1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
* Where the switching costs are high e.g. Switching from one software supplier to another.
* Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft.
* There is a possibility of the supplier integrating forward e.g. Brewers buying bars.
* Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
* This is high where there a few, large players in a market e.g. the large grocery chains.
* If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains.
* The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another.
3. Competitive Rivalry: What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
five forces.gifThis is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.
4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
* Where there is product-for-product substitution e.g. email for fax Where there is substitution of need e.g. better toothpaste reduces the need for dentists.
* Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies.
* We could always do without e.g. cigarettes.
5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.
* Economies of scale e.g. the benefits associated with bulk purchasing.
* The high or low cost of entry e.g. how much will it cost for the latest technology?
* Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up?
* Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects.
* Will competitors retaliate?
* Government action e.g. will new laws be introduced that will weaken our competitive position?
* How important is differentiation? e.g. The Champagne brand cannot be copied. This desensitises the influence of the environment.
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