Lesson 9 of 12 · All lessons in this module
- Why analyse an industry, and the five steps
- Defining an industry and grouping companies
- Industry size and the character of its growth
- Top-down and bottom-up: sizing an industry, shares and HHI sensitivity
- Integrated case: concentration, competitive intensity and market-share trends
- Industry profitability: margins, ROIC and value creation
- Industry structure: Porter's Five ForcesVideo lesson
- Economic moats and lasting barriers to entry
- Supplier and customer power, vertical integration and rating the forces
- External influences: PESTLE analysis
- The innovation matrix and other PESTLE themes
- Integrated case: from an industry survey to a forecast
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 9 of 12 · 14 min
Supplier and customer power, vertical integration and rating the forces
Supplier power rises with supplier concentration, tailored inputs and switching costs; customer power with commoditisation, low switching costs and concentrated buyers; firms answer with loyalty schemes and vertical integration, and the analyst ends by rating each force and asking which could dominate.
In short
- Supplier power is positively related to supplier concentration, how unique or tailored the inputs are, and switching costs. It applies to materials, licensed technology or content, and labour that is highly skilled, licensed or well organised.
- Supplier power is lowest with many small suppliers of commodity inputs; large buyers can then dictate price, quality, delivery times and payment terms.
- Customer power is high for commoditised products with low switching costs, and when buyers are few and large. Firms respond with price, differentiation, bundling and loyalty programmes.
- Vertical integration: backward/upstream (control suppliers via exclusive agreements, joint ventures or ownership) or forward/downstream (cut out distributors and retailers to capture more of the value chain).
- Backward integration trades less dependence on scarce inputs for large upfront investment and less flexibility.
- Rivalry also reflects price competition, product differentiation, relative size and share changes, and industry growth and profitability; rate each force (low/moderate/high) and build scenarios on which may dominate.
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