P&G Five-Forces Model Essay

Published: 2020-04-22 08:25:56
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In every industry, there is a model that can be used to identify the strategy, profitability, and power of particular companies. This model is called the five forces model. This gives an analysis of companies for competing and personal uses. The five forces model consists of two major parts. The first part of the model consists of rivalry among existing firms, threat of new entrants, and threat of substitute products. This part measures how much actual and potential competition there is. The second major part is between the bargaining power of buyers and the bargaining power of suppliers. These two measure the power a company has or does not have over the buyers and suppliers. In using this model, we will be able to identify these valuable parts of Procter & Gamble.

Rivalry Among Existing Firms

With a high industry concentration, relatively low switching costs, large economies of scale benefits, and possible high exit costs, rivalry among existing firms in the personal products industry tends to be high.

Threat of New Entrants

There are many different barriers in the personal products industry that a new entrant would have to overcome to enter. The large companies have a huge competitive advantage over new entrants that leave new entrants with little success in gaining any market share. With established economies of scale, access to distribution, relationships, and legal barriers in the favor of existing firms in the industry, a new entrant would little success in competing. This almost eliminates the threat of a new entrant in the personal products industry.

Threat of Substitute Products

Substitute products in the personal products industry are readily available by much smaller and different firms, but due to brand name recognition and developed relationships, it is not likely that a buyer will switch products. The added benefit, due to the higher price, is usually enough to keep customers happy with the brand name 22 products. Therefore, the threat of substitute products in the personal products market is low, due to the high concentration of the industry.

Bargaining power of Buyers

Bargaining power is the ability to influence the setting of prices (http://www.photopla.net/wwp0503/buyer.php). 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.

Bargaining Power of Suppliers

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 companys 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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