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by Joseph Baker

Illustration of Porters 5 Forces. Illustrates ...

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If your larger model business organization is enjoying a bounty of success in your given market, you may be seeking additional ways to increase your company’s earning power. If your company has a surplus of funds available and you are itching to keep the money flowing in with as little effort as possible, investing in another company could be a sound strategy.Ensuring that you are investing in the right small businesses is where things may seem risky. You want to make sure your investment is rock solid so you can continue to tend to your own business while letting your investment do the work for you. Making the steps toward doing your due diligence will pay off in the future. Vetting the company is the key to understanding how it will mesh with your company, its financial goals and most fundamentally, its potential for long-term success and financial gain. ExactTarget increased its own cache with potential investors by diversifying its portfolio and reaching from email marketing into a more interactive Internet marketing hub.

Ultimately, when you investigate the health of a prospective company, you not only ensure that you will be profitable, you are also helping to seal a better financial health for that company as well. For example, if you see an essentially tight ship with some room for improvement, you may drive that company to a success it hadn’t previously considered for itself so it is a chance for two companies to create a mutually beneficial relationship.

One way to measure a company’s health and desirability, as a potential recipient of your company’s investment dollars, is to employ the Porter’s Five Forces Analysis to any given company in which you have an investment interest. Developed in 1979 by Michael E. Porter at Harvard, this five-prong framework created to investigate and analyze a given market, using the five forces the name suggests, to determine how competitive and attractive the market is that you are considering, drawing upon the industrial organization of economics, focusing on external forces.

However, Porter examined those external forces of competition in the market and while they work to make up three of the five steps in his forces, the other two focus on internal factors that may or may not lead to the success of the company. The tools that Porter’s Five Forces provides you with a reliable guide from which to draw data regarding and how to best use it to your advantage.

A brief breakdown of Porter’s Five Forces follows below:

1. Rivalry. Examining the amount of competition and rivalry — as well as the degree of intensity of that rivalry — that your prospective investment company faces is critical. Economists use industry concentration as one method to measure the degree of rivalry for a company.

2. Threat of Substitutes. A company becomes vulnerable to risk when its product’s demand is threatened by a change in price for a substitute product.

3. Buyer Power. Buyer power is when a product’s availability is greater than demand and buyers will have many choices of suppliers for the same — or a similar — product.

4. Supplier Power. When a company is at the mercy of suppliers who may drive up prices, they wield control over some markets, which may cause a shift in your prospective company’s power.

5. Threat of New Entrants and Entry Barriers. The potential for new companies in any market are always a possibility; therefore making even more potential competition in the market.

When you set to task to understand the workings of one or more company in which you want to invest, finding the right assessment tools will help you to choose wisely.

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This entry was posted on Thursday, June 14th, 2012 at 2:26 pm and is filed under Business Education, Private investors. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.