Bargaining power


Bargaining power of buyers and customers:

Bargaining power of buyers/customers is another force that influences the competitive condition in an industry. It influences the prices the firm can charge. It also influences costs and investment, because powerful buyers usually bargain for costly service, which results in added costs/investment for the firm. The bargaining power of buyers will be stronger, if there are possibilities of buyers forming cartels. This is a phenomenon seen more often in Industrial products. Quite often, industrial product buyers come together, formally or informally, and exert pressure on the producer in matters such as price, quality and delivery. And any such cartelization on the part of buyers can be a major force in some industries.

Bargaining power of suppliers

Quite often suppliers too command considerable bargaining power over companies. The more specialized the offering from the supplier, the greater is his clout. And, if the suppliers are also limited in number, they stand a still higher chance to exhibit their bargaining power. The bargaining power of suppliers determine the costs of raw materials and other inputs of the industry, and the individual firm, and therefore, affect the profitability of the industry/firm.

The rivalry among existing players

The rivalry among existing players is the other source of competition in an industry. This can be easily understood. This is what is normally referred to as competition. And, it is obvious that for any player the existing competitors in the industry influence the prices as well as the costs of competing in the industry costs which they have to invest in pant, product development, advertising, sales force, etc. We discuss this subject in detail in the section that follows.

Threat from substitutes

Finally, substitute products are another source of competition in an industry. In many cases, they become a major constituent of competition. Substitute products offering a price advantage and/or performance improvement to the consumer can drastically alter the competitive character of an industry. And, they can bring it about all of a sudden. Wherever substantial investment in R&D is taking place, threats from substitute products can normally be expected. Substitutes too usually limit the prices and profits in an industry. It is quite possible that at times, corporations face more severe competition from a substitute product than from existing contestants.

So, competition has a larger boundary than what is normally understood. In addition to existing rivals or competitors proper, forces such as new entrants, customers, suppliers and substitutes also shape competition in an industry. A firm has to give due weight age to each of these forces as a fight can emerge from any quarter.

The five competitive forces together determine industry attractiveness and profitability. This is so because these forces influence the causes that underlie industry attractiveness/profitability. For example, these forces determine elements such as cost or price, and investments needed for being a player in the industry. And, these are the elements that decide the industry ROI and profitability. The collective strength of these five competitive forces determines the ability of firms in an industry to earn attractive profits, i.e. ROI in excess of the cost of capital. The strength of the forces may vary from industry to industry, and also within a given industry over time as it evolves.

Sizing up Existing Contestants Alone is not Enough; All Five Forces that Shape Competition must be sized up

From the foregoing discussions, it will be clear that the firm should have a proper understanding of the five forces that shape competition in its industry. It cannot stop with sizing up of ‘competition proper’ i.e. the other, existing players in the industry. It must know how each of the other forces affects the industry/firm. It must also understand ways of adjusting to them and, where possible, of taking advantage of them. The firm takes a competitive position where from it can defend itself best against all these forces. It can reduce its vulnerability by being aware of these forces and by developing a competitive strategy that will help cope up with them. By being aware of them, it can stake out position for it self in the industry that is less vulnerable too attack. These five forces of competition influence the firm’s strategy and its strategy, in turn, influences these forces. In fact, the strategy should preferably be able to influence all these forces in favor of the firm. Strategy can be viewed as building defenses against these competitive forces or finding positions in the industry where these forces are weakest. The firm has also to know which of these forces are particularly strong in its industry. This knowledge will come handy when the firm develops its competitive strategy.