A01254592

porter's 5 COMPETITIVE FORCES

Power of suppliers

Power of suppliers

Power of buyers

Rivalry among existing competitors

Power ofbuyers

Threat ofnew entrants

Threat ofsubstitutes

Threat of substitutes

Threat of new entrants

When suppliers hold considerable power, they can impact industry profitability by charging higher prices, lowering quality or services, or shifting costs onto businesses within the industry. This situation becomes especially challenging when industries are unable to pass on increased costs to customers. In such cases, powerful suppliers, including labor providers, can effectively reduce the profitability of the industry.A supplier group is powerful if:

• It is more concentrated than the industry it sells to
• Does not depend heavily on the industry to get revenues

• Supplier offer products that are differentiated
• There is no substitute for what the supplier provides
• Industry participants face switching costs in changing suppliers
• The supplier group can credibly threaten to integrate forward into the industry.

New entrants bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. The threat of entry puts a cap on the profit potential of an industry. It is the threat of entry, not whether entry actually occurs, that holds down profitability.Barriers to entry:

• Supply-side economies of scale
• Demand-side benefits of scale
• Costumer switching costs
• Capital requirements
• Access to distribution channels
• Restrictive government policy

A customer group has negotiating leverage if:

• There are few buyers, or each one purchases in relatively large volumes.
• The industry’s products are standardized or undifferentiated.

• Buyers face few switching costs in changing vendors.

Powerful customers can capture more value by forcing down prices, demanding better quality or more service, driving up costs and playing industry participants off against one another. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive.

A buyer group is price sensitive if:

• The product it purchases represents a significant part of its cost structure.
• The buyer group earns low profits or needs to trim its purchasing costs.
• The quality of buyers’ products or services is affected by the industry’s product.
• The industry’s product has little effect on the buyer’s other costs.

Substitutes offer similar functionality through different means, they are often overlooked because they appear different from the industry´s product. High threat of substitutes limits industry profitability by capping pricing potential. Failure to differentiate from substitutes leads to profitability and growth challenges

The threath of the substitute is high if:

• It offers an attractive price-performance trade-off to the industry’s product.
• The buyer’s cost of switching to the substitute is low.

Strategist should be alert to those changes in other industries that may make them new attractive substitutes when they weren't before.

Price competition is more probable to occur if:

• Products or services of rivals are nearly identical and there are few switching costs for buyers.
• Fixed costs are high and marginal costs are low.
• Capacity must be expanded in large increments to be efficient.
• The product is perishable.

Rivarly among existing competitors manifests in various ways such as price discounting, new product launches, advertising and service enhancements. This high rivarly limits the profitability of an industry. The intensity of rivarly is greater if the competitors are equal in size and power, if the industry growth is slow and the exit barriers are high.