Porter's Five Forces AnalysisWritten by Chris Mallon
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Buyer Power There are two types of buyer power. The first is related to customer’s price sensitivity. If each brand of a product is similar to all others, then buyer will base purchase decision mainly on price. This will increase competitive rivalry, resulting in lower prices, and lower profitability. The other type of buyer power relates to negotiating power. Larger buyers tend to have more leverage with firm, and can negotiate lower prices. When there are many small buyers of a product, all other things remaining equal, company supplying product will have higher prices and higher margins. Conversely, if a company sells to a few large buyers, those buyers will have significant leverage to negotiate better pricing. Some factors affecting buyer power are: • Size of buyer – larger buyers will have more power over suppliers. • Number of buyers – when there are a small number of buyers, they will tend to have more power over suppliers. The Department of Defense is an example of a single buyer with a lot of power over suppliers. • Purchase quantity – When a customer purchases a large quantity of a suppliers output, it will exercise more power over supplier. Supplier Power Buyer power looks at relative power a company’s customers has over it. When multiple suppliers are producing a commoditized product, company will make its purchase decision based mainly on price, which tends to lower costs. On other hand, if a single supplier is producing something company has to have, company will have little leverage to negotiate a better price. Size plays a factor here as well. If company is much larger than its suppliers, and purchases in large quantities, then supplier will have very little power to negotiate. Using Wal-Mart as an example, we find that suppliers have no power because Wal-Mart purchases in such large quantities. A few factors that determine supplier power include: • Supplier concentration – The fewer number of suppliers for a given product, more power they will have over company. • Switching costs – suppliers become more powerful as cost to change to another supplier increases. • Uniqueness of product – suppliers that produce products specifically for a company will have more power than commodity suppliers. It’s important to analyze these five forces and their affect on companies we want to invest in. The Porter Five Forces Analysis will give you a good explanation for profitability of an industry, and firms within it. If you want to know why a company is able, or unable, to make a decent profit, this is first analysis you should do.
Chris Mallon is the editor and publisher of the Undervalued Weekly, a financial analysis newsletter. Chris holds a Master of Science in Finance and is the leading analyst for the Dynamic Investors partnership. He is available at chrismallon@dynamicinvestors.net or the through the website at www.dynamicinvestors.net/index5.html.
| | Resolve to Improve Your Finances in 2004Written by James H. Dimmitt
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5) I will not use my credit card at an ATM or a bank for a cash advance. Cash advances on credit cards are assessed special fees and higher interest rates than what you pay for purchases made with your credit card. Creditors apply majority of your monthly payment to your purchase debt rather than cash advance debt which increases overall amount of interest you’ll pay to your creditor. 6) I will spend my money sensibly. Using your budget, you may find that you’re spending a good chunk of your income on discretionary items: morning coffee and donut, a weekly magazine, fast food lunches, etc. Each purchase seems like a small amount of money at time, maybe $3-5. But these small purchases add up quickly and amount to hundreds of dollars a year. Ask yourself if you really need these items and reduce your amount of discretionary spending. Use your savings to pay down credit card debt. 7) I will live within my means. Are you an impulse buyer? Do you use your credit cards to supplement your income? Do you feel need to have latest fashions, cars, stereos, etc.? If you answered yes to any of these questions, chances are good that you are overspending. And overspending means more debt - debt that will keep you from achieving your financial goals.
© 2003, www.yourfreecreditreportnow.com Author: James H. Dimmitt James is editor of “To Your Credit” a FREE weekly newsletter for consumers. You can subscribe at http://tinyurl.com/bgo9
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