Download Bargaining power of buyers

Chapter 5
Five forces (industry structure)
model
Suggested
reading
Topic
1.The strategic planning process
Intro to the Integrating case study
Case 1 :The ABC Cheese Factory
2.Portfolio model
Case 2 :Abbotsleigh Citrus
3.The growth strategies
Case 3 :Degrees South
4.Five forces model
Case 4 : A retail meat market
Question No 1
5.Competitive generic strategies
Case 5 : A retail meat market
Question no 2
6.Competitive market position and
related strategies
Case 6 : A retail meat market
Question No 3
7.Strategic alliance and network
Exam
Chapter 1-2
Page 202-209
Chapter 3
Page 209-212
Chapter 4
Page 212-217
Chapter 5
Page 228-237
Chapter 6
Page 228-237
Chapter 8
Page 228-237
Chapter 9
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Factors affecting industry attractiveness
Attractiveness can be judged from both outside and within an
industry. Relevant questions include:
1. How profitable is it likely to be in both the short and long term?
2. How well the industry factors match the business’s
characteristics and resources.
3. How easy will it be for the business to capture and keep a
significant and sufficient loyal customer base?
4. Is the business more or less dominant than its direct
competitors?
Shopping
Robot
Porter’s five forces
(industry attractiveness) model
Five
Threat of
new entrants
Bargaining
power of
suppliers
Intensity of
rivalry
between
existing
competitors
Threat of
substitutes
Bargaining
power of
buyers
Porter’s five forces model applied
An application of the model used to analyse the Australian
pharmaceutical industry can be found at the Pharmaceutical
Professionals website -
http://www.pharmaceuticaljobs.com
Click on ‘Healthcare Articles’ and find the article Competitive Strategy
in the Pharmaceutical Industry (viewed June 2007)
Intensity of rivalry
1. If competitive rivalry is high, it is more difficult and costly for
individual businesses to achieve sales and profit objectives.
2. If competitive rivalry is lower (competitors are reasonably
content to share the market between themselves), it is easier
and needs less effort and resources to achieve sales and profit
objectives (provided they are seen as reasonable by the
competitors).
Cola
Factors influencing competitive rivalry
1. The number of competitors.
2. The relative dominance of competitors.
3. The attitude or corporate commitment of
competitors.
4. The level of differentiation within the industry.
5. The cost structures within the industry.
6. The existence of high exit barriers.
7. The stage of the product or industry life cycle.
8. Low buyer switching costs.
9. The perishability of the product.
Countering competitive rivalry
The impact of competitive rivalry can be reduced by
using strategies relating to:
1.
2.
3.
4.
5.
6.
7.
8.
Quality,
Price,
Performance,
Service,
Strong differentiation,
Warranties,
Image,
Promotions and
sponsorships,
9. Loyalty programmes.
10.Strategic alliances with retailers and
distributors.
11. Being proactive rather than reactive.
12. Horizontally integrate by buying
weaker competitors.
13. If growth is slow, seek new markets
or segments that are growing faster.
14. If all else fails, sell out.
Toyota
Countering competitive rivalry
1. Market structure will impact on rivalry. Less differentiation
means more rivalry.
2. Competitors in undifferentiated market structures often try to
create intangible, but real to the consumer, differences to
artificially segment the market.
3. The non-dairy spreads (margarine) market is a good example of
this.
China
cars
Threat of new entrants
1. Entry barriers are factors that make it more difficult for new
businesses to enter the industry or market.
2. Industries with high entry barriers require substantial resources
or expertise to enter. This limits the number of competitors to a
few large firms, e.g., airline and heavy manufacturing industries.
3. Industries with low entry barriers tend to have larger numbers of
smaller firms, as the resource and expertise requirements are
easy to obtain, e.g., tourism, hospitality and many service
industries.
India
New entrants and attractiveness
1. Low entry barriers make industries more attractive
to potential entrants, but less attractive to existing
competitors.
2. High entry barriers make industries less attractive
to potential entrants, but more attractive to existing
competitors.
Entry barriers
can be created by:
1. High capital, expertise or
technology requirements.
2. Regulatory policies or
legislation, which places added
costs or conditions on the
industry.
3. Tariff and international trade
barriers.
4. Cost advantages held by
existing competitors.
5. Strong patents held by
existing competitors.
6.Brand image resulting in high
levels of customer loyalty for
existing competitors.
7.Access to distribution
channels.
Countering barriers to entry
The impact of barriers to entry can be reduced
by using strategies relating to:
1. innovation - new or different
patents;
2. forward or backward
integration;
3. better research leading to
better identification of
customer needs;
4. creating a strong point of
differentiation linked to your
new brand.
5. lobbying governments to change
policies and legislation;
6. leapfrogging production or
technology to cheaper or more
efficient methods;
7. strategic alliances that increase
power and resources, lower costs,
or overcome the barriers.
Threat of substitutes
1. Some industries or markets will experience competition from
substitutes as well as direct competitors.
2. This will lead to added competitive costs and lower stability.
3. Profit margins will be affected as prices are likely to reflect
increased elasticity of demand.
Substitutes may be:
1. Direct substitutes - products that perform basically the same
function for the customer.
2. Indirect substitutes - products that customers choose between to
spend discretionary income.
Threat of substitutes
will increase the intensity of competition when:
1. Customers switching costs are low.
2. Changing macro-environmental factors make the
substitute more attractive to customers.
3. The price performance trade-off of the substitute is not
significant in customer’s minds.
Countering the threat of substitutes
The impact of substitutes can be reduced by
using strategies relating to:
1. loyalty programmes
2. provide added value to your
offering to offset any savings
offered by the substitute
3. increase research into
customers needs, buying
decision processes and
preferences
4. Industry-based promotions.
5. increase differentiation
6. improve support to distributors
7. decrease the impact of the
substitute’s point of value
differentiation
8. diversification into the
substitute.
Bargaining power of suppliers
When suppliers have more bargaining power than
buyers, they can:
1. set higher prices for their products.
2. restrict products or services to competitors with whom they
have a stronger relationship.
Both scenarios will increase cost structures, make supply
acquisition more difficult, and decrease industry attractiveness.
Bargaining power of suppliers
is increased when:
1. there are few suppliers and many buyers.
2. individual suppliers have a strong differential advantage or
significant patents.
3. the buyers’ (industry competitors) switching costs are high.
4. the supplier’s product is an important part of the buyer’s products,
represents a large part of the buyer’s cost structure, or significantly
affects the buyer’s product quality.
5. buyers are not important due to small order sizes.
6. the suppliers may forward integrate and become new competitors.
Countering supplier power
The impact of high supplier power can be
reduced by using strategies such as:
1. a better supply chain
management.
2. developing a better
understanding of suppliers
costs and operations.
3. developing partnerships or
strategic alliances with
selected suppliers.
4. forming strategic alliances
with competitors to create
buying groups.
5. redesigning products so
substitute materials or
ingredients may be used.
6. sourcing from new
geographic locations.
7. backward integration.
Bargaining power of buyers
Buyers may be consumers, but are more likely to be
members of the distribution chain. When buyers have more
bargaining power than suppliers, they can:
1. set (restrict) the price the seller can charge, lowering profit
margins.
2. restrict their purchases to the ranges that provide them with the
best profit margins, reducing the ability of suppliers to maintain a
varied product range.
Both scenarios will reduce price potential and profitability,
restrict variety, and reduce the supplier’s investment in
new product development.
Trade
Bargaining power of buyers
is increased when:
1. There are few, or large, buyers who purchase a large
percentage of the industry’s product.
2. Smaller suppliers are of less significance or interest to the buyer
due to limited capacity.
3. The buyers (consumers) have low switching costs, or are able
and willing to buy substitute products.
4. The buyers pose a threat of backward integration.
5. The industry’s products have little differentiation.
6. The industry’s products do not save the buyer money, or
represent a minor part of the buyer’s purchases.
Countering buyer power
The impact of high buyer power can be reduced
by using strategies relating to:
1. value adding in forms of
additional service or
convenience.
2. developing a strong ‘pull’
strategy so end users will
demand your product.
3. forming strategic selling group
alliances to reduce marketing
and selling costs.
4. seeking new buyers and
markets.
5. removing the middle man and
sell directly to end users.
6. if the product is commodity in
nature, try branding it
anyway.
7. forward integration.
Limitations of the five forces model
1. Analysis is becoming more difficult as business activity
is becoming increasingly dynamic and changing rapidly
compared to when the model was first developed.
2. Good industry analysis needs focus on a greater variety
of factors than just the five Porter identified.
3. As with all analysis models, it cannot be used in
isolation, but provides one part of the total analysis
needed to make successful strategic decisions.