I'd like to introduce you to Michael Porter, Professor at Harvard Business School, who's been writing about competition for the last 40 years or so. You can see from the title of his book, a couple of trends uses the word competition a good bit. Very famous for the five forces framework. If you've graduated from MBA, you still probably remember it, it's that famous. He also founded a consulting firm by the name of Monitor, which was later acquired by Deloitte. The five forces framework originated from an article that he published in 1979, so it's been around a while, and it has stood the test of time. Still widely taught, I teach it in my strategy class. It can be purchased from Harvard Business School for I think eight or nine dollars or so. Another alternative you may choose, there's a video here at the bottom and we'll put a link into the Course Hero course where you can click on that, and he gives you a very good overview of the framework, very similar to what I'm going to be doing over the next couple of pages. Big takeaway, you want to know this framework most of your clients do. Not only what it is, but when and how to use it. There is a free video you can watch here on YouTube. Let's start with the concept of competition. One to take away is that there are many different kinds of competition for your clients profits. The ones that you see every day in the marketplace are called your rivals. Those are the companies that look just like you. Here, you can see I drew a box, and let's say your company or your client is the red star. Different people are competing with you every day. Some are smaller triangles and some are bigger triangles. They definitely can threaten your profitability. If they win a contract and you don't, you're in trouble. Different industries have different structures. The one I drew here, you can see there are four triangles and one red star, so they're five main players. It's possible that some industries you only have two or three main players. The industry structure inside that box, the number of direct rivals can vary. Also, how you define that industry or that box becomes very important, so do we define it as just cable TV or does that also include any streaming, Disney Plus, Hulu, Netflix that you stream over the top? If you define that as cable or streaming or more largely as home entertainment, you can see how you define the industry really matters. The last bullet point is that we have a box and it makes it feel very discreet, but there are many companies that do many different things, they can be very vertically integrated. As an example, Netflix used to only be in the business of streaming other people's movies and TV shows to your house. But as you know with House of Cards and many other shows that have been very successful, they also produce their own shows too, so they're more vertically integrated now. We've just started the discussion and there's already so much to talk about. How you define the industry matters, the number of players in that box can vary. Some can be bigger or smaller than others. This box is not everything, there are other forms of competition which we're going to show you next. We had talked about inside the box as your direct rivals, people that you fight with every day in the market, and you compete for customers. But it turns out that also your suppliers on the left hand side, and your customers or your buyers on the right hand side, they can also compete for your profits. I know when I first heard about that 15, 20 years ago, that felt really strange. Like, how do customers compete for your profits? Let's talk about that a little bit. Well, customers, I mean, they're picky and they have options. They may ask you to lower your prices or they may ask for more service or they may ask for a warranty. They can make your life difficult, and by making your life more difficult, it creates more costs or lower your price and then all of a sudden you're making less money. Same thing with suppliers. Suppliers, they can raise prices on you or they can give you worse delivery times. Instead of promising to deliver it tomorrow, they can say, we have some more important customers, they would never say that, but they imply that. We have some more important customers and we can give you some product next month. Well, all of a sudden that could limit your profit as well. Big takeaway. Yes, you have competition with your direct rivals that you fight with and you wrestle with every day in the market. But also your suppliers and your buyers can limit your profits too. I'm not even finished. We talked about all these different people who are trying to get some of your profits. Two more groups of folks. One, are new entrants. These are typically companies who in the past didn't do this business. They used to not do this business, but now they've decided to enter this market. We talked about it earlier. Let's say we're talking this industry about movie production. There's many famous Hollywood production studios. Then now, Netflix makes movie too, Amazon also makes movies. New entrants, people who used to not do this are now doing this business. It shows you that any industry that is profitable for a while, it's attractive. New people are going to join it. Here at the bottom, substitutes, they're typically products or services, not companies, but they're alternatives. They're things that people could do besides using this industry. If we're thinking about substitutes to movies, there are so many. You can watch YouTube videos, you can play board games, you can work on jigsaw puzzles, you can do gaming and use your Xbox and Sony PlayStation. There are so many other things you could do besides movies if movies was the industry we're talking about. When you add all these things together, what you get is something that looks like this. It shows you that there are five forces. You can count them, 1, 2, 3, 4,5. Competition comes from many sides not just your rivals. Also here on the left you can see that it's green, yellow, red. The threat that each of these has to your profits varies. Some of them might be very high. If you're thinking about the movie business, the threat of new entrants with Amazon, and Netflix, and all these new production studios, that thread is pretty high, of course. But then you might have other ones that are a little bit low. It might be high, high, low, low, medium. It can vary. Also, one thing it will point out is this tells you a little bit about the overall industry profitability. It doesn't tell you what individual companies are doing or how they should compete. It's a great starting point. It's a good checklist. If your manager asks you, hey John, I'd like for you to take a look at the general profitability of the movie business, not a bad framework to work from. It reminds you what to look at and gives you a simplification of what to think about. A few takeaways, for the green caps, the new hires, I strongly recommend that you become familiar with Porter's Five Forces, and also the other 30 key business frameworks. It helps you to analyze the client's situation. But remember, it's a checklist. It's a good place to start, but it's not the final conclusion or takeaway. For those of you who are internal, you have the benefit of already understanding the industry. It's not a new thing. You've lived in the movie business for 10 years, so no surprise. I will say that there's a tendency for companies to define competition too narrowly. They don't think more broadly about all the other types of competition for their profits. Pay attention to your customers and what your customers are doing. Because if we're in the movie business, it's possible our customers are now spending more time on TikTok and YouTube, and looking at other things besides just movies. If we only define our competition as other movie production studios, that's a problem. Think more broadly and focus on your customer more, than you are your direct rival. For the solo entrepreneurs shown here by the red airplane, remember that you know a lot about the industry. It might just be helpful for you to summarize what you know, maybe just in a one or two-page document, that you can use over and over in proposals and analyses. It's a way to, one, demonstrate that you know what you're talking about. Number 2, identify potential changes in trends. Then perhaps most importantly, it's going to help you to sell new business.
