Bargaining Power of Suppliers

• Increasing prices and reducing the quality of their products are potential means suppliers use to exert power over firms competing within an industry.
• If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability is reduced by its suppliers’ actions.
• A supplier group is powerful when:

  • It is dominated by a few large companies and is more concentrated than the industry to which it sells.

  • Satisfactory substitute products are not available to industry firms.

  • Industry firms are not a significant customer for the supplier group.

  • Suppliers’ goods are critical to buyers’ marketplace success.

  • The effectiveness of suppliers’ products has created high switching costs for industry firms.

  • It poses a credible threat to integrate forward into the buyers’ industry.
• Credibility is enhanced when suppliers have substantial resources and provide a highly differentiated product.
• Some buyers attempt to manage or reduce suppliers’ power by developing a long-term relationship with them.
• Although long-term arrangements reduce buyer power, they also increase the suppliers’ incentive to be helpful and cooperative in appreciation of the longer-term relationship (guaranteed sales).