by Emmett Dulaney
Sometimes, concepts seem overly simplistic on the paper of a textbook, making it difficult to understand how they would ever apply in the real world. One of the goals of entrepreneurship education is for students to learn that those principles truly do apply and to suffer the consequences while still in school so they won’t be so vulnerable to them after they graduate. Many times, it only takes a simple lesson for it to hit home, such as the case with Michael Porter’s Five Forces Model.
A standard of both management and marketing disciplines, the Five Forces Model identifies five different areas to evaluate for an industry, the goal being to strategize how to have the best hand. One of the five areas is the power of the supplier. It is unfortunate to find yourself in a position where the supplier of a good you need can dictate terms unfavorable to you. Since that concept is easily understood, most business plans just state that the business intends to have more than one supplier so they will never be in a situation where they can’t impose their own terms. That is a lot easier said than done, as students at Anderson University learned this fall.
In October, nineteen students ran a family fun park, which included a hayride, concessions, games, live music, and a pumpkin patch. The pumpkin patch was such an integral part of setting the scene for the business that it was advertised in every promotional piece and was included in a package deal marketed through Groupon (two pumpkins included with admission and games). Not only were the pumpkins used for aesthetics, but they were intended as a profit item as well. Unfortunately, all the promotion was done in September, before students got the news of a pumpkin shortage.
The shortage raised the price of pumpkins at the wholesale and retail levels and tipped the tables out of favor for the family fun park. Not purchasing pumpkins was never an option since the promotions were already underway and it was important to meet expectations of those who came to the park. The students hit the phones and called around until they found a pumpkin patch on the east side of Indianapolis that agreed to supply a large quantity at a reasonable price per pound compared to what others were charging.
Computing gasoline, labor, and other expenses involved with making the pumpkin run, it worked out to be slightly cheaper than buying them locally and would thus be worth the effort. On Thursday, the students arranged with the farmer to purchase and transport the pumpkins on Saturday morning (he said to be there at 8am), and reserved a van. At 7am on Saturday morning, they called to say they were on the way and confirmed the price; he said he would be waiting.
At 8am, they pulled into the farm with the intent of loading a cargo van with 300 pumpkins. The farmer told them not to get the pumpkins near the stand and drove with them back to the field where there were others to load. Try as they might, it was not possible to safely put that many pumpkins in that type of vehicle. It maxed out at around 200, meaning that the costs of getting the pumpkins now had to be spread over a smaller quantity, cutting into the profit.
When the van was full, and sagging like a teenager’s jeans, the farmer handed them a bill and told them to drive to the cashier. As they were driving, they did the math and found it to be 20% more per pound than the agreed upon price. When brought to the farmer’s attention, his response was “You should have locked it in.”
The price that existed on Thursday and the price that existed at 7am on Saturday morning went up by 20% at 8am when the van was loaded and the farmer had the power. The choices that existed in that moment were to pay the increased price, or unload all the pumpkins and leave empty handed (a more costly undertaking). The supplier genuinely had all the power in the relationship at that moment and a concept that had existed only on paper became a reality that those students suddenly grasped and will never forget.
More from Porter:
Michael Porter’s classic book On Competition was updated and expanded in 2008 (ISBN: 978-1422126967). Not many business books have stood the test of time the way this one has and it is well worth the read.
Emmett Dulaney teaches entrepreneurship and business at Anderson University.
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