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Sunday, May 9, 2010

Strategic Planning - Porter's 5 Forces - Industry Analysis (Part 3 of 5)

Michael Porter provides a framework that industry is being influenced by five forces. A Strategic Financial Leader can utilize this model to better understand industry and develop an edge over the competition.

"The competition is alive and hungry - continue to relentlessly move the business forward!"

The five forces are the following:

 I. Rivalry
II. Threat of Substitutes
III. Buyer Power
IV. Supplier Power
V. Barriers to Entry / Threat of Entry

The power of buyers is the impact customers have on an industry.  When buying power is strong, the relationship to the producing industry is near to what an economist terms monopsony - a market in which there are many suppliers and one buyer.  The following are key factors to determine buyer power:

As Keith Allen stated, “Business-to-government companies target fewer buyers that have enormous purchasing power and more dependable shopping lists.”

Buyers are Powerful:
  • Buyers are concentrated - there are a few buyers with significant market share.  
  • Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized.
  • Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival.
An example of a powerful buyer in the US is Wal-Mart.  A large number of small/mid/large manufacturers have set up infrastructure directly to support the Wal-Mart business and this drives a dependency of greater than 50% in many cases.

Buyers are Weak:
  • Producers threaten forward integration - producer can take over own distribution/retailing
  • Significant buyer switching costs - products not standardized and buyer cannot easily switch to another product.
  • Buyers are fragments - no buyer has any particular influence on product or price.
  • Producers supply critical portions of buyers' input - distribution of purchases.
Reference additional Strategic writings:
Strategic Planning - Porter's 5 Forces - Industry Analysis (Part 2 of 5)
Strategic Planning - Porter's 5 Forces - Industry Analysis (Part 1 of 5)
Strategic Planning - 3 components of a Mission Statement (Part 3 of 3)
Strategic Planning - 3 components of a Mission Statement (Part 2 of 3)
Strategic Planning - 3 components of a Mission Statement (Part 1 of 3)
Strategic Plan - Set the Future!
Strategic Planning - PEST Analysis