You can do Porter’s Five Forces by yourself, but it is more effective if done by a group of people, for example with colleagues. Show
Use Porter’s Five Forces to make a large printout and use this in a brainstorm. Use sticky notes to write things on the template, in this way it is easy to add or change things and keep the conversation going. Have a look at the example as well, learn about the practical application of this tool through Porter’s Five Forces of Nike. Porter’s Five Forces show that there are five important forces that determine the competitive power of your business. Write down high, moderate or low on Porter’s Five Forces template for each of the following forces. Intensity of competition from existing competitorsIdentify the existing competitors of your business. Write down their names and the size of their businesses. Estimate how heavy the competition is.
Threat of substitutesSubstitute products or services offer an alternative for your offering. Write down those products or services that can be an alternative for your customers.
Threat of new entrantsNew entrants are businesses that want to enter your market. Your power is affected by the ability of others to enter the market. New competitors can easily enter your market when there are low entry costs, few economies of scale, no knowledge-intensity and little protection of key technologies. Write down the potential new entrants and the entry barriers of your market.
Bargaining power of suppliersHigh bargaining power of suppliers will result in a higher price for resources for your product. The bargaining power of suppliers is determined by the number of suppliers in the market. Write down on which suppliers you depend for your resources and how many other suppliers could offer the same resources. Also describe if it is easy to switch suppliers.
Bargaining power of buyersHigh bargaining power of buyers means that it is easy for buyers to drive down the price of your product. The bargaining power of buyers is determined by the number of buyers in your market. Write down how many buyers there are in your market. Also describe if you depend on your buyers or if they depend on you.
The bargaining power is low if there are many buyers. An individual buyer has little bargaining power and cannot drive down the price. An important force within the Five Forces model is the bargaining power of suppliers. All industries need raw materials as inputs to their process. This includes labor for some, and parts and components for others. This is an essential function that requires strong buyer and seller relationships. If there are fewer suppliers or if they have certain strengths and knowledge, then they may wield significant power over the industry. In this article, we will look at 1) understanding suppliers, 2) bargaining power of suppliers, 3) effect on target market, 4) example – the diamond industry, and 5) example – the fast food industry. UNDERSTANDING SUPPLIERSDepending on the industry, there are different types of suppliers. Some of these may be:
Given the importance of suppliers to the entire value chain, it is in the interest of companies to create and maintain good supplier relations. Some strategies that can be employed to this end include:
BARGAINING POWER OF SUPPLIERSWhen suppliers have bargaining power, they can apply pressure on a company by charging higher prices, adjusting the quality of the product or controlling availability and delivery timelines. Within the five forces framework, there is an understanding that when suppliers have this bargaining power, they can affect the competitive environment and directly influence profitability for the company. Factors that Increase Supplier PowerSuppliers may have more power:
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines. POWERFUL SUPPLIERS AND THE TARGET MARKETWhen a company’s suppliers have significant power over the value chain, it can directly impact how the company serves its own customers. Depending on what power the supplier chooses to exert, a company may have to reflect this through product prices, product quality and quantity available. Too much disruption in any of these areas may even mean that a company is no longer able to stay in business. A company may need to end operations or shift to another industry to avoid being dictated by the whims of a supplier. PricingThe first issue a company usually has to face from a strong supplier is increased costs. A supplier who knows that they cannot be removed may insist on raising prices for their raw material too soon, or ahead of agreed upon timelines. If the buyer has to choice but to pay these prices, the resultant increase in total production cost will either need to be absorbed by the company itself or passed on to the consumer. If the profit margin does not allow the company to absorb this pressure, it will mean higher prices in the market. The target market may not be receptive to this change and sales may suffer. A loss of customers to a competing product or substitute may be another undesirable outcome. Supply/Product AvailabilityIf a supplier is unwilling or unable to meet quantity targets, then the company may have to deal with demand that outweighs supply. This can happen either in regular scenarios if the company decides to try and increase sales or at peak sale times such as holidays or special occasions where people tend to buy more of some types of products. Quality IssuesThere may be cases where the supplier decides to compromise on the quality of the product in order to bring down costs. This will directly impact the company’s product offering and may create a negative impact on the end consumer if the quality issues are significant enough to impact user experience. There may be an increase in complaints, returns and exchanges, and in worse cases, an entire switchover to another product. Dictating Industry DynamicsIf a single large supplier chooses to supply to only certain companies, it may end up with the power to push companies out of the industry. In these cases, a company will be helpless and unable to save itself. If the product is a fully manufactured by a supplier, they may also choose to deign selling it directly to the customer often at a lower price. Mitigating Supplier PowerIf supplier power becomes too strong in the market, companies will try to find ways to reduce this power. If the demand for the product is high enough, there may be ways to develop alternate ways to produce or sell a product that reduces the supplier power. Product re-design, or product line diversification may be some of the ways that companies can try to dislodge powerful suppliers. EXAMPLE – THE DIAMOND INDUSTRYThe diamond industry worldwide has historically been controlled by De Beers, a world famous and cartel like company. In addition the industry is global in nature making a regional analysis irrelevant. The supply chain moves from one country to the next. Over the years, this power has moved from De Beers to a more widespread competitive marketplace with a few major competitors and some second tier ones. The modern diamond industry started in 1867 when diamonds were discovered in South Africa. Prior to this, limited quantities were extracted from India and Brazil. There are 3 types of diamond segments are industrial diamonds which have use in manufacturing processes, jewelry diamonds that are rough diamonds polished to be used in ornaments, and investment diamonds that are high quality gemstones with special characteristics. The diamond supply chain is vast including processes such exploration, mining, sorting, cutting and polishing, jewelry manufacturing, and even retailing. DeBeers And The Global Diamond Industry[slideshare id=23172625&doc=debeersmagicfinale-130618211342-phpapp02] Issues in the IndustryThere are several issues that are pertinent to the diamond industry. These include:
Five Forces AnalysisKeeping these industry dynamics in mind, the five forces analysis is discussed below: Bargaining Power of SuppliersThere is increasingly larger number of competitors in the market which has meant a larger supply of diamonds in the market. In the past, De Beers solved oversupply problems by collecting and storing them to be sold when deemed appropriate by them. This meant enormous power of the supplier over the industry. With the change in market structure and pressure by anti-cartel laws, this power has diminished somewhat. De Beers now focuses more on repositioning itself as the supplier of choice and not the only supplier. The company has handled bans on stockpiling by reducing mining and leaving diamonds inside mines. There is also more of a focus on stronger vertical integration, by moving to value-added retailing and partnerships with premium fashion brands such as Louis Vuitton. Other Forces
EXAMPLE – THE FAST FOOD INDUSTRYSuppliers play a key role in the value chain of the fast food industry. Chain restaurants rely on suppliers for food items, packaging, napkins, as well as items like plates and spoons. The same suppliers may be serving competing chains in an industry. This means that the power of these suppliers needs to be assessed by any company looking to enter the industry. A strong supplier may be able to effect profitability, quality of products and force companies to raise prices. The following factors may raise the bargaining power of suppliers:
Any fast food chain needs to consider what power suppliers in its regional market exert before making the decision to move into that market or expand operations. Image credit: Flickr | Kim Alaniz and Flickr | Joey under Attribution 2.0 Generic. 30 Shares |