|Course 206: More on Competitive Positioning|
|A Five Forces Example: Consumer Products|
The five forces concept is perhaps best explained through example. (Porter's work is nothing short of excellent, but it is a heavy read.) Let's briefly examine the household consumer-products industry by considering rival firms Clorox CLX, Kimberly-Clark KMB, Colgate-Palmolive CL, and Procter & Gamble PG in terms of Porter's five forces:
Buyer Power. Consumer-products companies face weak buyer power because customers are fragmented and have little influence on price or product. But if we consider the buyers of consumer products to be retailers rather than individuals, then these firms face very strong buyer power. Retailers like Wal-Mart WMT and Target TGT are able to negotiate for pricing with companies like Clorox because they purchase and sell so much of Clorox's products. Verdict: Strong buyer power from retailers.
Supplier Power. More than likely, consumer-products companies face some amount of supplier power simply because of the costs they incur when switching suppliers. On the other hand, suppliers that do a large amount of business with these companies--supplying Kimberly-Clark with raw materials for its diapers, for instance--also are somewhat beholden to their customers, like Kimberly-Clark. Nevertheless, bargaining power for both the firms and their suppliers is probably limited. Verdict: Limited supplier power.
Threat of New Entrants. Given the amount of capital investment needed to enter certain segments in household consumer products, such as manufacturing deodorants, we suspect the threat of new entrants is fairly low in the industry. In some segments within the household consumer-products industry, this may not be the case since a small manufacturer could develop a superior product, such as a detergent, and compete with Procter & Gamble. The test is whether the small manufacturer can get its products on the shelves of the same retailers as its much larger rivals. Verdict: Low threat of new entrants.
Threat of Substitutes. Within the consumer-products industry, brands succeed in helping to build a competitive advantage, but even the pricing power of brands can be eroded with substitutes such as store-branded private-label offerings. In fact, some of these same store-brand private-label products are manufactured by the large consumer-products firms. The firms believe that if they can manufacture and package a lower-price alternative themselves, they would rather accept the marginal revenue from their lower-priced items than risk completely losing the sale to a private-label competitor. Verdict: High threat of substitutes.
Degree of Rivalry. Consumers in this category enjoy a multitude of choices for everything from cleaning products to bath washes. While many consumers prefer certain brands, switching costs in this industry are quite low. It does not cost anything for a consumer to buy one brand of shampoo instead of another. This, along with a variety of other factors, including the forces we've already examined, makes the industry quite competitive. Verdict: High degree of rivalry.
Examining an industry through the framework of Porter's five forces helps illustrate the different dynamics at work. It's not always clear-cut, either, so one wouldn't expect all of the firms in this industry to fall into one big bucket labeled wide moat or narrow moat. Instead, there are firms with distinct, long-term advantages and wide moats, like Procter & Gamble and Colgate, while others have advantages that we think may be less sustainable, such as Clorox and Kimberly-Clark.
Next: Getting Back to Moats >>
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