Since its introduction in 1979, Porter’s Five Forces has become the de facto framework for industry analysis. The five forces measure the competitiveness of the market deriving its attractiveness. The analyst uses conclusions derived from the analysis to determine the company’s risk from in its industry (current or potential). The five forces are (1) Threat of New Entrants, (2) Threat of Substitute Products or Services, (3) Bargaining Power of Buyers, (4) Bargaining Power of Suppliers, (5) Competitive Rivalry Among Existing Firms. Don’t forget to check out our sample Five Forces model analysis of Coca-Cola.
3. Bargaining Power of Buyers: The more powerful a buyer is relative to the seller, the more influence the buyer has. This influence can be used reduce the profits of the seller through a reduction of prices, increased favor in customer service or order delivery, or influence over who the seller supplies to. Customers are powerful if:
- Customers are concentrated: If there are only a few customers (or one) in the market, the customers will have more leverage because of the increased reliance on the income stream. A diversified customer base allows more leeway for a supplier to ignore a difficult customer requests.
- One customer consumes a significant amount of output: If one customer buys a significant amount of the output from a seller, the seller will do more for the buyer to keep them as a customer. Because of Wal-Mart’s buying power, it holds the upper hand over suppliers and is able to influence the suppliers’ prices. A fragmented customer base allows more leeway for a supplier to ignore difficult customer requests.
- Customers possess the power to buy seller or rival- If a customer is so large that it may choose backward integrate, the seller loses influence.