Porter's Five Forces Model: Part Two
Force 2: The power exerted by the customers in the market. Buyer Power.
In any industry companies organize their activities in the market of input resources and in the market of output products. In the first case a company buys raw material, components, financial services and manpower. In the second case a company sells ready-made products and services. In both cases this activity creates extra value for consumers and for sellers. The way how this extra value is distributed between a seller and a buyer depends on their relative economic power.
Buyer's power is one of the two horizontal forces that influence the existing cost created by an industry. Buyer's power depends on the following factors: sensibility to the price (the higher the consumer's sensibility to the product cost, the less this industry is attractive for a seller); number of consumers and their concentration as compared with sellers. If there are not so many buyers in the industry and their volume of purchase is high, they have great influence on sellers; consumers' knowledge about sellers, their prices and expenses gives them the possibility to reduce the cost of a product; possibilities for vertical integration (the ability of a buyer to organize the product output instead of buying the products). Sellers' and suppliers' power depends on the same factors as buyers' power. It is often necessary to distinguish potential buyer's power from the buyer's willingness to use his/her power, willingness that comes from the ‘risk of failure' associated with a product's use.
Force 3: The potential threat of new sellers entering the market.
Existing competitors and even potential ones influence average industry profitability. The price, which consumers are ready to pay for the product or service, partly depends on the choice available in a market. The absence of proximate substitute products (such as in case of petrol or cigarettes) means relative consumers' insensibility to the price. However, consumers will be inclined to buy other products in case of the cost increase for original products if there are relative products which may substitute original ones. The main factor which determines the distance between the substitute product and the original product is the comparison of the price/quality proportion for the original product and the substitute product. If there is almost no difference between these characteristics, the consumer will be inclined to shift into the substitute product in the nearest time.
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