What exactly is bargaining power of suppliers? When do you treat it as high or low bargaining power of suppliers?
You must have been working on your Porter’s Five Forces when you stumble upon this point and would want to know more about the type of bargaining power that suppliers have.
You’ve come to the right place.
In our years of providing essay writing services, while the other forces such as bargaining power of buyers, threat of new entrants and industry rivalry seem fairly straightforward, bargaining power of suppliers can be tricky in certain industries such as the airline industry, hotel industry and financial services industry.
Let us cover all that in this powerful blog post.
P.S. If you are working on an assignment that needed you to work on Porter’s Five Forces, there’s a high chance that you need help on PESTEL analysis as well. Here’s a blog post on how we scored 82% for one of our customers’ PESTEL piece.
1. What is bargaining power of suppliers?
To put it simply, how powerful are the suppliers in dictating prices, quantity and availability of their products? How powerful they are when it comes to bargaining?
Let us take for example, your local grocery store. You have been satisfied with them and been buying your grocery from them for a long time. One day, they increase prices and you decided to go to another nearby grocery store instead.
This means that they have low bargaining power as a supplier to you.
But wait. Is it really that simple?
You may have realised it now but there are many other factors in play here that may affect the grocer’s bargaining power. Factors such as:
- Are their grocery of better quality?
- Do you feel a sense or loyalty to them?
- Are there even any other competing grocers?
- If yes, are they close enough to your house?
From this, you can see that determining the bargaining power of suppliers can involve numerous factors.
Importantly, one thing to note though is that bargaining power of supplier is part of the Porter’s Five Forces, and the Five Forces are used to analyse the industry attractiveness. In other words, it is used to determine the attractiveness of the industry that your case company is in, so please focus on the industry, and not on the country, the case company or any particular supplier! You can however focus on any particular supplier only if there are very few suppliers in the industry and it makes sense to focus a little on certain supplier.
2. Factors affecting Bargaining Power of Suppliers
So, what are the factors that actually affects bargaining power of suppliers? While there can be some really unique factors that are one of a kind for a certain industry, there are numerous common potential factors that can affect bargaining power of suppliers. Here are some of the few:
Degree of differentiation of supplies: How unique/different can the supplies be in the industry?
Presence of substitute supplies: Are there any other suppliers that can be used in place?
Strength of distribution channel: How extensive is the distribution channel?
Switching cost of changing the supplier: How troublesome/expensive it is to switch supplier?
Number of supplier to buyer: Are there many more suppliers than buyers?
Threat of vertical integration: Is it possible that the supplier cuts off the middleman (you) and sell straight to the consumer?
3. Bargaining Power of Suppliers in different industries
To make things much clearer to you, here are numerous examples of bargaining power of suppliers in different industries:
In the airline industry, there are numerous different types of suppliers. This includes engineering services supplier, aircraft supplier, food and beverages suppliers, etc.
So, there are a few factors that you can look at:
Ratio of airlines to suppliers: Since there are many more suppliers than airline companies, suppliers therefore have low bargaining power.
Amount of sales attributed: As airlines are huge business entities that purchase significant amount of products or services from any supplier, you can say that the bargaining power of supplier is low since suppliers do not want to lose any businesses from huge buyers like airlines.
However, if you are comparing aircraft suppliers, the bargaining power may be slightly different. This is because of the huge brand equity held by both Boeing and Airbus which allows them to have higher bargaining power.
So all in all, you can say that the airline industry has low bargaining power of suppliers and moderate bargaining power for aircraft suppliers.
Fashion industry has rather unique suppliers as it requires two elements for its success: materials and fashion designers.
For materials, bargaining power is relatively low as suppliers tend to be generic, with low differentiation. Moreover, there are numerous suppliers from developing countries which further lower the bargaining power.
For Fashion designers, their bargaining power is much higher because of their highly differentiated output. Despite having numerous fashion designers or in this case, ‘suppliers’, around the world, quality fashion designers have high bargaining power as every single one of them ‘supplies’ unique output for the industry.
As such, you can similarly categorise the suppliers of fashion industry into materials supplier (low bargaining power) and fashion designer (high bargaining power).
Similar to airline industry, hotel industry involved large entities that buy in significant amount. This is especially so for hotel chains such as Hilton and Marriott that have thousands of hotels around the world. Supplies for the hotel industry tends to be generic with little differentiation as well. Generic supplies includes things like shower foam, razors and laundry services.
Moreover, there are significantly more suppliers than hotels in the industry and therefore, this further lowers the bargaining power of suppliers.
The bank or even financial services industry poses a very special scenario in that the buyers are also the suppliers. What do I mean by that?
The main business of banks is money. So customers like you and me are not just only the customers, we are the suppliers of money as well when we open a savings account with them. In your Porter’s Five Forces then, you will have to talk about the customers as both buyers and suppliers for banks.
So.. what is the bargaining power of the suppliers for the bank industry?
The suppliers, either individuals or businesses, each accounts for a very small percentage of the bank’s total supply of money. This means that the suppliers have low bargaining power. Moreover, money is generic and undifferentiated. Your money is as good as mine. This further lowers the bargaining power of suppliers.
However, the story does not end here.
We still have to account for other factors such as switching cost here. Since there is almost no switching cost for suppliers to switch to another competitor, their bargaining power has raised significantly. You can withdraw all your money from a bank and deposit it to another bank easily.
As such, considering all the factors, including the special case of the supplier being the customer as well, you can say that the bargaining power of suppliers in the bank industry is moderate or even high.
You can see a sample of our Porter’s Five Forces on the bank industry here.
4. Tips for scoring A+ for Bargaining Power of Suppliers
Even with all the above, we still have some valuable tips for you to score A+.
- Bargaining power of suppliers, like the other factors for Porter Five Forces, are sometimes not clear cut whether its high or low. It depends on how you argue for it. It is totally fine to put the bargaining power as moderate as well
- Lecturer tends to award higher marks if you get a little more creative with your arguments. What I mean is that you can probably sub-categorise suppliers to make it look more ‘professional’. For example, in the airline industry, you may want to say bargaining power of suppliers is low for non-essential items like food while high for suppliers like aircraft manufacturers. Limit yourself to at most two categories to avoid being ‘too creative’ with your work
- Try to be specific and offer some data. For example, if you can find that the largest supplier for the industry represents for a large % of all supplies, it will be good to include them in your analysis saying that the bargaining power of supplier is very high because of this
- And one very very important tip. Every lecturer is different with what he/she is looking for in Porter’s Five Forces. So do ask your lecturer what he/she is looking for and check with them whether what you have done is good enough.
5. Bargaining Power of Suppliers Examples
Here are some examples of highly graded Bargaining Power of Suppliers that you can reference to. The following two examples are for convenience store industry in the United Kingdom.
If your assignment has allocated a huge percentage (and therefore a huge amount of words) for Porter’s Five Forces, this is where you can write a slightly longer and detailed Bargaining Power of Supplier like the one above. Notice how it included a table discussing about the relative net price? Tables like this will definitely boost your grades to the stratosphere.
This example above while slightly shorter, is still considered long by the usual standard. Notice here that the writer took a different approach and talks about individual retailers like Tesco and Sainsbury. While this is usually not encouraged, in this case, because of the dominanace of Tesco and Sainsbury in the UK market, it is acceptable to talk about them.
So there you go, our ultimate guide to bargaining power of suppliers. This is part of our Porter’s Five Forces series and if well received, we will add on other forces as well!