Page 216 - (DK) The Business Book

214 PORTER’S FIVE FORCES

product accessibility. For example, substitute raw materials or
soft-drink manufacturers have suppliers. Their power is increased
achieved this by introducing if they are large and can threaten
branded vending machines, so to step in and produce themselves.
competitors are unable to offer their Oil is an example of a scarce
Industry structure, products at that particular place. resource that is controlled by a few
as manifested in the strength countries. OPEC (Organization of
of the five competitive forces, Buyer power the Petroleum Exporting Countries)
determines the industry’s Buyers can demand lower prices represented the political power of
long-run profit potential. or higher product quality from oil-exporting countries in 1973 when
Michael Porter producers when their bargaining it placed an oil embargo on the US.
power is strong. Both scenarios OPEC’s action disrupted supply and
result in lower profits for producers, forced up the price of oil four-fold.
because lower prices mean lower
revenues, and higher-quality New entrants
products usually incur higher If an industry is profitable and there
production costs. Buyers exert are few barriers to entry, Porter says
similar growth is slow; within a strong bargaining power when that competition will increase and
specific star-rating the hotels are all there are few of them; they buy profits will fall. Typically, existing
fairly similar, as are the sizes of the in large quantities; they are price organizations try to create ways to
big hotel chains. Customers can sensitive; they control distribution deter new entrants. The threat of
choose to go to any hotel, and have to the final customer; there are new entrants is high when the cost
good access to prices. Exit from many subsititutes; and switching to of entering the market is low; there
the industry is difficult because another supplier can be done at low is little government regulation;
of the upfront investment. Many cost. Buyers may also be able to customer loyalty is low; existing
large hotel groups have introduced produce the product themselves— businesses can do little to retaliate;
loyalty programs as part of their so may use this as a threat. and economies of scale can be
strategy to differentiate their brand. Buyers for big supermarkets have easily achieved. Risk is increased
huge bargaining power in the food if existing companies have not
Substitutes and drink industry. Fresh milk is established brand reputation and
The most significant of the five forces often at the heart of supermarket do not possess patents, and when
is not always the most obvious one. price wars, because the big chains
For example, even though rivalry is have significant buying power over
often fierce in commodity industries, suppliers. UK farmers have claimed
that may not be the factor that that they are so pressured to reduce
ultimately limits profitability. prices that they often make a loss
The “threat of substitutes” force on each bottle of milk produced.
is surprisingly important here—
buyers in these markets can easily Supplier power
find substitute raw materials or When the bargaining power of
products that have attractive prices suppliers is strong, it allows them
or are higher quality. What’s more, to sell higher priced or lower quality
buyers can switch from one product raw materials. This directly affects
or service to another with little the profits of the company that is
cost. For example, it costs relatively buying, because it has to pay more
little for a consumer to switch from for its raw materials. Suppliers have
tea to coffee, unlike switching from strong bargaining power when
Buyer power is high in the food and
traveling by bicycle to car. there are few of them (but many
beverage industry because consumers
In some industries, companies buyers); they hold scarce resources; can easily find a substitute that may be
try to limit the threat of potential the cost of switching raw materials cheaper or differentiated, such as by
substitutes by ensuring wider is high; and when there are few offering increased nutritional benefits.