Reading 8b

Reading 8b - A Framework for Analyzing Industries: Michael...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 A Framework for Analyzing Industries: Michael Porter’s Five Forces Analysis Michael Porter is a professor at Harvard University. His 1979 framework uses concepts developed in IO (Industrial Organization) economics to derive five forces that determine the attractiveness of a market. Porter referred to these forces as the microenvironment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. Four forces -- the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products -- combine with other variables to influence a fifth force, the level of competition in an industry. 1. The Five Forces Bargaining Power of Customers The power of buyers describes the effect that your customers have on the profitability of your business. The transaction between the seller and the buyer creates value for both parties. But if buyers (who may be distributors, consumers, or other manufacturers) have more economic power, your ability to capture a high proportion of the value created will decrease, and you will earn lower profit. The bargaining power of customers is likely to be high when They buy large volumes and there is a concentration of buyers. For example, you may have little negotiating power if you and several competing companies are trying to sell similar products to one large buyer. The supplying industry operates with high fixed costs.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 The product is undifferentiated and can be replaced by substitutes. If your brand is homogenous or similar to all of the others, buyers will base their decision mainly on price. Switching to an alternative product is relatively simple and is not related to high costs. For example, IBM customers might switch to Gateway or Dell, but it may be inconvenient for them to consider Macintosh. Customers have low margins and are price sensitive. Customers may not price shop for a quart of oil, but they will price shop if purchasing a new vehicle. Customers could produce the product themselves. Anheuser-Busch, Coors, and Heinz are examples of companies that have integrated back into metal can manufacturing to fill the balance of their container needs. The product is not strategically important to the customer. Customers have access to and are able to evaluate market information. You have less room for negotiation if buyers know market demand, prices, and your costs. Bargaining Power of Suppliers Any business requires inputs—labor, parts, raw materials, and services. The cost of your inputs can have a significant effect on your company’s profitability. Whether the strength of suppliers represents a weak or a strong force hinges on the amount of bargaining power they can exert and, ultimately, on how they can influence the terms and conditions of
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

Reading 8b - A Framework for Analyzing Industries: Michael...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online