CHAPTER 2 LITERATURE REVIEW
2.3 THE FIVE FORCES FRAMEWORK
2.3.3 POWER OF BUYERS
any form of commitment) and the partner models (collaboration with strategic suppliers) provides the key to future competitive advantage in supply chain management
•
Buyer volume;•
Buyer switching costs;•
Buyer information;•
Ability to integrate backwards;•
Substitute products•
Product differentiation;•
Brand•
Impact on quality or performance;•
Buyer profits;•
Decision maker's incentives10hnson and Scholes (2003) suggest that the bargaining power of suppliers and buyers are forces that can be considered together, because they are linked and they can impose similar constraints on the industry vis-a-vis the margins that firms in that industry can earn. Hence, many of the considerations that applied to the power of suppliers are readily applicable to buyers, including whether or not collaboration can co-exist with competition vis-a-vis buyers. 10hnson and Scholes (2003) add, in this regard, that collaboration between buyers and sellers is likely to be advantageous when such collaboration adds greater value to the firm, than that added when operating on its own,
•
Buyer volume;•
Buyer switching costs;•
Buyer information;•
Ability to integrate backwards;•
Substitute products•
Product differentiation;•
Brand•
Impact on quality or performance;•
Buyer profits;•
Decision maker's incentives10hnson and Scholes (2003) suggest that the bargaining power of suppliers and buyers are forces that can be considered together, because they are linked and they can impose similar constraints on the industry vis-a-vis the margins that firms in that industry can earn. Hence, many of the considerations that applied to the power of suppliers are readily applicable to buyers, including whether or not collaboration can co-exist with competition vis-a-vis buyers. 10hnson and Scholes (2003) add, in this regard, that collaboration between buyers and sellers is likely to be advantageous when such collaboration adds greater value to the firm, than that added when operating on its own,
and when the collaboration allows the firm to concentrate on and develop its own core competencies, whilst moving other non-core functions to specialists.
Central to the process of determining the bargaining power of buyers understands who the buyer is. Abell (1980) alludes to this when he argues that the first question to be asked when conceptualizing a market is which is being served, i.e. which particular customer group. Chan et aI., (1999) suggest that competitors in most industries converge around a common definition of who the customer is, when the reality is often that there exists a chain of customers who are directly or indirectly involved in the buying decision. Moreover, given that customers whose own costs are driven by their purchases, are increasingly looking to purchasing as a way to increase their profits and therefore bring additional pressure to bear on prices, it is necessary for the firm wishing to persuade customers to focus on total costs, as opposed to acquisition price only, to have an accurate understanding of what its customers do and would value (Anderson and Narus, 1998).
Chan et aI., (1999) also suggest that "challenging an industry's conventional wisdom about which buyer group to target can lead to the discovery of new market space. By looking across buyers groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of customers". Chan et aI., and Mauborgne (1999) advise, in a separate paper, that value innovation (which, through its emphasis on value, places the buyer, not competition at the centre of strategic thinking; and through its emphasis on innovation moves firms beyond incrementalism to completely new ways of doing things) makes competition irrelevant by offering new and superior buyer value. Moreover, this contributes to a reduction in and when the collaboration allows the firm to concentrate on and develop its own core competencies, whilst moving other non-core functions to specialists.
Central to the process of determining the bargaining power of buyers understands who the buyer is. Abell (1980) alludes to this when he argues that the first question to be asked when conceptualizing a market is which is being served, i.e. which particular customer group. Chan et aI., (1999) suggest that competitors in most industries converge around a common definition of who the customer is, when the reality is often that there exists a chain of customers who are directly or indirectly involved in the buying decision. Moreover, given that customers whose own costs are driven by their purchases, are increasingly looking to purchasing as a way to increase their profits and therefore bring additional pressure to bear on prices, it is necessary for the firm wishing to persuade customers to focus on total costs, as opposed to acquisition price only, to have an accurate understanding of what its customers do and would value (Anderson and Narus, 1998).
Chan et aI., (1999) also suggest that "challenging an industry's conventional wisdom about which buyer group to target can lead to the discovery of new market space. By looking across buyers groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of customers". Chan et aI., and Mauborgne (1999) advise, in a separate paper, that value innovation (which, through its emphasis on value, places the buyer, not competition at the centre of strategic thinking; and through its emphasis on innovation moves firms beyond incrementalism to completely new ways of doing things) makes competition irrelevant by offering new and superior buyer value. Moreover, this contributes to a reduction in
the bargaining power of buyers and is supported in this regard, by Michael Dell's view that a relationship with the customer provides valuable information, which in turn allows the fIrm to leverage its relationships with both buyers and suppliers (Magretta, 2004).