Porters Five Force Essay Example

weaken a company's competitive position;
- Differentiation: such as a unique brand that cannot be copied (e.g., The Champagne).

Force 3: The Threat of Substitutes

The profitability of an industry can be influenced by the threat of substitute products, which depends on the relative price-to-performance ratios of different types of products or services that customers can use to satisfy the same basic need. The threat of substitution is also influenced by switching costs, which refer to the costs incurred when a customer switches to a different product or service that require retraining, retooling, and redesigning.

Additionally, it involves:

- Product-for-product substitution (e.g., email for mail, fax) based on the substitution of need;
- Generic substitution (e.g., video suppliers competing with travel companies).• The substitution of items that people can go without, such as cigarettes and alcohol, is a strong force known as Buyer Power. This force is one of the horizontal forces that affect how an industry distributes the value it creates (refer to the diagram). The size and concentration of customers are significant factors in determining buyer power. Other factors include the level of buyer knowledge and the concentration or differentiation of competitors. Kippenberger (1998) suggests that it is helpful to differentiate between potential buyer power and the willingness or motivation of buyers to exercise that power. This willingness is often influenced by the perceived risks associated with using a particular product.

There are several factors that determine supplier power in a market. It tends to be high when there are only a few dominant players, such as in the case of retailers and grocery stores. It is also high when there are many small suppliers who offer similar products, like

small farming businesses supplying large grocery companies. Additionally, when switching between suppliers is easy and cost-effective, supplier power tends to be low, as seen in the example of switching fleet suppliers for trucks.

Supplier power is the opposite of buyer power and is influenced by the size and concentration of suppliers in comparison to industry participants, as well as the level of differentiation in the inputs they provide. If suppliers have the ability to charge different prices based on the value created for each buyer, it suggests a market with high supplier power and low buyer power.

The bargaining power of suppliers can be observed in various situations: when switching costs are high (such as switching internet providers), when brands have significant power (for example, McDonald's, British Airways, Tesco), when suppliers have the option to integrate forward (like brewers buying bars), and when customers are dispersed and have limited bargaining power (for instance, gas/petrol stations in remote areas).