Supplier power over industry firms is the "flip side of the coin" to buyer power. If suppliers have enough leverage over industry firms, they can raise prices high enough to significantly influence the profitability of their organizational customers. The ability of suppliers to gain leverage over industry firms is determined by several factors.


Suppliers will have the advantage if they are large and relatively few in number. Second, when the suppliers products or services are important inputs to industry firms or are differentiated or carry switching costs, the suppliers will also enjoy bargaining power if their business is not threatened by alternative products.

Willingness of Buyers :-

A fourth source of supplier power is the willingness and ability of suppliers to pursue a strategy of forward vertical integration and develop their own products if they are unable to get satisfactory terms with industry buyers.The Bargaining power of the buyers in an industry constitutes the ability of the buyers, individually or collectively, to force a reduction in the prices of the products or services or to demand a higher quality or better service or to seek more value for their purchases in any way.
a. Bargaining power is the ability to influence the setting of prices.
b. Monopsonistic or quasi-monopsonistic buyers will use their power to extract better terms (higher profit margins or ) at the expense of the market.
c. In a truly competitive market, no one buyer can set the prices. Instead they are set by supply and demand.
d. Prices are set by supply and demand and the market reaches the Pareto-optimal point where the highest possible number of buyers are satisfied at a price that still allow for the supplier to be profitable.

Demand of Buyers :-

The bargaining power of buyers comprises one of the five forces that determine the intensity of competition in an industry. The others are barriers to entry, the threat of substitutes, the bargaining power of suppliers & industry rivalry.To analyze the Bargaining Power of buyers, a few general criterias of a particular industry have to be considered & then reviewed, such as :
1)The differentiation of outputs
2)Switching costs
3)Presence of Substitutes
4)Industry concentration relative to buyer concentration
5)Importance of volume to buyers.If the buyers perceive that the products or services of one company are different from the competitors & if the buyer values that difference then the company have some protection during negotiations,
However, if the buyer perceives that the products/services are essentially the same as the competitors then they will have more bargaining power.Most Marketing is aimed at differentiating a brand or product from that of the consumers.A switching cost is a cost that a buyer would incur if they ceased buying from a company & started buying from one of the competitors. These costs could be anything like , The cost for legal to prepare & review of new contracts . The cost of stocking spare parts specific to your competitors products. The cost of adopting a new ordering systems, The cost of retraining your employees

Supply and demand of buyers :-

The supply curve is the relationship between price and supplied quantity. Normally, the higher the price, the higher the supplied quantity as more supplier will be interested to produce and sell at a higher price.
The demand curve is the relationship between price and demanded quantity. Normally, the lower the price, the higher the demanded quantity as buyers will be willing to buy more at a lower price.
In a truly competitive market, supply and demand meet at the price where the supplied quantity equals the demanded quantity.If supplied quantity is higher, price will fall or If demanded quantity is higher, price will raise.

Reference :-

1. Business policy and strategies management
2. Michael Poter's 5 strategies market forces

Post a Comment