The Five Forces of the Porter Model: Buyer's Power

This is the fourth in a series of articles about the Porter Five Forces Model for Market Positioning. This article is preceded by an article with the title "Porter's Five Forces Model: Supplier's Power" by the same author. To best grasp the content of this article it is advised to first read the preceding articles in this series.

The power wielded by buyers constitutes another one of the five forces that influence the extent of the competition in an industry or industry sector. The power of buyers as intended in the Porter five forces model is the capacity of buyers of goods and services to impact on the setting of prices of these commodities.

In this article the power that is wielded by buyers in the market will be discussed.

The Five Forces

The economic factors present in an industry are not as a result of an accident. The market complexities are the result of continuing political and social development and economic factors. The effects of the market on companies directly influence the competitive strategies that may be available for implementation to maximize shareholder value and ensure sustainability.

Bargaining Power of Buyers

For the purposes of the porter five forces model buyers may be distributors, consumers, or other manufacturers. Buyer power is one of two opposing forces that influence the establishment of the value produced by an industry or industry sector.

The bargaining power of buyers is illustrated by the consequences that the customers can have on the success of a business. The power of buyers is represented by how much pressure customers can put on a business. If any customer or group of customers has a considerable impact on the prices or the volume of sales that is significant enough to affect the margins of the company, then the customer possesses substantial power.

Ideally business deals between sellers and buyers create equal value for the participants. This balance of power is disturbed under circumstances where the buyers have more economic power than the sellers.

The power of buyers is also increased under conditions where they can play suppliers off against one another. Another significant determinant of the power that buyers can yield is the size and the geographical distribution of buyers.

Other factors that influence the power of buyers include the bargaining leverage, buyer volume and product information available to buyers. A weak brand identity will result in an increase in buyer power whereas buyers who are price sensitivity will have much less power. It is important to point out that not all buyers wield the same level of negotiating power with a company. Buyers that depends on products with low differentiation characteristics and where substitute products are generally available normally have less power.

In industries where there is a threat of backward integration where buyers can easily acquire ownership of their supply chain, usually in the hope of reducing supplier power and thus reducing input costs, the power of buyers are increased.

Conclusion

According to Kippenberger (1998) it is important and can be extremely useful if one be capable of differentiating between the potential buyer power and their willingness or incentive to use the power. The willingness normally originates primarily from the potential risk of failure that is associated with the use of the product.

This article is followed by another article with the title "The Five Forces of the Porter Model: Treat of Substitutes" by the same author.

© Carl Marx