Today's organizations exist in an echo system where they are dependent on their suppliers significantly while providing value add services to their customers while retaining their profit margins. With globalization in place, even top branded multinational companies also depend on goods and services provided by their suppliers who are situated locally to their business unit in the context. When it is wise to "buy" or "rent", Organizations are depending on their suppliers as they do not have other choice to remain profitable and competent in business environment.
Thus, suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers’ ability to do all these depends on the bargaining power over buyers. Suppliers’ bargaining power would normally depend on:
1. Importance of the Buyer to the Supplier Group: If the buyer is important for supplier’s strategic business interests, if the buyer purchases large size of supplies (goods/services) from the supplier, then it is likely to put the buyers in a relatively advantageous position. In this scenario, the suppliers work on the hinges of competition so as not to lose the buyer contract. Because, Suppliers always have the fear that buyer can switch to their competitors with less switching cost. Consequently, in dealing with such buyers, suppliers’ bargaining power is naturally reduced. Suppliers are more likely to offer favorable terms to win or retain the customer in these scenarios.
On contrary, if the buyer is not important for supplier’s strategic business interests, it is less likely that suppliers offer favorable terms to win or retain the customer in these scenarios. Often supplier’s bargaining power will be more over buyers in these scenarios to the extent that suppliers are quite fine, if buyers do not buy their goods and services.
2. Importance of the Supplier’s Product to Buyers: If the buyers perceive that their supplier is offering quality products at optimized price and other decision criteria, then only they may accept to the bargaining terms and conditions of suppliers. This is the scenario where supplier’s product is important to the buyers.
On contrary, the supplier is forcing more bargaining power over buyers because of their sheer size or image, buyers will not succumb to such suppliers. Instead, they tend to switch to alternatives available at their hand.
3. Greater Concentration among Suppliers than among Buyers: Imagine a situation, where a supplier organization is quite large on the account of raw materials available, research and development or patent rights available with them. In this scenario, supplier organization hold greater power with them as the proportion of the industry’s total output is in hands of such large firms. This gives such firms greater power over those who do business with them.
4. High Switching Costs for Buyers: In this case buyers suffer, because of the supplier's advantageous position or by the nature of supplies itself, the buyers have to face a higher switching cost.
5. Credible Threat of Forward Integration by Suppliers: Suppliers in a given situation may see an opportunity in moving up the value chain and may seriously think of getting into the business of what its buyers have been doing till now. Any indication of that nature from supplier side puts the buyers at the receiving end as they feel threatened because of a new player in that market and of losing an assured source of supplies. A recent example may be of Reliance which has decided to move from exploration and refining of oil to selling of oil through its own retail petrol pumps.
Thus, suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers’ ability to do all these depends on the bargaining power over buyers. Suppliers’ bargaining power would normally depend on:
1. Importance of the Buyer to the Supplier Group: If the buyer is important for supplier’s strategic business interests, if the buyer purchases large size of supplies (goods/services) from the supplier, then it is likely to put the buyers in a relatively advantageous position. In this scenario, the suppliers work on the hinges of competition so as not to lose the buyer contract. Because, Suppliers always have the fear that buyer can switch to their competitors with less switching cost. Consequently, in dealing with such buyers, suppliers’ bargaining power is naturally reduced. Suppliers are more likely to offer favorable terms to win or retain the customer in these scenarios.
On contrary, if the buyer is not important for supplier’s strategic business interests, it is less likely that suppliers offer favorable terms to win or retain the customer in these scenarios. Often supplier’s bargaining power will be more over buyers in these scenarios to the extent that suppliers are quite fine, if buyers do not buy their goods and services.
2. Importance of the Supplier’s Product to Buyers: If the buyers perceive that their supplier is offering quality products at optimized price and other decision criteria, then only they may accept to the bargaining terms and conditions of suppliers. This is the scenario where supplier’s product is important to the buyers.
On contrary, the supplier is forcing more bargaining power over buyers because of their sheer size or image, buyers will not succumb to such suppliers. Instead, they tend to switch to alternatives available at their hand.
3. Greater Concentration among Suppliers than among Buyers: Imagine a situation, where a supplier organization is quite large on the account of raw materials available, research and development or patent rights available with them. In this scenario, supplier organization hold greater power with them as the proportion of the industry’s total output is in hands of such large firms. This gives such firms greater power over those who do business with them.
4. High Switching Costs for Buyers: In this case buyers suffer, because of the supplier's advantageous position or by the nature of supplies itself, the buyers have to face a higher switching cost.
5. Credible Threat of Forward Integration by Suppliers: Suppliers in a given situation may see an opportunity in moving up the value chain and may seriously think of getting into the business of what its buyers have been doing till now. Any indication of that nature from supplier side puts the buyers at the receiving end as they feel threatened because of a new player in that market and of losing an assured source of supplies. A recent example may be of Reliance which has decided to move from exploration and refining of oil to selling of oil through its own retail petrol pumps.