5 Classic Forces MSPs Should Think About
There’s a classic model that gets drummed into every business student which is called Porter’s Five Forces. It’s worth knowing for MSP owners because it enables you to have a quick mental-checklist (if nothing else) that you can use when you’re reviewing your existing products and services and – more importantly – if you’re thinking of adding any new products and services to your portfolio.
So, here’s a little background.
Porter’s Five Forces model was developed by Harvard Business School professor Michael E. Porter. It’s a strategic tool that helps businesses understand their industry’s competitive dynamics. For Managed Service Providers, this model can be a roadmap to navigate competition and optimise their offerings.
Let’s look at each of these forces in turn.
- Competitive Rivalry: This force gauges the intensity of existing competition in the industry. If a particular market makes lot of profit, it will likely attract more competition. For an MSP owner, understanding your competitive landscape is crucial. For instance, if the market is saturated with MSPs offering similar services (which it is), you could differentiate by specialising in a niche, such as healthcare IT or cybersecurity services, where your expertise can set you apart. The amount of competition for any particular service gives an indication of how much struggle you’ll likely have. In short, if there’s not much competition (at least not yet) in an area then you can focus all your time on sales and delivery otherwise you’ll need to sacrifice some of that time on differentiation.
- Threat of New Entrants: This force assesses how easy it is for new competitors to enter the market. If you find that the barriers to entry are low in your market, you could focus on creating barriers to entry. There are various strategies for creating barriers to entry. One example could involve such developing proprietary technology that’s really hard to copy.
For example, it would be hard for a new company to produce a mainstream operating system that would have much chance of threatening Apple or Microsoft!
- Threat of Substitutes: This force looks at the potential of alternative products or services replacing your offerings. If there’s a risk your clients might prefer an offshore team to save money, you could emphasise the unique value you provide. For example, you could highlight your own team’s ability to know the company intimately such as knowing their staff by name and you can offer personalised support and even occasionally meet with their staff in person to literally go the extra mile, which offshore or further remote solutions can’t easily replicate.
In general, a substitute is a different type of product or service that offers a solution to a problem. Whereas increasing competition for (say) selling phone services back in the day could mean charging less and less for phone-calls, a substitute could be a different technology altogether, such as Voip or now Teams or Zoom … or whatever comes next. Basically, it’s comparing apples with oranges rather than apples with other apples.
- Bargaining Power of Suppliers: This force considers the influence suppliers have on your business. As an MSP owner, your suppliers might include software vendors or hardware manufacturers. If a key supplier increases prices, it could squeeze your margins. To mitigate this, you could diversify your supplier base. For example, instead of relying on a single cloud service provider, you could partner with multiple providers to increase your bargaining power. Perhaps you could join forces and joint-venture with other businesses to get more power back
- Bargaining Power of Buyers: This force evaluates the influence that your customers have on your business. If you have a few large clients who contribute a significant portion of your revenue, they might demand price reductions or improved service levels. To counteract this, you could focus on expanding your client base to reduce dependence on a few large clients.
In summary then, these five forces include :
1 Competitive Rivalry
2 Threat of New Entrants:
3 Threat of Substitutes:
4 Bargaining Power of Suppliers
5 Bargaining Power of Buyers
This classic Porter’s Five Forces model provides a very simple strategic framework for MSP owners to understand their competitive landscape and make informed decisions about their existing business and services and especially about any new services they might be looking to bring to the market.
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