Bargaining power of suppliers: Porter’s Five Forces

The presence of powerful suppliers reduces the profit potential in an industry. Suppliers increase competition within an industry by threatening to raise prices or reduce the quality of goods and services. As a result, they reduce profitability in an industry where companies cannot recover cost increases in their own prices.

Porter’s five forces

The bargaining power of suppliers comprises one of the five forces that determine the intensity of competition in an industry. The others are barriers to entry, industry rivalry, the threat of substitutes and the bargaining power of buyers.

Power of supplier group

The following conditions indicate that a supplier group is powerful:

·         It is dominated by a small number of companies and is more concentrated than the industry to which it sells

·         It is not required to contend with substitute products for sale in the industry

·         The industry is not one of the supplier’s important customers

·         Its products are an important part of the buyer’s business

·         Its products are differentiated or there are built-up switching costs

·         It poses a definite threat of forward integration

Bargaining Power of Buyers: Porter’s Five Forces Analysis

The presence of powerful buyers reduces the profit potential in an industry. Buyers increase competition within an industry by forcing down prices, bargaining for improved quality or more services, and playing competitors against each other. The result is diminished industry profitability.

Porter’s five forces analysis

The bargaining power of buyers comprises one of Porter’s five forces that determine the intensity of in an industry. The others are barriers to entry, industry rivalry, the threat of substitutes and the bargaining power of suppliers.

The power of an industry’s important buyer groups depends upon:

·         Characteristics related to its market situation.

·         The relative importance of its purchases from the industry as compared with its overall business

How to assess the power of a buyer group

The following conditions indicate that a buyer group is powerful:

·         The buyer group is concentrated, or purchases large volumes relative to the seller’s sales

·         Products purchased from the industry represent a significant percentage of the buyer’s costs or purchases

·         Products purchased from the industry are standard or undifferentiated—alternative suppliers are easy to find and competitors are played against each other

·         Few switching costs exist (little penalty for moving to another supplier)

·         Profits earned are low (greater incentive to reduce purchasing costs)

·         Buyers pose a significant threat of backward integration—buyers demand concessions, and may engage in tapered integration (producing some components in-house and purchasing the rest from outside suppliers)

·         The industry’s product is not important to the quality of the buyer’s products or services

·         The buyer has full information (their knowledge of demand, market prices and supplier costs provides them with leverage)