Buyer Bargaining Power (one of Porter’s Five Forces)

Porter’s Five Forces of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. When analyzing the bargaining power of buyers, the industry analysis is being conducted from the perspective of the seller. According to Porter’s 5 forces industry analysis framework, buyer power is one of the forces that shape the competitive structure of an industry.

The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory.

Buyer Power – Determining Factors¶

Several factors determine Porter’s Five Forces buyer bargaining power. If buyers are concentrated compared to sellers – if there are few buyers and many sellers – buyer power is high. If switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high. If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high. If the consumer is price sensitive and well-educated regarding the product, buyer power is high. If the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.

And of course, if the opposite is true for any of these factors, buyer bargaining power is low. For example, low buyer concentration, high switching costs, no threat of backward integration, less price sensitivity, uneducated consumers, consumers that purchase specialized products, and the absence of substitute products all indicate that buyer power is low.

Buyer Power – Analysis¶

When analyzing a given industry, all of the aforementioned factors regarding Porter’s 5 Forces buyers power may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high buyer bargaining power and some may indicate low buyer bargaining power. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market. Buyer Power is High/Strong if:¶

• Buyers are more concentrated than sellers

• Buyer switching costs are low

• Threat of backward integration is high

• Buyer is price sensitive

• Buyer is well-educated regarding the product

• Buyer purchases product in high volume

• Buyer purchases comprise large portion of seller sales

• Product is undifferentiated

• Substitutes are available

Buyer Power is Low/Weak if:¶

• Buyers are less concentrated than sellers

• Buyer switching costs are high

• Threat of backward integration is low

• Buyer is not price sensitive

• Buyer is uneducated regarding the product

• Buyer purchases product in low volume

• Buyer purchases comprise small portion of seller sales

• Product is highly differentiated

• Substitutes are unavailable
Buyer Bargaining Power Interpretation¶

When conducting Porter’s 5 forces buyer power industry analysis, low buyer bargaining power makes an industry more attractive and increases profit potential for the seller, while high buyer bargaining power makes an industry less attractive and decreases profit potential for the seller. Buyer power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. The buyer power Porter’s five forces laid out is well respected even to this day.

In Porters five forces, threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. A profitable industry will attract more competitors looking to achieve profits. If it is easy for these new entrants to enter the market – if entry barriers are low – this poses a threat to the firms already competing in that market. More competition – or increased production capacity without concurrent increase in consumer demand – means less profit to go around. According to Porter’s 5 forces, threat of new entrants is one of the forces that shape the competitive structure of an industry. Porters threat of new entrants definition revolutionized the way people look at competition in an industry.

The threat of new entrants porter created affects the competitive environment for the existing competitors and influences the ability of existing firms to achieve profitability. A high threat of entry means new competitors are likely to be attracted to the profits of the industry and can enter the industry with ease. New competitors entering the marketplace can threaten or decrease the market share and profitability of existing competitors and may result in changes to existing product quality or price levels. An example of the threat of new entrants porter devised exists in the graphic design industry: there are very low barriers to entry.

A high threat of new entrance can make an industry more competitive and decrease profit potential for existing competitors. On the other hand, a low threat of entry makes an industry less competitive and increases profit potential for the existing firms. New entrants are deterred by barriers to entry. Barriers to Entry¶

Several factors determine the degree of the threat of new entrants to an industry. Many of these factors fall into the category of barriers to entry, or entry barriers. Barriers to entry are factors or conditions in the competitive environment of an industry that make it difficult for new businesses to begin operating in that market.

A high production-profitability threshold requirement, or economy of scale, is an entry barrier that can lower the threat of entry. Highly differentiated products or well-known brand names are both barriers to entry that can lower the threat of new entrants. Significant upfront capital investments required to start a business can lower the threat of new entrants. High consumer switching costs are a barrier to entry. When access to distribution channels is an entry barrier – if it is difficult to gain access to these channels, the threat of entry is low. Access to favorable locations, proprietary technology, or proprietary production material inputs also increase entry barriers and decrease the threat of entry.

And of course, if the opposite is true for any of these factors, barriers to entry are low and the threat of new entrants is high. For example, no required economies of scale, standardized or commoditized products, low initial capital investment requirements, low consumer switching costs, easy access to distribution channels, and no relevant advantages due to locale or proprietary assets all indicate that entry barriers are low and the threat of entry is high.

Other factors also influence the threat of new entrants. Expected retaliation of existing competitors and the existence of relevant government subsidies or policies can discourage new entrants. While no expected retaliation and the lack of relevant government subsidies or polices can encourage new entrants.

Threat of Entry Analysis¶

When analyzing a given industry, all of the aforementioned factors regarding the threat of new entrants may not apply. But some, if not many, certainly will. Of the factors that do apply, some may indicate a high threat of entry and some may indicate a low threat of entry. The results will not always be straightforward. Therefore it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market. High Threat of entry of new competitors when:¶

• Profitability does not require economies of scale

• Products are undifferentiated

• Brand names are not well-known

• Initial capital investment is low

• Consumer switching costs are low

• Accessing distribution channels is easy

• Location is not an issue

• Proprietary technology is not an issue

• Proprietary materials is not an issue

• Government policy is not an issue

• Expected retaliation of existing firms is not an issue

Threat of New Entry is Low if:¶

• Profitability requires economies of scale

• Products are differentiated

• Brand names are well-known

• Initial capital investment is high

• Consumer switching costs are high

• Accessing distribution channels is difficult

• Location is an issue

• Proprietary technology is an issue

• Proprietary materials is an issue

• Government policy is an issue

• Expected retaliation of existing firms is an issue

Threat of New Entry of competitors Interpretation¶

When conducting Porter’s 5 forces industry analysis, a low threat of new entrants makes an industry more attractive and increases profit potential for the firms already competing within that industry, while a high threat of new entrants makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The threat of new entrants porter’s 5 forces explained is one of the factors to consider when analyzing the structural environment of an industry. ————————————————-

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Supplier Power (one of Porter’s Five Forces)
Supplier Power Definition¶

In Porter’s five forces, supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. When analyzing supplier power, the industry analysis is being conducted from the perspective of the industry firms, in this case referred to as the buyers. According to Porter’s 5 forces industry analysis framework, supplier power, or the bargaining power of suppliers, is one of the forces that shape the competitive structure of an industry.

The idea is that the bargaining power of the supplier in an industry affects the competitive environment for the buyer and influences the buyer’s ability to achieve profitability. Strong suppliers can pressure buyers by raising prices, lowering product quality, and reducing product availability. All of these things represent costs to the buyer. A strong supplier can make an industry more competitive and decrease profit potential for the buyer. On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and price, makes an industry less competitive and increases profit potential for the buyer.

Supplier Power – Determining Factors¶

The supplier power Porter has studied includes several determining factors. If suppliers are concentrated compared to buyers – if there are few suppliers and many buyers – supplier bargaining power is high. If buyer switching costs – the cost of switching from one supplier’s product to another supplier’s product – are high, the bargaining power of suppliers is high. If suppliers can easily forward integrate – or begin to produce the buyer’s product themselves – supplier power is high. If the buyer is not price sensitive and uneducated regarding the product, supplier power is high. If the supplier’s product is highly differentiated, supplier bargaining power is high. If the buyer does not represent a large portion of the supplier’s sales, the bargaining power of suppliers is high. If substitute products are unavailable in the marketplace, supplier power is high.

And of course, if the opposite is true for any of these factors, supplier power is low. For example, low supplier concentration, low switching costs, no threat of forward integration, more buyer price sensitivity, well-educated buyers, buyers that purchase large volumes of standardized products, and the availability of substitute products. Each of the fore mentioned factors indicate that the supplier power Porter’s five forces emphasize is low. Intensity of Rivalry (one of Porter’s Five Forces)

Porter’s Intensity of Rivalry Definition¶

The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, competitors are trying to steal profit and market share from one another. This reduces profit potential for all firms within the industry. According to Porter’s 5 forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry.

Porter’s intensity of rivalry in an industry affects the competitive environment and influences the ability of existing firms to achieve profitability. High intensity of rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.

High intensity of competitive rivalry can make an industry more competitive and decrease profit potential for the existing firms. On the other hand, low intensity of competitive rivalry makes an industry less competitive and increases profit potential for the existing firms. Porter’s Intensity of Rivalry Determining Factors¶

Several factors determine the intensity of competitive rivalry in an industry. If the industry consists of numerous competitors, Porter rivalry will be more intense. If the competitors are of equal size or market share, the intensity of rivalry will increase. If industry growth is slow, the intensity of rivalry will be high. If the industry’s fixed costs are high, competitive rivalry will be intense.

If the industry’s products are undifferentiated or are commodities, rivalry will be intense. If brand loyalty is insignificant and consumer switching costs are low, this will intensify industry rivalry. If competitors are strategically diverse – they position themselves differently from other competitors – industry rivalry will be intense. An industry with excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses incurred as a result of ceasing operations – will cause intensity of rivalry among industry firms to increase.

And of course, if the opposite is true for any of these factors, the intensity of Porter rivalry among competitors will be low. For example, a small number of firms in the industry, a clear market leader, fast industry growth, low fixed costs, highly differentiated products, prevalent brand loyalties, high consumer switching costs, no excess production capacity, lack of strategic diversity among competitors, and low exit barriers all indicate that the Porter intensity of rivalry among existing firms is low. Porter’s Intensity of Rivalry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the intensity of competitive rivalry Porter placed among existing competitors may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high intensity of rivalry and some may indicate low intensity of rivalry. The results will not always be straightforward. Therefore it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market. Intensity of Rivalry is High if¶

• Competitors are numerous

• Competitors have equal size

• Competitors have equal market share

• Industry growth is slow

• Fixed costs are high

• Products are undifferentiated

• Brand loyalty is insignificant

• Consumer switching costs are low

• Competitors are strategically diverse

• There is excess production capacity

• Exit barriers are high

Intensity of Rivalry is Low if¶

• Competitors are few

• Competitors have unequal size

• Competitors have unequal market share

• Industry growth is fast

• Fixed costs are low

• Products are differentiated

• Brand loyalty is significant

• Consumer switching costs are high

• Competitors are not strategically diverse

• There is no excess production capacity

• Exit barriers are low
Porter’s Intensity of Rivalry Interpretation¶

When conducting Porter’s 5 forces industry analysis, low intensity of rivalry makes an industry more attractive and increases profit potential for the firms already competing within that industry, while high intensity of rivalry makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The intensity of rivalry among existing firms is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework.