Some important retailers in the food and clothing sectors have been referred to as ‘manufacturers without factories’. They so dominate their suppliers that they can dictate many trading conditions, from payment terms to production methods.
If most of a supplier’s output goes to one retailer, the latter’s bargaining power is even greater. If, however, the supplier is one of only a very small number of sources of a particular service or product, that supplier has a stronger bargaining position with their customer.
Porter argued that organisations' competitive positions depended in part on the relative bargaining power of their suppliers and their customers.
Suppliers are powerful if some or all of the following apply:
- There are many small customers buying from only a few larger suppliers.
- They sell unique products or services.
- It costs the customer a lot to change to buying from another supplier (switching costs).
- They are not dependent on the fortunes of only one industry.
- They could start doing themselves what their customers do.
Customers are powerful if some or all of the following apply:
- They purchase in huge volumes.
- It is easy for them to buy alternatives from different suppliers.
- They have the financial power and purchasing systems that can secure good prices and high quality from their suppliers.
- What they are buying is of relatively little importance to what they sell.
- They could make the products or provide the services themselves if necessary.
The threat of substitute products or services The final force discussed by Porter is the threat of something new replacing the need for the services or products provided in a particular industry or sector. The replacement of mechanical dispensing machines with electronic ones is an instance of this, although sometimes whole industries can virtually disappear.
Porter argued that as well as technological developments, there is a greater likelihood of substitute products or services when existing ones are generally perceived to be too costly or lacking in quality; this can apply in public as well as commercial sectors.
We arrived at the model of Porter's forces by extending the scope of market research to include the environment beyond your organisation, and more specifically the near, or competitive, environment populated by organisations whose actions your organisation influences and whose actions influence it.
Our aim here is not to move on to the strategic level of what an organisation should do to position itself in its competitive environment; rather it is to help you to be more aware of what to look out for in the near environment, and offer you a framework for thinking about your organisation's relationship with its competitors, suppliers, collaborators and customers.
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