5 Forces Framework

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The power of suppliers: will charge higher prices that creates limit on quality, and can shift costs to industry participants. A supplier groups is powerful when it more concentrated that the industry it sells to and it is dominated by a small number of companies. The supplier group is stronger: when they do not depend heavily on the industry for its revenues, Suppliers offer products that are distinguishable, there is no alternative for what the supplier is offering, the supplier group can present a definite threat of forward integration.

The powers of buyers are very powerful and can reduce the profit potential in an industry. Buyers have the capability of increasing competition within the industry by forcing down prices, bargaining for improved quality or services. Buyers also play competitors against each other as well. There are few buyers, but large volume buyers are extremely dominant in industries with high fixed cost (telecommunications equipment, off shore drilling, etc.). They can play vendors if they feel like there are equivalent products. Buyers don’t really face much switching costs in changing vendors. Buyers are willing to produce the product themselves if they feel that vendors are too profitable.

Understanding the five forces that shape industry competition is key for developing a strategy. A future manager should know the average profitability of its current industry and how it is shifting over time. The five forces create an understanding and can also provide a model for the industries strengths and weaknesses. The future manger can impact the company by using the five forces framework. The five forces create strategies where it can spot an industry with a good future before the industry is reflected in the prices of the buyers.