Page 34 - Strategic Management

Strategic Management 6 External Analysis

• little opportunity to practise product differentiation and
• slow rates of growth.
• Extra capacity.

Supplier power is determined by such factors as importance of product to buyer, switching costs, degree of supplier
concentration to an industry and the supplier’s ability to enter an industry.

Supplier power is likely to be high when:

• there are few suppliers
• The cost of switching to another supplier is high.
• The brand of the supplier is powerful.
• There is a possibility of forward integration by the supplier.
• The supplier’s customers are highly fragmented so their bargaining power is low.

Buyer power. The bargaining power of buyers depends on several factors, including buyer knowledge, purchase size,
product function, degree of buyer concentration in an industry, degree of product differentiation and the buyers’ ability
to enter the industry.

Buyer power is likely to be high when:

• There is concentration of buyers.
• There is a large number of small operators in the industry.
• There are alternative sources of supply.
• Material costs are high.
• The cost of switching to another supplier is low.
• There is a threat of backward integration by the buyer

Threat of substitutes is important because they can de-stabilise the current industry structure by offering customers better-
valued or more useful products.Forms of substitution:

• Product-for-product substitution.
• Substitution of need.
• Generic substitution.
• Product not a necessity

It is important to note that each industry will have its own unique interrelationship of the five forces and that the relative
bargaining power of each of the five forces together determines the overall attractiveness or profitability in an industry.

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