Porter’s Five Forces (Buyer Power)
Buyer Power
The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony – a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.
| Buyers are Powerful if: | Example |
| Buyers are concentrated – there are a few buyers with significant market share | DOD purchases from defense contractors |
| Buyers purchase a significant proportion of output – distribution of purchases or if the product is standardized | Circuit City and Sears’ large retail market provides power over appliance manufacturers |
| Buyers possess a credible backward integration threat – can threaten to buy producing firm or rival | Large auto manufacturers’ purchases of tires
|
|
|
|
| Buyers are Weak if: | Example |
| Producers threaten forward integration – producer can take over own distribution/retailing | Movie-producing companies have integrated forward to acquire theaters |
| Significant buyer switching costs – products not standardized and buyer cannot easily switch to another product | IBM’s 360 system strategy in the 1960’s |
| Buyers are fragmented (many, different) – no buyer has any particular influence on product or price | Most consumer products |
| Producers supply critical portions of buyers’ input – distribution of purchases | Intel’s relationship with PC manufacturers |
