review, there are several forces that are often missed when shaping competitive strategies.
Companies need to look beyond typical rivals. They need to focus on prospective new entrants, suppliers, customers and substitution threats. Creating strategies to address these threats will allow your company to sustain and grow market share.
Risk of New Entrants
A new company entering the market causes ripples in the industry. For example, when Pepsi entered the bottled water market, competitors were taken by surprise. The company leveraged assets from complementary products to secure a prominent position in the market. Apple used the same strategy when capturing the music distribution marketplace. These large companies quickly capture market share, even when competitors didn’t see it coming. The entrance of a new player in the market puts pressure on pricing and the return on investment necessary to compete. For companies already struggling, this is a serious challenge.
Industries have different risks for new competition entering the market. This risk depends on the barriers the new company faces when entering the playing field. If barriers are high, your company can expect a low risk for new entrants. If barriers are lower, however, you should pay attention to companies that may pose a threat.
Bargaining Power of Suppliers
Powerful suppliers are a hidden threat to your company. Suppliers charging high prices and limiting products or services can threaten your business model. If suppliers increase pricing, this puts the squeeze on companies who can’t afford to pass costs along to customers. For example, if the marketplace is saturated with competitors, the company may have limited ability to raise prices, fearing customers will chose the competitor’s product instead.
When a supplier is used by many companies in the industry, the supplier is usually powerful. For example, Microsoft is a large seller of operating systems. Companies have very few options when deciding to make a change, which makes the supplier a threat. Switching suppliers is also expensive. If a company can’t afford to pony up the resources to make the switch, the supplier gains power. Suppliers that offer a unique product, which can’t be easily be substituted, also have more leverage.
Bargaining Power of Buyers
Buyers are another force that is often overlooked. Powerful buyers have the ability to drive down prices, increase quality and play industry competitors against each other. If a single company makes up a large portion of your business, the company is usually a powerful buyer. A customer who has large fixed costs and low margins usually puts more pressure on your business.
Powerful buyers are aware of their leverage. Some of these buyers are willing to play your company against the competition to find the best deal. Buyers who don’t lose much money when switching vendors also have more power. If the customer can secure lower pricing elsewhere without a penalty, the organization doesn’t have anything to lose. Some buyers with significant resources may leverage better pricing with your company by threatening to take the service in-house. For example, soda companies have threatened packaging manufactures by showing they can produce the items in-house, if needed.
Substitution Items
The final threat to consider is substitution. A substitution product or service provides the same function to the customer, but is a different item. For example, online travel companies are a substitute for old fashion brick and mortar travel agents. Videoconferencing is a substitute for business travel. Businesses often overlook substitution products when planning for potential threats. However, these items can surprise a business and substantially affect the company’s success.
If your products and services have many prospective substitutes, profitability may be at risk. Substitute products may also interfere with your company’s pricing strategy. For example, once the product’s price exceeds a certain level, the customer may prefer the substitute which is less expensive.
Combat substitute products by differentiating your product or service. This can be accomplished through marketing campaigns, product quality or other strategies.
Understanding some of the most overlooked threats will assist in developing more effective strategies. A company should always consider these risks when evaluating potential strengths and weaknesses. If a new company is entering the market, evaluate the organization’s largest threats to identify their weaknesses. Taking a detailed look at the industry will also uncover potential opportunities. These opportunities are important to boosting performance and gaining market share. Your company will be positioned better in the market and have a more effective strategy in place.
Resource:
Michael E. Porter. “The Five Competitive Forces that Shape Strategy.” The Harvard Business Review 2006.
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Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Companies need to look beyond typical rivals. They need to focus on prospective new entrants, suppliers, customers and substitution threats. Creating strategies to address these threats will allow your company to sustain and grow market share.
Risk of New Entrants
A new company entering the market causes ripples in the industry. For example, when Pepsi entered the bottled water market, competitors were taken by surprise. The company leveraged assets from complementary products to secure a prominent position in the market. Apple used the same strategy when capturing the music distribution marketplace. These large companies quickly capture market share, even when competitors didn’t see it coming. The entrance of a new player in the market puts pressure on pricing and the return on investment necessary to compete. For companies already struggling, this is a serious challenge.
Industries have different risks for new competition entering the market. This risk depends on the barriers the new company faces when entering the playing field. If barriers are high, your company can expect a low risk for new entrants. If barriers are lower, however, you should pay attention to companies that may pose a threat.
Bargaining Power of Suppliers
Powerful suppliers are a hidden threat to your company. Suppliers charging high prices and limiting products or services can threaten your business model. If suppliers increase pricing, this puts the squeeze on companies who can’t afford to pass costs along to customers. For example, if the marketplace is saturated with competitors, the company may have limited ability to raise prices, fearing customers will chose the competitor’s product instead.
When a supplier is used by many companies in the industry, the supplier is usually powerful. For example, Microsoft is a large seller of operating systems. Companies have very few options when deciding to make a change, which makes the supplier a threat. Switching suppliers is also expensive. If a company can’t afford to pony up the resources to make the switch, the supplier gains power. Suppliers that offer a unique product, which can’t be easily be substituted, also have more leverage.
Bargaining Power of Buyers
Buyers are another force that is often overlooked. Powerful buyers have the ability to drive down prices, increase quality and play industry competitors against each other. If a single company makes up a large portion of your business, the company is usually a powerful buyer. A customer who has large fixed costs and low margins usually puts more pressure on your business.
Powerful buyers are aware of their leverage. Some of these buyers are willing to play your company against the competition to find the best deal. Buyers who don’t lose much money when switching vendors also have more power. If the customer can secure lower pricing elsewhere without a penalty, the organization doesn’t have anything to lose. Some buyers with significant resources may leverage better pricing with your company by threatening to take the service in-house. For example, soda companies have threatened packaging manufactures by showing they can produce the items in-house, if needed.
Substitution Items
The final threat to consider is substitution. A substitution product or service provides the same function to the customer, but is a different item. For example, online travel companies are a substitute for old fashion brick and mortar travel agents. Videoconferencing is a substitute for business travel. Businesses often overlook substitution products when planning for potential threats. However, these items can surprise a business and substantially affect the company’s success.
If your products and services have many prospective substitutes, profitability may be at risk. Substitute products may also interfere with your company’s pricing strategy. For example, once the product’s price exceeds a certain level, the customer may prefer the substitute which is less expensive.
Combat substitute products by differentiating your product or service. This can be accomplished through marketing campaigns, product quality or other strategies.
Understanding some of the most overlooked threats will assist in developing more effective strategies. A company should always consider these risks when evaluating potential strengths and weaknesses. If a new company is entering the market, evaluate the organization’s largest threats to identify their weaknesses. Taking a detailed look at the industry will also uncover potential opportunities. These opportunities are important to boosting performance and gaining market share. Your company will be positioned better in the market and have a more effective strategy in place.
Resource:
Michael E. Porter. “The Five Competitive Forces that Shape Strategy.” The Harvard Business Review 2006.
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Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
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