Porters Five Competitive Forces - Essay Example

A good example of this is Baxter International which is a big manufacturer of hospital supplies where it acquired American Hospital Supply, a distributor. In doing so, the company gained a lot of bargaining power and consequently set higher prices for the supplies to maximize the profit.

Suppliers offering differentiated products such as pharmaceutical companies offering patented drugs with distinctive medical benefits have power over hospitals and health maintenance organizations as well as other drug buyer companies offering generics. When there are only a few suppliers available in an industry, their bargaining power is higher as they take advantage to increase their profits. Scholars have cited that suppliers may gain power when there is a significant cost involved to change suppliers.

A good example is the relationship between Microsoft and the PC manufacturers. Microsoft’s near monopoly in the operating system increases its supplier bargaining power. However, the supplier bargaining power may be weak in the case of many competitive suppliers, for example, the tire manufacturing companies in America, the prices become standardized (Roy, 2006). The suppliers also lose power when there is only a little switching cost to another supplier or when the industries being supplied with the raw materials threaten to integrate backward producing the industry's product if the suppliers are too profitable. The five forces, therefore, reveal if the industry is profitable and help investors anticipate positive and negative shifts.