Industry Analysis: Global Cosmetic Manufacturing

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Threat (bargaining power) of Buyers

When buyers pose a high threat the profit potential of an industry is reduced. Buyers drive up competition within an industry “by forcing down prices, bargaining for improved quality or more services, and playing competitors against each other” (Buyers Bargaining Power). More simply, when buyers have more power than sellers, the buyers dictate the market. The high level of competition and availability of products gives the power to the buyer to shop around and decide where their money is best spent. For every product in this industry, there are a number of manufacturers that make a similar product. For example, Unilever, L’Oréal and Estee Lauder all make face moisturizer. Buyers can leverage their power for better pricing and can easily, and inexpensively, switch from one brand to another. Buyer information is another threat since “the better informed buyers are about suppliers and their prices and costs, the better they are able to bargain” (Grant, 75). As a result of the high buyer bargaining power, manufacturers may need to lower their prices, often times by acquiring their competitors.

An alternative scenario we could assess for this industry would be the buyers who are loyal to a specific brand and are always willing to spend more on the brands they refuse to deviate from. These buyers are price insensitive and will not switch brands. In this case, the threat/bargaining power of the buyer is very low. However, since these buyers make up a small segment of the market, we can conclude that overall, the bargaining power of buyers is high.

Threat (bargaining power) of Suppliers

The threat of suppliers determines the intensity of competition in an industry. This factor examines the power of suppliers to change the price and quality of their products. The threat of suppliers can be analyzed when we look at the power of the buyers to influence the price of the products in this industry. Strong suppliers have the ability to “pressure buyers by raising prices, lowering product quality, and reducing product availability” (Wilkinson). To a buyer, quality and price both represent costs. Suppliers with high bargaining power can increase competition within an industry and decrease profit potential for buyers. Conversely, a supplier with weak bargaining power is “at the mercy of the buyer in terms of quality and price” - this creates less competition within the industry and increases profit potential for the buyer (Wilkinson). Since there are large number of suppliers within this industry, and competition is high, suppliers present a low threat, not much bargaining power. Additionally, “suppliers of commodities tend to lack bargaining power relative to their customers” (Grant, 76). Since there are numerous manufacturers of the products that are required by the industry, buyers have the power to influence the market prices of these goods, and suppliers must adjust accordingly to meet market demands – again, demonstrating their weak threat in this industry.

Suppliers, for this analysis, can also be considered as the companies who supply raw materials to the manufacturers – these raw material suppliers also pose a low threat, with the exception of any rare specialized ingredients. In the Global Cosmetics Manufacturing Industry much of the base raw materials are the same, and there are a number of suppliers who can provide these goods, all at competitive prices so as to not lose business. The cost for a manufacturer to switch raw materials suppliers is low (or nothing at all), as they’re likely to run through materials before switching suppliers. Many manufacturers, such as Unilever, Procter and Gamble and L’Oréal “acquire their suppliers through backward vertical integration which reduces the impact of the supplier to zero” (Adamkasi).

Threat of Rivalry

Threat of rivalry can gauge the intensity of competition within an industry. More specifically, the intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other's profit potential (Porter). There are a number of factors that determine competitive rivalry such as barriers to exit, strategic focus, undifferentiated products, switching costs, capacity increases, diversity of competition and slow growth within the industry (Martin). In the Global Cosmetics Manufacturing industry the threat of rivalry is high, and since switching costs are low, manufacturers must use creative tactics to differentiate themselves from one another. The barriers to exit the industry can be high if manufacturers have invested in equipment, packaging and materials. This means that companies with low profit may choose to remain active and feel pressure to produce profits anyway they can. Since much of the products in this industry are generic, think toothpaste and body lotion, these items are treated as a commodity – meaning consumer choices tend to be based on value/price, which increases rivalry (price based competition). The relationship between the incumbents in this industry are predominately competitive. However, given the portfolio of products each manufacturer presents, there can be complementary relationships between the items, which is up to the discretion of the consumers.

Works Cited

Adamski. “Porter’s Five Forces Analysis of Nivea.” Porter Analysis, 13 June 2017, www.porteranalysis.com/porters-five-forces-analysis-of-nivea/. Accessed 6 November 2017

“Buyers Bargaining Power | Porters Five Forces Analysis.” MaRS, 14 Sept. 2013, www.marsdd.com/mars-library/bargaining-power-of-buyers-porters-five-forces-analysis/. Accessed 3 November 2017.

Cohen, A. (2017, June). BISWorld Industry Report C1934-GL. Global Cosmetics Manufacturing. Retrieved from http://clients1.ibisworld.com.libezproxy2.syr.edu/. Accessed 29 October 2017.

“Cosmetics Market Analysis, Market Size, Application Analysis, Regional Outlook, Competitive Strategies, and Forecasts, 2015 To 2022.” Cosmetics Market Size & Analysis | Industry Report, 2022, Grand View Research, www.grandviewresearch.com/industry-analysis/cosmetics-market. Accessed 2 November 2017.

“Global Beauty and Personal Care Products Market Forecast 2017-2023: Major Players in this Industry are Loreal Group, Procter and Gamble, Avon, Unilever, Revlon - Research and Markets.” Business Wire, 3 Jan. 2017, www.businesswire.com/news/home/20170103005748/en/Global-Beauty-Personal-Care-Products-Market-Forecast. Accessed 2 November 2017.

Martin. “Competitive Rivalry | Porter's