How do you test your business assumptions using Porter's Five Forces?

When dissecting a business domain, it's not just about identifying the industry, but about grasping its dynamics. You're not just listing assumptions; you're laying out hypotheses. Are consumers truly attached or just short-term enthusiasts? Maybe the belief is that suppliers are partners, not just transactional entities. Categorize these hypotheses; some might dramatically influence your strategy more than others.

Porter’s 5 Forces are a start, not the end. It comes down to the quality of future assumptions and the capabilities / strengths YOU have to gain market advantage. I have witnessed too many examples where business jump into profitable markets, only to find they lose out because those with established market reach and scale can undercut new completion (witness protein body building powders / liquids). It also,comes down to differentiation - commodity approach v niche and promoting the niche attributes to a real value add.

In my opinion, maximum weightage needs to be given to "the threat of new entrants". I have seen this aspect completely ruin the businesses. Therefore, consider the ease of new competitors entering your market. If your assumption is that your niche is impenetrable, assess barriers like high capital requirements or strong brand loyalty. For instance, assume you run a premium coffee shop. Your assumption might be that the artisanal nature of your business makes it immune to new entrants. By using Porter's framework, you'd analyse factors like the cost of setting up a similar café or the uniqueness of your offerings. This helps refine your assumption.

The risk here is of comparing assumptions against further assumptions. Consider working with an external team or researcher to objectively research external factors to compare against your assumptions.

With enriched knowledge, sculpt a strategy that’s both proactive and adaptive. Maybe it’s not about capturing a larger market share, but about niche domination. Or perhaps, it’s not about competing on prices but delivering unparalleled experiences. It’s about pivoting, maneuvering, and sometimes, about holding your ground.

Industries are living ecosystems, with dynamics that constantly adapt and shift. Beyond the metrics and forces, there’s a web of relationships, emerging technologies, and geopolitical factors that can have unforeseen impacts. To truly master your industry analysis, remain curious, always open to new information and perspectives, ensuring the strategy is both agile and well-informed.

In a practical example, let's say you're planning to launch an electric scooter rental service in a city. Your assumption is that the absence of competitors guarantees success. However, applying Porter's Five Forces, you realize that new entrants could swiftly enter due to the relatively low barriers. Additionally, the threat of substitute modes of transport like bike-sharing could impact your assumption of limited substitutes. Armed with this analysis, you can refine your strategy to consider these forces and test your assumptions more comprehensively.