Suppliers

The success of your company depend heavily on the prices of your suppliers. Hence the bargaining power of suppliers is an issue of major importance and depends on several factors (Grant 2002):

  • Degree of concentration: The lesser the number of suppliers in a sector, the bigger their influence in this sector. However, if there are many suppliers and only a small number of customers, the demand side of the market can define the prices.
  • Degree of standardizing: The design of products and services are also an important factor in terms of the bargaining power of suppliers. The more standardized they are, the easier it is to substitute them. If they are very specific in their design there is normally a high substitution costs ? due to the high expenses which will occur, when changing the supplier, e.g. the introduction of new logistics software. 
  • Possibility of forward integration: The bargaining power of a supplier is increased by his ability to increase his activities in your sector, as it may be easier for him to find other customers.
  • Importance of the sector: Bargaining power also depends on the importance of the sector for the supplier. If a producer earns a major part of his profits or his revenues in your sector, then you can expect that he will care about the companies in your sector and that he will try to respond to your needs. If, on the other hand, the sector is of minor importance for him, his bargaining power is strengthened.

EXERCISE: Now you should take some time to consider the following questions. Which of the following producers possess the highest bargaining power? Which of them has the lowest? Analyse them with regards to the above mentioned factors.

  • Intel - hardware industry
  • Organic farmers - supermarket chain
  • Nail producers - joinery workshop
  • Mobile phone producers - mobile phone service provider
  • Bakery - caterer