Page 62 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes powerful if they have more negotiation leverage than the firms in the industry, using
their clout primarily to pressure price reductions. According to Porter, buyers are most
powerful under the following conditions:
(a) There are few buyers: If there are few buyers or each one does bulk purchases, then
they have more bargaining power. Large buyers are particularly powerful in
industries like telecommunication equipment, off-shore drilling, and bulk chemicals.
High fixed costs and low marginal costs increase the pressure on rivals to keep
capacity filling through discounts.

(b) The products are standard or undifferentiated: If the products purchased from the firm
are standard or undifferentiated, the buyers can easily find alternative sources of
supplies. Then buyers can play one company against the other, as in commodity
grain markets.
(c) The buyer faces low switching costs: Switching costs lock the buyer to a particular firm.
If switching costs are low, buyers can easily switch from one firm’s product to
another.
(d) The buyer earns low profits: If the buyer is under pressure to trim its purchasing costs,
the buyer is price sensitive and bargains more.

(e) The quality of buyer’s products: If the quality of buyer’s product is little affected by
industry’s products, buyers are more price sensitive.

Most of the above sources of buyer power can be attributed to consumers as a group as
well as to industrial and commercial buyers. The buying power of retailers is determined
by the same factors, with one important addition. Retailers can gain significant bargaining
power over manufacturers when they can influence consumers. Purchasing decisions as
they do in audio components, jewellery, appliances, sporting goods etc., are examples.
6. Bargaining power of suppliers: The fourth of Porter’s Five Forces model is the bargaining
power of suppliers. Suppliers are companies that supply raw materials, components,
equipment, machinery and associated products. Powerful suppliers make more profits by
charging higher prices, limiting quality or services or shifting the costs to industry
participants. Powerful suppliers squeeze profits out of an industry and thus, they are a
threat. For example, Microsoft has contributed to the erosion of profitability among PC
makers by raising prices on operating systems. PC makers, competing fiercely for
customers, have limited freedom to raise their prices accordingly.
A supplier’s bargaining power will be high under the following conditions:
(a) Few suppliers: When the supplier group is dominated by few companies and is more
concentrated than the firms to whom it sells, an industry is called concentrated. The
suppliers can then dictate prices, quality and terms.

(b) Product is differentiated: When suppliers offer products that are unique or differentiated
or built-up switching costs, it cuts off the firm’s options to play one supplier against
the other. For example, pharmaceutical companies that offer patented drugs with
distinctive medical benefits have more power over hospitals, drug buyers etc.
(c) Dependence of supplier group on the firm: When suppliers sell to several firms and the
firm does not represent a significant fraction of its sales, suppliers are prone to exert
power. In other words, the supplier group does not depend heavily on the industry
for revenues. Suppliers serving many industries will not hesitate to extract maximum

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