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Force 4: Buyer Power Buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry (refer to the diagram). The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
This force is relatively high where there a few, large players in the market, as it is the case with retailers an grocery stores;
Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power (Porter, 1998). Bargaining power of suppliers exists in the following situations:
Where the switching costs are high (switching from one Internet provider to another);
Possibility of forward integration of suppliers (Brewers buying bars);
Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol stations in remote places).
The nature of competition in an industry is strongly affected by the suggested five forces. The stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution, the more intense competition is likely to be within the industry. However, these five factors are not the only ones that determine how firms in an industry will compete – the structure of the i
Economies of scale: for example, benefits associated with bulk purchasing;
Cost of entry: for example, investment into technology;
Distribution channels: for example, ease of access for competitors;
Cost advantages not related to the size of the company: for example, contacts and expertise;
Government legislations: for example, introduction of new laws might weaken company’s competitive position;
Differentiation: for example, a certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
Product-for-product substitution (email for mail, fax); is based on the substitution of need;
Generic substitution (Video suppliers compete with travel companies);
Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 1: The Degree of Rivalry The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
This force is located at the centre of the diagram;
Is most likely to be high in those industries where there is a threat of substitute products; and existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for thecost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
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