Which are the factors that influence the buyer to have a list because of the bargaining power?
Porter's Five Forces (or 5F) are one of the most frequently-cited strategy concepts. Like many other strategy and business management concepts, whenever you look for examples for such intriguing concepts, you will always see examples
from traditional industries. We are all about digital technology businesses and therefore will be showing how to apply this important strategy concept on companies from different verticals within digital technology. This article is structured in 2 parts: In the end you will have gained great knowledge on both: the strategy concept as well as Uber (in one important aspect of their business model). “The Five Forces is a framework for understanding the competitive forces at work in an industry and which drive the way economic value is divided among industry actors” ISC webpages. … and what the Five Forces (5F) good for?As an innovator wouldn’t you want to know if you will be profiting from your idea or if someone else (e.g. a key supplier, your distribution channel or your customer) will rapidly capture the majority of the economic benefits of your idea? According research from Counterpoint, "In Q2 2021, it captured 75% of the overall handset market operating profit and 40% of the revenue despite contributing a relatively moderate 13% to global handset shipments."" Note that there are considerable quarterly fluctuations to this figure with some quarters even better and others not as good. More importantly, take note that Apple's market share is far higher in the US than globally. Nevertheless, the Five Forces can help explain these kinds of observations very well and help to:
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And you get our game-changing course. (1) Bargaining Power of Buyers (=customers)Where buyers are powerful profits are generally lower. Buyer power can lead to lower prices or having to increase costs by adding features, services, quantity in order to sell. Where sellers have too much power over buyers opportunities can emerge for others. Bargaining power can be exercised in different ways. We might be talking about negotiations as such, say a large multi-year supply contract or a supply contract for smartphone components. Bargaining power can also be exercised indirectly through purchase decisions of end customers, i.e buying from the lowest-priced company, deferring the purchase for a prolonged period, buying pre-owned (e.g. car) or not purchasing at all. When you read the below remember we are not just talking about end-buyers (=consumers). Apple is a seller to the end customers but they are also a buyer of components, such as displays, graphic processing units (GPUs), system on a chip (SoC). They are also a buyer of the assembly services of huge companies like Foxconn who are producing about 40% of all electronics world-wide and employ 1.3 million employees. Here is an image of Apple’ supply chain. Factors that influence buyer bargaining power:
Some ways that Apple uses to exert power over their supply side as well as their buyers (2) Bargaining Power of SuppliersWhere suppliers are powerful they may make a larger profit margin than the company that integrates the inputs of several supplier to sell to the end customer. And there are cases where suppliers also sell directly to the end user as well as to another company. Samsung sell displays and other smartphone components to competitors as Apple (e.g. iPhone X’s OLED display) and use them in their own phones to sell to the end customer. Hotels sell their room directly to travellers and in some cases they wholesale rooms to the likes of Expedia at discounted rates. A particularly successful supplier combination was the Microsoft, Intel duo in the PC space. Though many suppliers were involved in a typical PC, the biggest profit margins ended up in these two vendors' pockets when looking over the long run. Other vendors made good profits over certain periods but none of them anywhere close to “Wintel” if you look over the last 3 decades, many component manufacturers went out of business as newer technologies leapfrogged theirs (refer to supplier switching costs above). Important factors that give suppliers bargaining/pricing power:
(3) Threat of New EntrantsWinners attract others that wish to get a share of their success. A company that makes above industry-average profits will face the risk of new entrants that may either imitate bluntly or come up with similar (or even somewhat better) value proposals. This threat alone can keep a lid on the achievable profits. It may lead to having into continually add to the original value proposal with limited ability to increase prices. New entrants will add new capacity, thus supply, to the market which will reduce prices (at least in the medium term). The pace at which competition can form depends on a number of factors listed below.
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(4) Threat of Substitute Products or ServicesLet’s first clarify what a substitute is (and what it’s not). It is not the same product from a different company. Buying petrol from a different brand petrol station is not a substitute. Driving an electric vehicle is a substitute for using oil (it’s a substitute on the dimension of energy but not one on the dimension of transport). Using a train to commute to work is a substitute for using a car (on the transport dimension/industry). Substitutes satisfy the same basic/economic need (or utility) using a different technology (in a narrower viewpoint coming from the same industry). Clayton Christensen’s concept of “getting the job done” extends this definition. E.g. there are many things that compete for your recreational time which may be suitable to substitute each other. In this case, the substitutes may be coming from an entirely different industry. Factors affecting the threat of substitutes:
Developing a simpler substitute that scores better on the price-performance trade-off can be a great starting point for innovators. This is particularly true if you are looking developing a substitute for high-profit industries or where products have outstripped the user’s typical requirements. Become a Master!
Become a master on the Best Digital Technology Business Models Today with our game-changing course. Learn more about Innovationtactic's world-leading, laser-focussed course on The Best Digital Technology Business Models Today. (5) Rivalry Among Existing CompetitorsNot all industries are equal. Some are much more competitive than others. Prof Porter has identified the settings that frequently lead to fierce competition. Ingredients of highly competitive industries are:
Part 2: Porter's 5 Forces example UberThis completes Part 1. It was covering the concept of Porter's Five Forces in theory with many short examples from a broad range of industries. In our course, we have 20 intro/theory videos (one per submodule) doing the same - the examples therein are however exclusively from digital technology verticals (no traditional industries). Part 2 will demonstrate this concept using Uber as an in-depth example. Five forces analysis UberLet’s start with a brief recap of Uber’s value proposition in comparison to its rivals. This plays a role in a number of the forces. Uber’s value proposition is distinctly different to other forms of transport (=substitues – force 3) but very similar to other ride-hailing companies (=competitors – force 5) (1) Bargaining Power of Buyers (=riders)
(2) Bargaining Power of Suppliers (=drivers)
The bargaining power of drivers is low but likely rising: Slowly things have improved for drivers over the last 5 years. While one cant extrapolate from this that things will always get better, it seems still probable that the bargaining power of drivers improves (slowly)
The bargaining power of Uber drivers is lower than that of unionised taxi drivers. And this leads to lower entitlements for Uber drivers than taxi drivers. These savings then are one of four major types of savings that Uber uses to achieve lower unit cost compared to taxis. The image shows how the revenue model and cost base compare to taxis. We are discussing all of this in more detail and many related aspects and concepts in the course. (3) Threat of new entrants
The most likely scenario here is not that another global Uber emerges but rather several local competitors. A lot of locally-focused entrants (possibly with slightly differing value propositions) may dilute Uber’s strength (i.e. financial resources) enough to capture enough market share in those regions (4) Threat of substitutes
The threat of substitutes is low due to the very different value proposition of the substitutes – check the map above. (5) Rivalry among competitors
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What factor is most likely to increase the bargaining power of buyers?If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.
What is bargaining power of buyers examples?Let's consider the bargaining power of buyers example. In the real estate sector, customers or investors have the power to drive the prices up or down. The bargaining power of buyers gives them the opportunity to compare prices across websites and brokers. They don't have to restrict themselves to one price.
How do buyers deal with bargaining power?Here are some recommendations that can help:. Offering differentiated value: Of course, customer retention always starts with a good product. ... . Increasing switching costs: Creating an environment that your buyers would miss if they switched to a different vendor.. How does bargaining power of buyers affect a business?The presence of powerful buyers reduces the profit potential in a given industry. Buyers increase competition within an industry by forcing down prices, bargaining for improved quality or more services, and playing competitors against one another. The result of this is diminished industry profitability.
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