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The POWER relationship Featured

9:44am EDT July 22, 2002

Traditionally, an industry is analyzed by assessing five attributes: power of the buyers, power of the suppliers, threat of new entrants, threat of substitute products and extent of rivalry within the industry.

It’s important to gather and organize knowledge to understand your industry. Those who understand their industry have an advantage over those who don’t because they are able to foresee trends and respond appropriately.

It’s critical to understand the relationship between you and the people who buy your product or service. The issue is not with the customer, per se; it’s your power relationship with that customer. If you sell near-commodity products to a large concern that buys in huge quantities, you may have an excellent customer, but the customer has all the power.

Conversely, if you sell near-monopoly products to customers who buy in low quantities and who have few alternatives, you have greater power than your customers, regardless of your history with them.

You must also assess this relationship with your suppliers. Just because you’re the customer doesn’t necessarily give you the power in that relationship. Imagine Coca-Cola purchasing Nutrasweet when it was still a patented product.

Despite Coca-Cola’s size and industry clout, the power was with Nutrasweet. Nutrasweet set the price, not Coca-Cola. After the patent expired and several companies entered the aspartame market, the product became a near-commodity. Seemingly overnight, the power shifted from supplier to buyer, from Nutrasweet to Coca-Cola.

Another consideration is the threat of new entrants. How easy is it for opportunists to enter your industry? Can newcomers, suppliers, or competitors easily enter your specific market, whether by starting from scratch (newcomers), acquiring your customer list (suppliers) or by market diversification (competitors)?

If it’s easy to enter, then strategically you have to plan differently — perhaps by making longer term, committed customer relationships.

If it’s difficult to enter your industry and your customer and client relationships are mutually satisfactory, you have the luxury of allocating precious resources differently.

The fourth concern is the availability of substitute products (from adjacent industries, not substitute brands). For example, part of the problem the U.S. steel industry faced was not just low-cost, high-quality competition, but low-cost substitutes, such as the substitution of concrete highway barriers for steel guardrails.

Not only are they cheaper, but the concrete barriers are designed to make contact with the tire and wheel before the car body, drastically reducing damage and potential injury. The more substitutes that exist, the more of a fight you have to retain customers, which may change your strategic emphasis, perhaps to marketing or R & D.

Finally, ponder what the rivalry is like in your industry. If two like-sized firms compete to sell products that are not very well differentiated (Coke and Pepsi), expect fierce competition (cola wars). By contrast, if firms in an industry are seeing well-differentiated products or services, that difference essentially sells the product; rivalry is not as critical an issue.

Understanding your strategic industry position is essential: powers, entry, substitute, rivalry. Such understanding explains Microsoft’s dominating presence in its industry. A quick analysis reveals low-power buyers of its products, low-power suppliers to it, low potential for new entrants into its industry, few substitutes and insignificant rivalry.

Lance Kurke, Ph.D, is president of Kurke & Associates, Inc., a Pittsburgh-based strategic planning firm that helps companies with their customer and supplier relationships, among other challenges. He is president of the CEO Club of Pittsburgh, serves on the faculty at Duquesne University, and is an adjunct at Carnegie Mellon University, where he teaches strategic planning and leadership. Reach him at (412) 281-2930 or at kurke@msn.com.