Industry Analysis: the Five Forces

6821 Words Oct 3rd, 2012 28 Pages
Purdue extension
EC-722

Industry Analysis: The Five Forces
Cole Ehmke, Joan Fulton, and Jay Akridge Department of Agricultural Economics Kathleen Erickson, Erickson Communications Sally Linton Department of Food Science

Overview
Assessing Your Marketplace
The economic structure of an industry is not an accident. Its complexities are the result of long-term social trends and economic forces. But its effects on you as a business manager are immediate because it determines the competitive rules and strategies you are likely to use. Learning about that structure will provide essential insight for your business strategy. Michael Porter has identified five forces that are widely used to assess the structure of any industry. Porter’s
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Reducing the Bargaining Power of Suppliers
Most businesses don’t have the resources to produce their own inputs. If you are in this position, then you might consider forming a partnership with your supplier. This can result in a more even distribution of power. For instance, Dell Computer uses partnering with its components suppliers as a key strategy to be the low-cost/high-quality leader in the market. This can be mutually beneficial for both supplier and buyer if they can: • Reduce inventory costs by providing just-in-time deliveries, • Enhance the value of goods and services supplied by making effective use of information about customer needs and preferences, and • Speed the adoption of new technologies. Another option may be to increase your power by forming a buying group of small producers to buy as one large-volume customer. If you have the resources, you may choose to integrate back and produce your own inputs by purchasing one of your key suppliers or doing the production yourself.

Factors Affecting the Bargaining Power of Suppliers
Suppliers have the most power when: • The input(s) you require are available only from a small number of suppliers. For instance, if you are making computers and need microprocessors, you will have little or no bargaining power with Intel, the world’s dominant supplier. • The inputs you require are unique, making it costly to switch suppliers. If you use a certain enzyme in a
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