Santa Isabel College of Manila

Strategic Management
AUGUST 2022
Bargaining power of customers
The bargaining power of buyers, used in conjunction with the other forces
(threat of new entrants, rivalry among existing competitors, bargaining
power of suppliers, and threat of substitute products or services), provides
an external analysis of an industry and allows companies to:
1. Determine threats and opportunities in the industry
2. Determine if above-average profits are attainable in an industry
3. Understand the competition in the industry
4. Make more informed strategic decisions
Buyer power is important in an external analysis of an industry, as it
provides an understanding of the profit potential in an industry. High buyer
power diminishes the industry’s profitability and lowers the attractiveness
of an industry. This may deter new entrants or cause existing firms to make
more strategic decisions to improve the profitability of their business.

How does the following affect
the operation in a company?
Threat of new entrants
The threat of new entrants fundamentally represents
the degree to which a particular industry or market and
the existing businesses can be affected by the arrival of
new players. It also describes the level at which these
new players can exert pressure on these existing firms.
New entrants affect a business by heightening the level
of competition which could lead to a more intense
Bargaining power of
suppliers
The Bargaining Power of Suppliers, one of the forces in
Porter’s Five Forces Industry Analysis Framework, is the
mirror image of the bargaining power of buyers and
refers to the pressure that suppliers can put on
companies by raising their prices, lowering their quality,
or reducing the availability of their products. This
framework is a standard part of business strategy.
The bargaining power of the supplier in an industry
affects the competitive environment and profit potential
of the buyers. The buyers are the companies and the
suppliers are those who supply the companies.
The bargaining power of suppliers is one of the forces
that shape the competitive landscape of an industry and
help determine the attractiveness of an industry.

competitive rivalry. It also affects a particular industry by

increasing the bargaining power of customers and the
bargaining power of suppliers.
It is also important to note that this threat also
determines the attractiveness of a particular industry or
market. The arrival of new entrants is an indicator that
there is a huge potential in an existing market or that the
industry remains underserved by existing firms.
Hence, apart from the possibility of exerting direct
pressure on existing businesses, the threat of new
entrants can also interact with and influence the three
other forces of Porter’s Five Forces. This threat also
represents the ability of new firms to enter into an
industry or market.
Threat of substitute products
Porter’s threat of substitutes definition is the availability of a
product that the consumer can purchase instead of the
industry’s product. A substitute product is a product from
another industry that offers similar benefits to the consumer as
the product produced by the firms within the industry. According
to Porter’s 5 forces, threat of substitutes shapes the competitive
structure of an industry.
The threat of substitution in an industry affects the competitive
environment for the firms in that industry and influences those
firms’ ability to achieve profitability. The availability of a
substitution threat effects the profitability of an industry
because consumers can choose to purchase the substitute
instead of the industry’s product. The availability of close
substitute products can make an industry more competitive and
decrease profit potential for the firms in the industry. On the
other hand, the lack of close substitute products makes an
industry less competitive and increases profit potential for the
firms in the industry.