The 5 Forces That Shape Industry Competition
As a person that considers himself an endless student of business, I was searching the Internet and thus came across a Harvard Business Review article written by Michael E. Porter, The Five Forces That Shape Industry Competition. This article is not only a good read but reminds me of the importance of getting back to the basics.
The Five Forces described in the article are basic concepts that apply to all industry groups. When reading the article one can see how appropriate these strategies are from the perspective of the insurance industry … to be honest they also shape Premier’s business model.
Without a doubt we can benefit from the study by understanding the guidelines that Porter details in the article. Porter stresses the importance of “awareness”… and that a business that is aware of the “five forces” will be better suited to understand the structure of its industry and can create a position for itself that is more profitable and less vulnerable to attack. Aligned with the message of the article, our business model is shaped by the understanding of competition and other risk management philosophies. It is important to have an educated point of view and an advocate for insurance matters!
All businesses are buyers of insurance products that protect their company. When you refer to Porter’s chart – if you are the buyer then you must ask yourself – who is the supplier?
If you said the supplier is the insurance carrier, then this is exactly what the insurance industry wants … overlooking the Broker as the true supplier.
- How does a supplier gain bargaining power? Reducing competition and creating so called expanded services to make it harder for customers to leave.
- How do you gain bargaining power as the buyer? By being a savvy buyer and forcing down prices by playing rivals against one another.
- If you said the supplier is the Broker then what is your strategy for managing the procurement process? Do you internally have the skill set to understand and interpret factors such as market intelligence and product knowledge?
Remember the insurance carriers are experts when it comes to their products … are you?
Too often businesses as the buyer look at the insurance carriers as the Supplier. If you really think about it the Broker is the supplier and what the insurance carrier provides is the product.
So why, when it comes to insurance procurement do buyers not create competition at the supplier level? Remember, suppliers gain power by reducing competition. It truly comes down to being a savvy buyer. The real dilemma here is that buyers don’t know that there is in fact a niche business of insurance advisers or the “substitute” as identified in this article that can help shape competition.
Porter’s article would suggest that you can reshape the forces in your favor by using tactics designed specifically to reduce the share of profits (premium) leaking to other players. An example; neutralize supplier power by standardization, or as we would say “you can’t standardize it unless you understand it” thus making it easier to vet out your vendors.
The journey is not a straightforward path but one that is complicated and though it is sometimes considered a necessary evil – insurance matters.