Academic

What Really Is Bargaining Power of Suppliers?

We recently published a blog article entitled: What Really Is Bargaining Power of Buyers, now… you may be wondering what is bargaining power of suppliers then? 

We PROMISE to help you with the basic things you need to know on Bargaining Power of Buyers. So READ AHEAD!

To start, according to the study of Grundy, Porter’s Five Forces is popular in business schools as it is basically useful in determining a company or firm’s success in terms of profit.

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Short Background on Porter’s Five Forces

Well coming across the phrase “bargaining power of buyers” surely you have also encountered Porter’s Five Forces which are competition, supplier power, buyer power, threat of new entrants and substitute products and services. Above is an illustration from Harvard Business Review.

Porter’s Five Forces successfully created an input-output analysis while considering barriers and substitutes of respective industries. Bargaining powers of suppliers and buyers are two factors that Porter emphasised in his model. His model is seen to have a macro level approach and focuses on the concept of competitive advantage.

According to Magretta’s Understanding Michael Porter, Porter arrived at three things:

  • All varying industries in the field of business have the same five forces affecting their profitability. However, the degree on how these respective forces affect industries may vary per industry.
  • The structure of industries is the primary indicator of how much a company may earn. It does not entirely depend on an industry’s growth, technology, whether it is regulated or not, or the nature of the industry.
  • Industry structure tends to be stable in time. Once an industry structure finished its emergence phase, it will then become stable. Other factors such as new products and technology may change rapidly but structure may take a long time before it can shift into new forms.
So What is Bargaining of Power of Suppliers Really?

According to Magretta’s Understanding Michael Porter, one can determine if suppliers have power when they are able to negotiate prices to their advantage in order to increase their company or firm’s profitability.

Bargaining power of suppliers may be exercised in 3 ways: increasing prices, lowering quality and reducing availability of products.

That’s not all, powerful suppliers who are able to raise prices on their favour may lower industry profitability. Also, bargaining power of suppliers can directly affect the competition among buyers and an industry.

Before We Continue, You Should Know That There are Different Types of Suppliers!

According to Corporate Finance Institute there are four:

  • Manufacturers and Vendors: companies that sell their products to distributors
  • Distributors and Wholesalers: companies that sell to retailers or smaller distributors
  • Independent Suppliers/Independent Craftspeople: sells exclusive products to retailers and agents
  • Importers and Exporters: purchasers of products from one country to be distributed in another country
  • Drop Shippers: supplier for a variety of companies
Well, How Do Suppliers Exercise Their Bargaining Power in Different Industries?

In retail industry

The bargaining power of suppliers in the retail industry is higher when there is only one or few suppliers for a particular retailer, the absence of a substitute supplier increases the bargaining power of the supplier.

However, in the case of an increased market concentration, the decrease in retailers may have a reverse effect on the supplier.

Here’s the catch for buyers: when the bargaining power of supplier decreases in the instance of retailer concentration then this may cause decrease in overall product prices.

 

In airline industry

One supplier for the airline industry that exercises high bargaining power is fuel suppliers. Due to the crucial importance of fuel suppliers, somehow they may dictate fare prices.

Also, negotiations between airline companies and fuel suppliers are time sensitive. This importance of fuel suppliers to airline companies significantly increases their bargaining power in negotiations.

Plus! Aside from fuel suppliers, you should know the two leading suppliers in the airline industry: Boeing which is from United States and Airbus from the European Union.

Moreover, according to Market Realist, suppliers tend to earn higher than airlines. Among the suppliers with high returns are aircraft manufacturers, reservation services providers, travel agencies and freight fowarders.

Well… We should not forget employees: considered as supplier of skills. In the aviation business, pilots are of high demand. It was reported that there is a projection of pilot shortage by 2025.

 

In education industry

One of the discussions about education is it has been highly treated as a commodity than a citizen’s right. At the end of the day it’s a product that is highly on demand among people.

Universities are suppliers with a high bargaining power over its buyers – the students.

Buyers of education through entry in universities have little to no say in terms of fees.

However, they may be regulated, in some countries universities may be mandated by the state government to lower or increase tuition fees.

Moreover, with the concept of switching costs, costs would be the quality of faculty roster, curriculum, and other services a university offers. These are the things that students (buyers) consider in shifting to alternatives.

There are also suppliers within universities such as support services like publishing companies, clinics, and food services. But the most important suppliers of universities are faculty members, administrators and researchers.

 

In hotel industry

The bargaining power of suppliers in the hotel industry tend to be low because of the high number of available substitutes for products, services and supplies.

Bargaining power of suppliers and the availability of substitutes in the hotel industry do not pose as much threat to hotel companies. Hotel company profit largely depend on their clients, hotel competitors, and new hotel entrants.

 

In financial services industry

In the financial industry, negotiations and bargaining power are central to the relationship between the supplier and the client. One would be able to recognise weak bargaining power of a company in financial services industry when the company offers longer credit payment or allows extensions prior imposing penalties.

When it comes to credit services, those suppliers with high bargaining powers utilise their leverage to raise prices from companies in credit services. This scenario can lower the profitability of credit services.

 

In apparel industry

Bargaining power of suppliers in the apparel industry does not give much impact to the apparel business. Most materials used for apparel production come from sources that sell cheap bulk materials. Not only that, fashion brands tend to use their influence to increase their bargaining power over suppliers.

 

But Wait, When is Bargaining Power of Suppliers High?

According to Magretta’s Understanding Michael Porter there are several determining factors: 

  • If a particular supplier represents a huge percentage of a particular industry’s (buyer) sales.
  • If a supplier’s departure may significantly affect buyers.
  • If there is no immediate available substitute to a particular supplier for the buyer.
  • For example, telecommunications, private modes of transportation, China’s production of 95% of world’s neodymium (a kind of metal used by Toyota and other automobile companies).
And When is Bargaining Power of Suppliers Low?

According to Magretta’s Understanding Michael Porter here are several determining factors:

  • When the buyer can easily switch to another supplier. This happens because the switching cost is low for the buyer.
  • When there is little difference between or among suppliers or industries, buyers can easily stir competition among suppliers and manipulate prices on their favor.
  • When a buyer comprises a huge percentage of a supplier’s product sales. For example, how beer and soft drinks (buyers) control prices with the suppliers of their containers.
Here’s the best part! Tips for Scoring A+ for Bargaining Power of Supplier Essays
  • In topics such as bargaining power of suppliers, there is a wide array of circumstances and scenarios that differ from one another, hence scoring high in your essays depend on how you argue your points.
  • Lecturers tend to give higher marks when they see and read that essays are written with structure and coherence. Hence, in writing and presenting your arguments, it is good to create sub-sections to your essay in order to show structure and coherence.
  • Give your lecturers numerical data to support your argument. It is always good in essays to be backed with quantitative data. It makes your essay more reliable and it does look good on paper.
  • I can’t emphasise this enough – whenever lecturers and professors require essays, often they are looking for specific arguments and points. Hence, it is important to heed carefully on the instructions given to you for your essays.

 

 

Sooooo there you go! We hope we have provided you with enough information about what bargaining power of buyers really is!

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