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Bargaining power of suppliers
The model is purely derived from an industrial perspective and has significantly contributed to strategic management. In Porters five forces, the pressure exerted by suppliers by decreasing the quality, increasing the prices of products, and reducing the availability of products is known as the supplier’s power (Kim, 2014). During evaluation of the supplier’s power, one conducts an assessment from the industry’s view, referred to as buyers.
According to this evaluation framework, the bargaining power of suppliers is one of the
significant elements which form a viable environment in the business. Strong suppliers have the capability of influencing the buyer’s ability in achieving profitability by decreasing profit potential while a weak supplier will undoubtedly increase the potential of the buyer’s profit.
There several determining factors in the Porter five model of analysis. If buyers are more compared to suppliers, the power of bargain is high. Moreover, when the switchig costs of buyers are high, the supplier’s power is high (Laniz, 2018). If suppliers incorporate the buyer’s product, the power of bargain of suppliers is high. If the buy is uneducated and insensitive to buyers products, the supplier’s power is high. If the products of the supplier are highly differentiated from others in the market, the supplier’s power is high. Lack of substitute products in the market ensures high bargaining power of suppliers. On the other hand, well-educated buyers, more suppliers as compared to buyers, low switching costs, availability of substitute products and large volumes of standardized products lower the bargaining power of suppliers (Wilkinson, 2018).
The bargaining power of buyers
Consumers apply pressure on businesses to make available high-quality goods and services at an affordable prices. Consumers power is one of the key drivers of a competitive structure of an industry. Strong buyers influence sellers, to raise the standard quality of their products at selling them at lower prices (Assad, 2012). Likewise, a strong buyer decreases profit potential of the seller and makes the industry more competitive while a weak buyer increases the profit potential of the seller. These elements represent a cost to the seller. There are several determining factors in Porter’s five forces of bargaining power. If the sellers are more than buyers, then the buyer’s bargaining power is high (Assad, 2012). If switching costs from one seller to another’s products is relatively low, the buyer’s bargaining power is high.
The buyer’s power is high if he or she is informed about the product and sensitive to prices. Purchasing seller’s products in vast capacities of standardized products increasing the buyers bargaining power. In addition, availability of substitutes power in market increases the consumer’s purchasing power (Brown, 2013). If consumers can produce the seller’s products, the buyers power is high . On the other hand, high switching costs, buyer’s insensitivity to prices, uninformed customers on products, low buyers concentration and lack of substitute products, small portion purchases or low volume of purchases, and threat to sellers on integration is low are indicators that the bargaining power of buyer’s is low (Brown, 2013).
- Assad, M. (2012). Bargaining Power Of buyers | Porter’s Five Forces Model. SSRN Electronic Journal.
- Brown, D., Fee, C., & Thomas, S. (2013). Financial Leverage and Bargaining Power With Buyers: Evidence from Leveraged Buyouts. SSRN Electronic Journal.
- Kim, J. (2014). Bargaining power of suppliers. Veterinary Record, 174(Suppl 1), 6-6.
- Laniz, K. (2018). Bargaining Power Of Suppliers | Porter’s Five Forces Model. Cleverism.
- Wilkinson, J. (2018). Supplier Power (one of Porter’s Five Forces) • The Strategic CFO. The Strategic CFO.