11.6 Porter's 5 forces and the analysis of competitors

Porter’s five forces, first covered in [link] Chapter 3 as a methodology for assessing industry attractiveness, plays an important role in competitor analysis. The five forces perspective of competitor analysis views each force as a determinant of the level of competition in the industry. The level of competition in turn determines the firm’s ability to operate profitably in the industry.

Bargaining power of buyers

A firm’s buyers or customers have varying needs and wants. Meeting customers’ needs represents a cost to the firm. When the firm can easily meet the customer’s needs the firm’s cost is relatively low. Because the firm can easily give the customer what he/she values, the firm is in a strong bargaining position and sales are likely to generate healthy profits. When the customer’s needs are not easily met, the cost to the firm increases. Because the firm’s product is less attractive to the customer, the firm must lower prices or take other steps to entice the customer to make a purchase. Under these conditions the firm’s profits are likely to be low. Consequently, the firm can be seen as always bargaining with customers for the firm’s potential profits. The firm is in the strongest bargaining position when it understands its buyer’s needs. Understanding buyer needs is the role of marketing and may be viewed as a form of competitive intelligence.

Buyers are in a particularly strong bargaining position when they can easily switch from the firm’s product to a competitor’s equivalent product. For example, a firm that has many competitors offering a similar product will have customers with significant bargaining power. If the customer is not happy with the product offered by one firm, they can simply choose to go to another firm that provides the same item. For this to be a powerful bargaining tool for the customer, the switch from one firm to another must be cost-efficient and easy. Conversely, if a firm has desirable products and competing products are perceived as less desirable, customers will have reduced bargaining power. If it is expensive or burdensome to switch products, customers will also lose bargaining power. A good example of a firm in this coveted position is Apple with their iPod product. While other MP3 players are on the market, none have the market share and desirability enjoyed by iPod.

Customers almost always have choices and they will vote for their chosen firms with their purchases. Customers will vote against firms by simply walking away. It is important to balance the needs of the customer with the goals of the firm.