The higher the bargaining leverage and the more sensitive a buyer is towards a productвЂ™s price, the more power that buyer has, potentially resulting in lower prices, higher churn rates, and higher buyer surplus industrywide. In this case, Company Z operated in the media products wholesale distribution and fulfillment industry serving commercial consumers.ДЄccording to PorterвЂ™s Competitive Advantage Creating and Sustaining Superior Performance, industry buyer power can be broken down into two primary buckets: bargaining leverage, the measure of leverage buyers have relative to the target industry players, and price sensitivity, the measure of buyer sensitivity to changes in price. For those analyzing any industry, WhartonвЂ™s Nicolaj Siggelkow, in his course Strategy and Competitive Advantage, highly recommends, if not requires, precise industry definition as a first step. Without a specific definition, the final analysis may poorly reflect the environment in which the target company operates. Labeling an industry simply as вЂњmediaвЂќ or вЂњwholesale distributionвЂќ does not work for a meaningful and instructive industry analysis. Industry Definition and Buyer PowerД«efore diving in, the first and most critical step in any industry analysis is accurately defining that industry. While improving insuredsвЂ™ customer experience has been the popular trends as of late, in response to increasing broker buyer power, some insurance companies are investing even more heavily in enhancing their broker service quality. As a result, the surviving brokers control more and more premium and are slowly shifting leverage away from insurance companies who spent the last decades transacting with thousands of brokers.

Buyers within that industry, the insurance brokers, have undergone rapid consolidation with hundreds of insurance brokers having been acquired by the largest industry players each year for the last five years. Take, for example, the evolving commercial property and casualty insurance industry. Buyer power refers to a customerвЂ™s ability to reduce prices, improve quality, or вЂњgenerally play industry participants off one another.вЂќ This potent force can offer insight into existing operational tactics and strategies that directly drive industry revenue such as pricing or consumer targeting, to name two, and can generally help explain why some companies fail while others thrive in a given industry. In this blog post, IвЂ™ll explore buyer power within the context of Company ZвЂ™s industry. The chart below illustrates these five forces as well as a simplified view of their interactions. These forces include competitive rivalry, barriers to entry, threat of substitutes, supplier power, and buyer power. Michael PorterвЂ™s Five Forces analysis provides a (IвЂ™d venture to state the) structured framework for industry analysis. Michael PorterвЂ™s Five Forces and the Importance of Buyer Power In my experience, there are methods of industry analysis that companies can use to foresee the ways in which they must adapt and evolve if they are to remain competitive and thrive. But is this inevitable? Can companies learn to adapt and react to ensure their continued success and prosperity? The answer is yes. I see countless examples of great companies that fail to understand the changing competitive environment around them and as a consequence start down a path of eventual decline. In todayвЂ™s ever-changing business environment, the unfortunate fate of Company Z is not uncommon. Industry players were suffering, helplessly standing by as revenues and profits dwindled while the shrinking market only intensified competition. The industry faced competitive pressures from online distribution and fulfillment platforms that continued to innovate almost daily as well as changing customer expectations around media consumption. With hindsight, even without considering the advent and popularization of streaming, the traditional media fulfillment and distribution industry was not long for the future. Nonetheless, reflecting paltry growth prospects, weakening demand, and business model disruption, the company was sold for a low valuation to a synergistic buyer.

In late 2012, during my tenure as an investment banking analyst, I worked on the sale of a declining media fulfillment and distribution business, вЂњCompany Z.вЂќ Company Z fulfilled and distributed products that were nearing technological obsolescence (think DVDs, CDs, Blu-ray) while directly competing against Amazon and other online retailers on a number of others.Д¬ompany Z had been in business for over 20 years, having established a reputation for reliability, dependability, and product offering breadth and variation.

High threat of new entrants example