External Analysis Porter’s Five Forces (4-5_5)
4th Force: Bargaining Power of Suppliers
Suppliers are entities that provide the necessary inputs—such as raw materials, components, or services—that enable a company to operate. The following examples show supplier relationships across different industries:
| Industry | Suppliers |
|---|---|
| Airlines | Aircraft manufacturers |
| Medical Devices | Component manufacturers |
| Solar Power | Silicon and steel manufacturers |
Suppliers can influence the competitive landscape through their bargaining power—especially when switching is costly or difficult due to factors like specialized or scarce components.
To prepare for the threat of powerful suppliers, businesses can take these strategic actions:
- Diversify suppliers: Avoid relying on a single supplier to reduce their influence and increase flexibility.
- Increase switching ability: Use standardized inputs to make switching suppliers easier and less costly.
- Strengthen differentiation: Build a strong brand and customer loyalty so that businesses can share the burden of supplier cost increases with customers while minimizing the loss of sales.
5th Force: Bargaining Power of Buyers
Buyers can also shape the competitive landscape through their bargaining power when:
- They are large and account for a significant share of industry sales. These buyers can negotiate better terms, demand lower prices, and influence product features. Walmart is an example, leveraging its scale to pressure suppliers.
- They can easily switch to competing products or are highly sensitive to price. Online retail markets exemplify this dynamic—customers can instantly compare prices on platforms like Amazon and eBay to find the best deal.
To prepare for the threat of powerful buyers, businesses can take these strategic actions:
- Differentiate products: Offer unique products or services to reduce price sensitivity and build brand value.
- Improve customer loyalty: Strengthen relationships so customers are less likely to switch, even if alternatives are slightly cheaper.
- Reduce buyer concentration: If possible, businesses can try to reduce their reliance on a few large buyers by diversifying their customer base and targeting smaller customers or niche markets. One possible way is developing tiered product lines: offer variations of your product at different price points to attract a wider range of buyers, including budget-conscious or premium-focused customers. (We will dive into this in the economics part 10.)
More about Porter’s five forces