Using Michael Porter’s analytical framework to understand the bankruptcy industry
Renowned Harvard Business School professor, Michael Porter, developed a popular framework for industry analysis in 1979. This framework analyzes 5 main forces at work in every industry to determine how competitive and attractive (profitable) the industry is. A tough industry is one in which the forces at work drive down the profitability of most (or all) of the businesses in that industry.
Using Porter’s 5 Forces, we learn what the greatest challenges are that the bankruptcy industry faces as a whole. Understanding these forces will help you adapt your marketing strategies accordingly.
Market Force #1: Threat of New Entrants
A market with a higher opportunity for profits will naturally attract more new entrants, or attorneys that either expand into practicing bankruptcy or new college graduates who start a bankruptcy practice. Industries with high threats of new entrants will face lower overall profits as the pool of firms grows and compete with one another.
Most industries have “barriers to entry”, or factors that make it difficult for firms to enter the market. The bankruptcy industry has several barriers to entry for new attorneys starting their own practice. These barriers include the time and money required to pursue a legal degree and the challenges and risks of starting a law practice from the ground up. Also, for established firms, there is a barrier to expanding into practicing bankruptcy law due to the learning curve of changing their operational procedures and marketing efforts to adapt to the bankruptcy market.
Overall, the bankruptcy industry has a moderate threat of new entrants. Most attorneys can decide to start practicing bankruptcy law, but the learning curve in developing a marketing strategy can deter many from trying. You should be aware of the threat of new entrants, but this is not the primary challenge that you face in the bankruptcy industry.
Market Force #2: Bargaining Power of Customers
Buyers, or customers, can have a great influence on price. When there are few buyers and many suppliers (law firms), the buyer has more control over what they will pay for legal services and will usually get a lower price due to their ability to “shop around”. However, those that need to file bankruptcy usually have great urgency due to the issues they are facing from their debt. This makes them less likely to exert power over law firms in determining price.
The overall threat to you from customer buying power is moderate. You should be aware that your customers have some say over what they will pay since they have so many law firms to choose from. However, their urgency (and sometimes desperation) makes them less likely to drive prices down in the market.
Market Force #3: Threat of Substitute Products
For many products and services, customers have the option to buy a substitute product, or a product that achieves the same or similar benefits to your product but in a different way. With bankruptcy, substitutes may include debt consolidation or management, home refinancing, or creditor negotiations, While these are not perfect substitutes, customers may see these as a preferable option in some situations. This means that you are indirectly in competition with companies that provide these substitute services.
How strong is the threat of substitutes in the bankruptcy industry? Because substitute products for bankruptcy are not always as effective as bankruptcy in eliminating debt, this threat isn’t terribly strong. While you should be aware of any trends going on in these substitutes’ industries that may affect your business, substitute services should not be your primary concern.
Market Force #4: Bargaining Power of Suppliers
Many businesses have suppliers that provide the raw materials necessary to create a completed product. A supplier can have a great influence on a business if it is able to control the prices of materials that it sells. The fewer suppliers there are in a market, the more powerful the suppliers are.
Luckily, this is not a force that you face in the bankruptcy industry since there are no “raw materials” or suppliers in the truest sense.
Market Force #5: Intensity of Competitive Rivalry
This is by far the greatest challenge that you face in the bankruptcy industry. It is the factor that has the greatest influence on prices, marketing, and overall profitability of the bankruptcy market as a whole. Competitive rivalry is intense if there are many law firms that create a highly segmented market.
Intense rivalry can be demonstrated by:
- Changing prices and price competition
- Intense marketing efforts and spending
Rivalry increases even more when the market faces decline or slow growth or has low levels of product differentiation,
The bankruptcy market faces very high levels of competitive rivalry as firms with similar services fight for market share through intense price and marketing efforts. This means that you should be highly aware of your competitors’ prices and marketing efforts and have a powerful strategy to promote your own law firm.
Overall, the bankruptcy industry faces several challenging forces that make it difficult to sustain high levels of profitability. While you don’t face any pressure from suppliers and face only mild pressure from new entrants, customers, and substitute products, you do face intense competitive pressure from other firms in your area. Therefore, your primary goal to sustain your profitability should lie in creating an effective marketing strategy to compete with other firms in your area for market share.