After we have discussed SWOT analysis, we still need to analyze the macro-market more thoroughly. So, now let’s start with Michael Porter’s Five Forces.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
1. Supplier Power: How powerful the suppliers over you. They can drive up your prices. It is up to the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. The price is in their hand.
Here are some examples where suppliers are very powerful,
a. Where the switching costs are high, e.g. Switching from one software to another.
b. Where the brand names are powerful, e.g. Microsoft, Starbuck, Cadillac and so on
c. Where is a possibility of the suppliers to integrate forward e.g. Brewers buying bars
d. Where customers are fragmented, buyer has little bargain over suppliers, e.g. Gas/petrol stations in remote places.
To conclude, when the suppliers are powerful, all products you want from them is up to their discretion. The price is in their hand. Therefore, it can cause you a lot of problems such as shortage of required raw materials and prices which are far higher than the end consumers are willing to pay. So, there is high supplier bargaining power.
2. Buyer Power: Here you can ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
Here are some examples of powerful buyers:
a. Where there are a few but large players in the market, like large grocery chains, Big C, and so on, because 80 percent of your revenue comes from this small (20%) of your total customers. So, you can not dictate them.
b. Where the cost of switching between suppliers is low, e.g. from one fleet suppliers of trucks to another.
c. Where there are a large number of undifferentiated, small suppliers, when they are not happy with you, they can easily go to another supplier who is offering undifferentiated products.
If you are in this kind of business, you don’t have power to bargain your customers. So, there is high buyer bargaining power.
The rest three, Competitive Rivalry, Threat of substitutes and Threat of new entrants will be discussed in the next article. Click Here to continue reading!
Ref: Strategic management, ABAC, and self reading.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
Figure (1) Michael Porter’s Five Forces Model
1. Supplier Power: How powerful the suppliers over you. They can drive up your prices. It is up to the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. The price is in their hand.
Here are some examples where suppliers are very powerful,
a. Where the switching costs are high, e.g. Switching from one software to another.
b. Where the brand names are powerful, e.g. Microsoft, Starbuck, Cadillac and so on
c. Where is a possibility of the suppliers to integrate forward e.g. Brewers buying bars
d. Where customers are fragmented, buyer has little bargain over suppliers, e.g. Gas/petrol stations in remote places.
To conclude, when the suppliers are powerful, all products you want from them is up to their discretion. The price is in their hand. Therefore, it can cause you a lot of problems such as shortage of required raw materials and prices which are far higher than the end consumers are willing to pay. So, there is high supplier bargaining power.
2. Buyer Power: Here you can ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
Here are some examples of powerful buyers:
a. Where there are a few but large players in the market, like large grocery chains, Big C, and so on, because 80 percent of your revenue comes from this small (20%) of your total customers. So, you can not dictate them.
b. Where the cost of switching between suppliers is low, e.g. from one fleet suppliers of trucks to another.
c. Where there are a large number of undifferentiated, small suppliers, when they are not happy with you, they can easily go to another supplier who is offering undifferentiated products.
If you are in this kind of business, you don’t have power to bargain your customers. So, there is high buyer bargaining power.
The rest three, Competitive Rivalry, Threat of substitutes and Threat of new entrants will be discussed in the next article. Click Here to continue reading!
Ref: Strategic management, ABAC, and self reading.
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