Suppliers must have the ability to enter Buying Industry:
For new entrants building a favorable brand image in the minds of potential customers is a tough and costly exercise. Entrenched firms use powerful brands as tools to lock in customer loyalty to their products. In late 90s companies such as Hyundai, Daewoo, TELCO had to spend huge sums on advertising and new product development to overcome the Indian consumer’s preference for cars manufactured by Maruti Udyog Limited. Only by doing so could these manufacturers gain market share against Maruti’s existing dominance.
There are two ways through which suppliers can exert power over firms and impact their profit potential competing within an industry: 1) increase prices 2) reduce the quality of products sold. But to make any of these changes stick suppliers need bargaining power over the customers. A supplier group is said to be powerful when:
High supplier concentration: it is dominated by a few large companies and is more concentrated than the industry to which it sells. Selling to fragmented buyers means that concentrated suppliers will be able to exert great influence over price, quality and selling terms. The pharmaceutical industry is an example in which comparatively few firms produce each specific type or class of drug. This supplier concentration gives drug producers considerable bargaining power over physicians, wholesalers, and hospitals.
There are no substitute products. If buyers have no alternative sources of supply, then they are weak in relation to the existing suppliers.
Buyer is an important customer: The buying industry is not an important customer of the suppliers. McDonald’s is a much more important customer or soft drink producer than a small diner would be. If the industry is an important customer, suppliers’ fortunes will be tied closely to the industry and they will want to protect the industry through reasonable pricing, Research & Development support, lobbying etc.
Products crucial to buyer: The suppliers’ products are critical to buyers’ market place success. If suppliers provide crucial products or inputs to buyers then their bargaining power is likely to be high. McDonald’s finds it important to carry the most popular lie of soft drinks therefore increasing Coke’s bargaining power.
Suppliers products differentiated: The suppliers products are differentiated or they have built in switching costs. The airlines use of frequent flyer programs is a clear attempt to reduce their customer’s flexibility by raising their switching costs Flying on a competitor’s flights generates no frequent flyer mileage and joining multiple frequent flyer plans greatly dilutes the benefits of membership so a customer is effectively locked in to a particular airline.
Suppliers ability to enter the buying industry: The supplies pose a credible threat of forward integration (for example a clothing manufacturer like Raymond might choose to operate its own retail outlets) When suppliers can fairly easily enter the industry they are supplying their bargaining power is increased. If suppliers possess the resources and the ability to operate their own production facilities, distribution channels or retail outlets they obviously exert great influence over buyers (e.g. supplier like Raymond, ITC Grasim). Buyers on their part are then reluctant to bargain too hard for price concessions because they may unwittingly compel the suppliers to enter the industry
Powerful Buyers: Customers likewise, can force prices down demanding better quality or more service and play competition off against each other – all such actions affecting industry’s profitability. Wal-Mart for example forces suppliers to extend credit beyond the normal 15 day period after enjoying a discount of 2 per cent on the gross bill.
Buyers are powerful under the following circumstances:
Buyer’s concentration >>>
Buyers are concentrated or buy in large quantities relative to total industry sales. In such a scenario, buyers can get the deals struck in their favor with huge discounts and other concessions. Large firms in the computer and automobile industries for example, have traditionally been able to bargain heavily with key suppliers to these industries because they are more concentrated than their suppliers.
Source: Strategic Management