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Note: By understanding the Porter Model, you will be better prepared for your negotiations
with your suppliers. To read an overview of porters five forces, click
here
"What impact will your suppliers have on
your
profitability?"
Discover how to
analyze your industry environment and determine how much
bargaining power your suppliers will
have
Written by Ian
Pratt
The Bargaining Power of Suppliers
The Porter Model describes the 5 Forces
that affect the expected profitability of your industry. One of
these forces, the bargaining power of suppliers, identifies the
extent to which your suppliers can choose
to raise prices, reduce quality or reduce service without
consequence.
You will find that
the greater the bargaining power of suppliers the less
profitable the industry is likely to be.
Remember, the bargaining power of
suppliers is only one of the five forces in the
Porter model. You will need to complete your
analysis of all five forces
to have a full view of your industries expected level
of profitability.
The Bargaining Power of Suppliers
Example:
Imagine you run an aged care
facility and you need to purchase cleaning services and
specialist beds.
For the cleaning services you can
request a quote annually from 6 or 7 suppliers of cleaning
services, and
For the beds you may have only two suppliers
to choose from, although you currently have over 100 beds
from one supplier and have a healthy stock of spare parts
for those beds.
From the above example, you can see
that your two suppliers have different levels of bargaining
power, the cleaners have a strong competitive environment,
where the bed supplier has limited
competition.
The Porter Model: How to
Assess the Bargaining Power of Suppliers
The good news
it that the bargaining power of supplier’s is similar to the bargaining power
of customer’s section of the Porter Model. We ask
the essentially the same questions only from the other perspective.
The following factors will help you to
analyze the bargaining power of suppliers, click on each for more details and
ignore those not relevant to your industry.
What makes a good leader
has
provided strategic planning templates for each of the five forces in the
porter model. The bargaining power of suppliers
template is at the bottom of this page, take me there
Lets explore the bargaining power of
suppliers in more detail
Please
review each of the factors that affect the bargaining power
of suppliers in more detail and use our free
template
to assess
the power of suppliers in your industry.
Return to Index
Differentiation of Inputs
Is your supplier's product unique or does it have
any special attributes that you desire.
If so, you might be stuck with this
supplier and they could increase their price eroding your
margin.
For Example: If your business uses a
mainframe system for managing customer accounts and this
mainframe system is the only one available that meets
your requirements, then your desire to keep the system gives
a commercial advantage to your
suppliers.
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Index
Switching
Costs
Do
you incur any costs to change suppliers? (these are called switching
costs)
Imagine your business has used
the same electrician for 10 years to maintain your
production line switchboards. If you were to change
electricians, the new electricians will take a
bit longer as they are not
as familiar with your equipment. This will be a cost to you.
Another common example is a switch
from MS office to an alternative product will
require your staff
to be re-trained and there
will be a loss of productivity during the transition
period.
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Index
Substitute
Products
Are their alternatives or substitutes for your supplier's
product/service?
Substitutes are typically products
or services that
are not in your supplier's industry, you may choose
a substitute product or service over your supplier's product or
service.
Example: Imagine that you are in the business
of making aluminium blinds for houses and you
paint the aluminium, you could substitute powder coating or anodizing
for painting.
However, you are less likely to be able
to find substitute products for your core software
systems, as you business will have grown around your current
systems.
Return to
Index
Supplier concentration relative to industry concentration
Are
there more suppliers or buyers in your industry?
Quite often
this is measured by looking at the market share of the top
4 suppliers to your industry, if the top 4 suppliers have 90%
of the market then they can drive price if the top 4 have 30%
of the market then you can drive price.
Examples: There are only a few businesses manufacturing paint and many
outlets selling paint, regardless of which retail shop you go to you
will find many retail outlets will be selling the same brands of paint. This
will give the manufacturers the market power.
However, if any one of the retail outlets gains significant market share then the
power will shift back to the retailer.
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Index
Importance of volume to the supplier
If the supplier supplies to some high volume customers
and to some low volume customers then they are unlikely to be willing
to bargain with the low volume customers.
If your business
is a low volume buyer then you are unlikely to have
much bargaining power, whereas if you are the high volume buyer
then you will have more market power.
Examples: Fleet buyers tend to get cars at
a lower price than the average family.
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Index
Cost relative to the total purchases of the
industry
What is the percentage of your spend that is spent
on the suppliers product if it is low then price may not be so
important to you, conversely if 70% of your spend is on the
suppliers product then you will put more pressure on
price.
Example:
A building company may spend more time negotiating with suppliers on concrete
prices than they would spend negotiating with their stationary
suppliers.
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Index
Impact of inputs on cost or
differentiation
If
your business is successful because of a quality that
is inherent in your supplier's product your supplier will have the negotiating
power.
An example:
If you have a shop that sells one brand
of clothing exclusively, the supplier will be able to dictate price to
you.
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Index
Threat of
forward integration
Is it likely that the supplier can
see that they can make more profit by getting into your line of
business, if so, can your business integrate backwards and do what
your suppliers do?
Example: An
independent clothing retail outlet is unlikely to start their own
fashion design and manufacturing business, however a clothing fashion house may establish
retail outlets.
Return to
Index
Porter Model
Exercise
Before you can
complete an analysis of the bargaining power of suppliers you
will need to indentify which factors above are relevant to your
industry.
(Indicate below which of the following factors
are relevant for your industry).
Strategic
Planning Template, Bargaining Power of suppliers
The what makes a good leader site has provided free
strategic planning templates throughout our site, the porter
model includes five templates. The bargaining power of suppliers
template is provided for your use, below.
Porter model templates,
by whatmakesagoodleader.com
Where to from here?
The porter model consists of five
forces, review all five forces to complete your industry analysis
Remember to update your SWOT analysis
with any environmental threats or industry opportunities
that you have identified while using the Porter Model.
Return to
Index
Return to Top
Learn how to use all five
forces in the porter model to analysis and understand the
nature of competition in your industry
.
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