BARGAINING POWER OF SUPPLIERS: ASPECTS, EXAMPLES - DUDAS - 2025

The bargaining power of suppliers is described as the pressure that suppliers can exert on companies by increasing prices, reducing quality, or decreasing the availability of their products. All this represents costs for the buyer.

It is one of the forces within the framework of the industry analysis of the five forces created by Porter. It is the image that is opposed to the bargaining power of buyers.

Source: pixabay.com

The bargaining power of suppliers can affect the competitive environment of buyers in an industry and intervenes in the buyer's ability to achieve profitability. The companies are the buyers and those who supply these companies are the suppliers.

It is one of the forces that shapes the competitive landscape of an industry and helps determine the attractiveness of the industry. The other forces include competitive rivalry, the bargaining power of buyers, the threat of substitutes, and the threat of new entrants.

Aspects that determine a high bargaining power

All industries need raw materials as inputs for their process. This is an essential function that requires a strong relationship between buyers and sellers.

If there are fewer suppliers or if they have certain strengths and knowledge, then they will be able to exercise significant power over the industry.

The vendor power that Porter has studied includes several determinants of vendor bargaining power:

Number of suppliers in relation to number of buyers

If the suppliers are condensed compared to the buyers, which means that there are few suppliers and many buyers, the bargaining power of the suppliers will be high.

Exchange cost by buyer

If the switching costs on the part of the buyer, which is the cost of having to change the product of one supplier to the product of another supplier, are high, the negotiating power of the suppliers will be high.

Possibility of integration by suppliers

If suppliers can be easily integrated or can start manufacturing the product that the buyer makes, then the supplier's power is high.

Substitute products available

If no substitute products are available in the market, then the power of the supplier is high.

Dependence on the supplier's sale to a buyer

The bargaining power of the suppliers is high if the buyer does not represent a significant part of the supplier's sales.

Dependence of the buyer on the supplier's product

If the supplier's product is highly differentiated, then the supplier's bargaining power is high.

The power of the supplier is also high if the buyer is not price sensitive and does not have a good knowledge of the product.

Likewise, the availability of the supplier to be able to satisfy an immediate purchase.

Analysis of the bargaining power of suppliers

When doing an analysis of supplier power in an industry, low supplier power increases profit potential and creates a more attractive industry, since buyers are not constrained by suppliers.

High supplier power reduces profit potential and creates a less attractive industry, as buyers have to rely more on suppliers.

If the supplier's power grows too strong in the market, companies will try to find ways to reduce this power. If the demand for the product is high enough, there may be ways to develop alternatives to produce or sell a product that reduce the power of the supplier.

Examples

-Fast food industry

To determine the bargaining power of the suppliers faced by McDonald's in the fast food industry, the following analysis is considered:

Number of suppliers in relation to buyers

There is a significant number of suppliers in relation to buyers (companies). Therefore, the provider's power is low.

Differentiated products

Suppliers with strong brands will be able to exercise greater control. For example, condiment suppliers can take advantage of consumer preference for their brand over a generic of the same type.

Additionally, beverage options, such as Coca-Cola's preference over Pepsi, can lead people from one chain to another.

Dependence on the sale of a supplier to a buyer

Assuming that suppliers have few customers, then they are likely to give in to buyers' demand.

Since it is not known whether these suppliers have few or many buyers, a middle ground would be a reasonable answer. Therefore, the power of the provider is medium.

Exchange costs

Since there are a significant number of suppliers in the fast food industry, switching costs are low for buyers. Provider power is low.

Integration

There is low integration of suppliers in the fast food industry and the possibility of this occurring is also low.

conclusion

In general, McDonald's faces low bargaining power from suppliers. Therefore, supplier power is not an issue for McDonald's in the fast food industry.

-Diamond industry

The global diamond industry has historically been controlled by De Beers, a world famous company.

The diamond supply chain is very broad and includes processes such as exploration, mining, grading, cutting and polishing, jewelry manufacturing, and retail.

Bargaining power issues

There is an increasing number of competitors in the market, which has meant a greater supply of diamonds in the market.

In the past, De Beers solved the problem of oversupply by collecting and storing diamonds to sell when appropriate.

This meant enormous power from the supplier over the industry. With the change in the structure of the market and the pressure of laws against the cartels, this power has diminished somewhat.

De Beers is now more focused on repositioning itself as the provider of choice rather than the sole provider. It also focuses more on stronger vertical integration, moving into value-added retail and alliances with premium fashion brands like Louis Vuitton.

On the other hand, there is increased awareness and protests against so-called blood diamonds, which has made it necessary for suppliers to use better practices.

In addition, the market for synthetic diamonds is growing, because technology has allowed the manufacture of these almost at par with the value of natural ones. This has changed profitability and customers' perception of value.

References

1. CFI (2019). Bargaining Power of Suppliers. Taken from: corporatefinanceinstitute.com.
2. James Wilkinson (2013). Supplier Power (one of Porter's Five Forces). The Strategic CFO. Taken from: strategiccfo.com.
3. Martin (2014). Bargaining Power Of Suppliers - Porter's Five Forces Model. Taken from: cleverism.com.
4. Mars (2019). Bargaining power of suppliers: Porter's Five Forces. Taken from: learn.marsdd.com.
5. Valuation Academy (2019). Porter's Five Forces- Bargaining Power of Suppliers. Taken from: valuationacademy.com.