Threat Of Substitutes

All firms in and industry compete with other industries offering substitute products or services. Steel producers are in competition with aluminum producers. Sugar producers are in competition with the firms which are introducing sugar-free products. The competitive force of closely-related substitute products impact sellers in several ways.

First, the presence of readily available and competitively priced substitutes places a ceiling on the prices companies in and industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position.

Another determinant of whether substitutes are a strong or weak competitive force is whether it is difficult or costly for customers to switch to substitutes to substitutes. Typical switching costs include, the cost of purchasing additional equipment, employees retraining costs, the time and costs to test the quality for technical help needed to make the changeover.

As a rule, the lower the price of substitutes and the higher the quality and performance of substitutes, the more intense are the competitive pressures posed by substitute products.

Bargaining Power Of Buyers

Buyer power refers to the ability of customers of the industry to influence the price and terms of purchase.

The competitive strength of buyers can range from strong to weak. The buyers are powerful when:

• They are concentrated and buy in large volume.
• The buyer's purchases are a sizable percentage of the selling industry's total sales.
• The supplying industry is comprised of large numbers of relatively small sellers.
• The item being purchased is sufficiently standardized among sellers that not only can buyers find alternative sellers but also they can switch suppliers at virtually zero cost.
• The buyers pose a threat of integrating backward to make the industry's product.
• The sellers pose little threat of forward integration into the product market of buyers.
• The products are unimportant to the quality of the customer's product or service.
• It is economically feasible for buyers to follow the practice of purchasing the input from several suppliers rather that one.

These factors change with time and firm's choice of buyers-groups should be regarded as an important element in strategic decision-making.