1. Supplier Power: Here you assess how easy it is for suppliers to drive up
prices. This is driven by the number of suppliers of each key input, the
uniqueness of their product or service, their strength and control over you,
the cost of switching from one to another, and so on. The fewer the supplier
choices you have, and the more you need suppliers' help, the more powerful your
suppliers are.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive
prices down. Again, this is driven by the number of buyers, the importance of
each individual buyer to your business, the cost to them of switching from your
products and services to those of someone else, and so on. If you deal with
few, powerful buyers, then they are often able to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability of
your competitors. If you have many competitors, and they offer equally
attractive products and services, then you'll most likely have little power in
the situation, because suppliers and buyers will go elsewhere if they don't get
a good deal from you. On the other hand, if no-one else can do what you do,
then you can often have tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find
a different way of doing what you do – for example, if you supply a unique
software product that automates an important process, people may substitute by
doing the process manually or by outsourcing it. If substitution is easy and
substitution is viable, then this weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter
your market. If it costs little in time or money to enter your market and
compete effectively, if there are few economies of scale in place, or if you
have little protection for your key technologies, then new competitors can
quickly enter your market and weaken your position. If you have strong and
durable barriers to entry, then you can preserve a favorable position and take
fair advantage of it.
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