Professor Michael Porter of the Harvard Business School developed a framework that aids in the development of an organizations competitive advantage.
Porter identified five basic forces that act on the organization;
I. The bargaining power of suppliers;
II. The bargaining power of buyers;
III. The threat of potential new entrants;
IV. The threat of substitutes;
V. The extent of competitive rivalry.
The bargaining power of suppliers.
Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services.
In every industry there are suppliers; Porter put forward the idea that suppliers are more powerful under the following conditions;
« If it is dominated by a few companies and is more concentrated than the industry it sells to. This means it is difficult to switch suppliers if they start exerting power.
« It is not obliged to contend with other substitute products for sale to the industry. This is the case if the suppliers role is technical and no other suppliers can offer this product/service.
« The industry is not an important customer of the supplier group. If the industry that the supplier is selling to, does not represent a large proportion of its sales then it can exert power.
« The supplier¡¦s product is an important input to the buyers business. Supplier¡¦s product is essential to the buyer then they can charge whatever price they wish, and the buyer will pay because the product is essential.
The bargaining power of buyers.
Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other.
Porter put forward the idea, that buyers have more bargaining power under the following conditions;
« It is concentrated or purchases large volumes relative to seller sales. The organisation has little or no choice but to bargain with buyers, as there are few alternative buyers in the industry.
« The products it purchases from the industry represent a significant fraction of buyer¡¦s costs or purchases. Buyers will shop around and get a better price and purchase selectively.
« The products it purchases from the industry are standard or undifferentiated. If the buyer can easily switch products, without any great difficulty, then they will switch.
« Buyers pose a creditable threat of backward integration. As with suppliers above, the buyers bargaining power is increased if the buyer is able to backward-integrate and take over the role of the organisation.
« The buyer has full information. When the buyer has full information about the product (demand, market prices, supplier costs), being supplied they can exert their power to ensure they receive a favorable price.
The threat of potential new entrants.
New entrants to an industry bring new capacity, the desire to succeed and gain market share, and new ideas. New...