60 Part 1: Strategic Management Inputs
more power for buyers in the process. When a large airline signals that it might
place a “significant” order for wide-body airliners that either Airbus or Boeing might
produce, both companies are likely to battle for the business and include a financing
arrangement, highlighting the buyer’s power in the potential transaction. And, with
China’s expected entry into the large commercial airliner industry, buyer power is
likely to increase in the future.2-4c Bargaining Power of Buyers
Firms seek to maximize the return on their invested capital. Alternatively, buyers
(customers of an industry or a firm) want to buy products at the lowest possible price—
the point at which the industry earns the lowest acceptable rate of return on its invested
capital. To reduce their costs, buyers bargain for higher quality, greater levels of ser-
vice, and lower prices.^113 These outcomes are achieved by encouraging competitive battles
among the industry’s firms. Customers (buyer groups) are powerful when:
■■They purchase a large portion of an industry’s total output.
■■The sales of the product being purchased account for a significant portion of the
seller’s annual revenues.
■■They could switch to another product at little, if any, cost.
■■The industry’s products are undifferentiated or standardized, and the buyers pose a
credible threat if they were to integrate backward into the sellers’ industry.
Consumers armed with greater amounts of information about the manufacturer’s
costs and the power of the Internet as a shopping and distribution alternative have
increased bargaining power in many industries.2-4d Threat of Substitute Products
Substitute products are goods or services from outside a given industry that perform
similar or the same functions as a product that the industry produces. For example, as
a sugar substitute, NutraSweet (and other sugar substitutes) places an upper limit on
sugar manufacturers’ prices—NutraSweet and sugar perform the same function, though
with different characteristics. Other product substitutes include e-mail and fax machines
instead of overnight deliveries, plastic containers rather than glass jars, and tea instead
of coffee.
Newspaper firms have experienced significant circulation declines over the past
15 years. The declines are a result of the ready availability of substitute outlets for news
including Internet sources, cable television news channels, along with e-mail and cell
phone alerts. Likewise, satellite TV and cable and telecommunication companies pro-
vide substitute services for basic media services such as television, Internet, and phone.
Tablets such as the iPad are reducing the number of PCs sold as suggested by the fact that
worldwide shipments of PCs been declining each year since 2010.^114
In general, product substitutes present a strong threat to a firm when customers face
few if any switching costs and when the substitute product’s price is lower or its quality
and performance capabilities are equal to or greater than those of the competing product.
Differentiating a product along dimensions that are valuable to customers (such as quality,
service after the sale, and location) reduces a substitute’s attractiveness.2-4e Intensity of Rivalry among Competitors
Because an industry’s firms are mutually dependent, actions taken by one company usu-
ally invite responses. Competitive rivalry intensifies when a firm is challenged by a com-
petitor’s actions or when a company recognizes an opportunity to improve its market
position.^115