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Using Porters Five Forces for strategic planning
The example of how I have used Porters Five Forces is given below. Of course I have used other formal assessment and evaluation models and like you I also use informal methods, such as a best guess or I just take a punt or a risk. To be completely honest I rarely sit down and go through a formal process when making business decisions but if the risk is high and a lot of investment is required, time, effort and money, I will go through several assessment processes.
Starting a Care Home Business
I just want to state for the record that have no interest in starting a Care home facility. However ten years ago, back in 2010 I did consider the venture. The main reason the idea came to mind was because I had the expertise around me who could have managed the home. It is not always a good idea. Just because you can do something does not mean you should.
The main reasons I did not put substantial amounts of cash, time and effort in to this venture are indicated below as I used Porters Five Forces, just as an example.
The Care home I had in mind was residential and care for the elderly with 20 beds operating 24 / 7. You will note that I am not using each of the factors within Porters but those that I considered pertinant at that time.
Step One – The barriers to entry as I assessed them, are substantial. The finances required to have the facilities, a suitable building, trained competent caring staff, the time it would take which would draw me away from my main business. Of course this should mean that others, like me, who are thinking about starting this venture might mean, like me, that they would be discouraged and as such future rivals and competition would be no more of a threat than it currently was.
My assessment with regards to others in my geographical area who already had established Care homes and as such had a brand and a loyal client base, was that if my Care home could be seen as a good one, then their loyalty base might shift to me. In any case how many times does a family or an individual place someone in a Care home! I also recognised that many people needing care are placed by local councils and in this respect I would offer a first rate caring facility that was second to none. My care facility would be a “preferred option”.
The rules and regulations of operating a Care home did not phase me. In my business we work with a range of accreditations, awarding bodies and regulators. I assessed that while it was true that I had little experience or knowledge of the Care sector others around me did. As my knowledge grew however I realised that the regulations were complex and of course a care facility deals with health of some of the most vulnerable in society.
Step Two – Bargaining power of suppliers as I noted above in terms of supply did not concern me too much, however the fact that I had knowledge that local councils could reduce the price they paid for placing a person into our care home did concern me. I was hearing stories of what price was paid at the start of a placement and what price was paid after a few months. This non regulated pricing policy concerned me greatly as I would have based the care home finances on a fluctuating cash-flow which in the first 12 months of trading would have been less than ideal.
At that time I realised that there was a lot of care homes in my area and the council and private individuals had their pick and could to a certain extent tell me how much they would pay, within reason of course.
Any concerns I had with regards to supply of goods, equipment and services to the home were put to rest quickly. We as a buyer had advantage of knowing that there were a lot of suppliers who would sell at a cut price just to get the business.
Step Three – Bargaining Powers of Buyers in this case the buyers are those that are buying the service, placing people in our care for a price. There are a lot of elderly people needing the service but there are also a lot of providers offering the service. Most care homes are similar in service with some exceptions that offer additional care and nursing and enhanced living accommodation, pools, spars and gyms and even restaurants and shops. Like everything else 3 star is normally less expensive than 5 star. As much as I would have liked to have a 5 star facility it was going to be 3 star at 3 star pricing. This is price sensitive but would not mean the quality of service, care and accommodation would be shabby. My assessment was that I needed to provide a good home with quality staff, quality location, quality furniture & fittings and good home cooked food. This I assessed would attract the numbers of occupants and the home would always be fully occupied. We would gain a reputation of a quality provider at the market price.
Step Four – Threat of a substitute of the service. My only concern was that the care sector would be provided soley by the NHS or maybe a large part of the service leaving a market share for the wealthy who could and maybe would pay for a 5 star facility. May be the local council would invest more in providing the facilities which might mean that my care home business would only pick up the business they did not have the capacity for. Certainly in my assessment I could see that a council funded and operated care home would be less expensive than a service contract with me. I did consider the threat of substitution or another way that the elderly who wanted or needed a residential care facility could take but I came up with nothing. We, as we get older and less mobile will need care to a degree and this can not always be provided other than being a paid guest.
Step Five – Rivalry and competitors & Exit Strategy. As mentioned in the steps above competition within the sector is high unless that is you are offering a very different service for a more challenging clientele. Within the service I was considering the numbers of well established quality care homes appeared to be high. The more I researched the number of care homes within my preferred area the more I realised that there may be too many. When supply is higher than demand the market will pay less. In terms of an exit I could see that in normal times the price of property rises over say a 10 year period and also the care home would be established and would have the advantage of supply contracts in place. Given that I would have operated the business at a profit I could forecast a sale of business that gave me a return on my investment.
Conclusion
Keep in mind that I took around six months going through the process. I spoke to many who were operating residential care homes and I had a team around me that included four members of my staff who had actual experience of working in and managing such a facility. While I could see that a profit would have been realised and might even offer further business opportunities to my existing business, this new venture would be missing, in my opinion one vital aspect of business. I was not enthusiastic about the sector and as such it became clear to me that I was considering this venture with profit in mind and very little else.
My passion and energy and dedication to the business I owned and operated at that time was boundless. Every day was a new fresh day, every day was a challenge that I enjoyed, and the outcome of my days work could be measured
Reflecting
Using Porters Five Forces to assess the benefits and threats of entering into a business venture or expanding an existing business is useful. It is also true to say that while I used it formally, once I became aware of it, I also used most of its factors of assessing when I was not aware of it. The last time I used it I got it wrong. I basically ignored what the assessment indicated and expanded the business into a new area. Porters model suggested that I should reconsider expanding because my initial financial investment was too low, but my instinct suggested otherwise, I was wrong and invested a great deal of time and about £50,000 into something that I could only deliver on if I made further investment.
Mike Watson
SVT Ltd