In every industry, there is a design that can be utilized to identify the method, success, and power of specific business. This design is called the 5 forces model. This provides an analysis of companies for contending and personal uses. The 5 forces model consists of 2 significant parts. The first part of the design consists of competition among existing companies, threat of new entrants, and hazard of alternative products. This part measures how much actual and prospective competition there is. The second significant part is between the bargaining power of purchasers and the bargaining power of suppliers.
These two procedure the power a company has or does not have over the purchasers and providers. In utilizing this model, we will have the ability to identify these valuable parts of Procter & & Gamble.
With a high market concentration, reasonably low switching costs, big economies of scale advantages, and possible high exit costs, competition among existing companies in the individual products market tends to be high.
There are several barriers in the individual items industry that a new entrant would have to overcome to go into. The large companies have a substantial competitive benefit over brand-new entrants that leave brand-new entrants with little success in acquiring any market share. With established economies of scale, access to distribution, relationships, and legal barriers in the favor of existing companies in the industry, a brand-new entrant would bit success in competing. This nearly gets rid of the hazard of a new entrant in the personal items industry.
Alternative products in the personal items market are easily offered by much smaller sized and different firms, but due to brand acknowledgment and established relationships, it is not likely that a buyer will switch items. The added benefit, due to the higher price, is generally adequate to keep consumers delighted with the brand name 22 items. For that reason, the threat of replacement products in the individual products market is low, due to the high concentration of the market.
“Bargaining power is the ability to influence the setting of prices” . It is based on the relationship between the firm and the buyer. The main question in this part of the five factor model is “who has the power over whom?” In this case, the retailers are the buyers and Procter & Gamble is the firm. Obviously, the source with the most power will be able to control the other. If the company has the most power then they will be able to raise prices and most likely be the only source around. If the buyer has the most power then the company will have to lower its costs and add a lot more expenses to its list.
“Our suppliers are valued partners in the success of our business. Our relationships with them must be characterized by honesty and fairness. Suppliers are selected on a competitive basis based on total value, which includes quality, service, technology, and price” (Sustainability guidelines for Supplier Relations, 2007 P&G 10-K). Bargaining power of suppliers involves the relationship between the firm and the suppliers. When there are fewer companies, the supplier is able to have more control over a firm in this industry.
Procter & Gamble has many sustainability guidelines that must be followed in order to be involved with their suppliers. Some of these guidelines are legal compliance, human rights, employment practices, forced labor, and child labor. Most of the companies in this industry have guidelines like these because they are ethical companies who want to do the right thing. “Supplier diversity is a fundamental business strategy at P&G” (www.pg.com). Since Procter & Gamble has this option, this allows them to be more diversified.
This also allows them to have some power over their suppliers. If one of the suppliers is trying to raise prices, they can just go to another. A great portion of a company’s success in this industry depends on brand name. These suppliers know this, which leaves them with some power. Suppliers have to provide good materials for people to see the quality. There are a few companies in this industry that can manage and compromise with suppliers like Procter & Gamble. Because of their large size and name, these companies are not only able to get whom they want, but they can also control prices. This is a big plus for these companies in this industry.
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