Ryszard Barnat, LLM., DBA, Ph.D. (Strat. Mgmt) Bargaining Power Of Buyers

                   

Bargaining Power Of Buyers

Buyer power refers to the ability of customers of the industry to influence the price and terms of purchase.

The competitive strength of buyers can range from strong to weak. The buyers are powerful when:

  • They are concentrated and buy in large volume.
  • The buyer's purchases are a sizable percentage of the selling industry's total sales.
  • The supplying industry is comprised of large numbers of relatively small sellers.
  • The item being purchased is sufficiently standardized among sellers that not only can buyers find alternative sellers but also they can switch suppliers at virtually zero cost.
  • The buyers pose a threat of integrating backward to make the industry's product.
  • The sellers pose little threat of forward integration into the product market of buyers.
  • The products are unimportant to the quality of the customer's product or service.
  • It is economically feasible for buyers to follow the practice of purchasing the input from several suppliers rather that one.

These factors change with time and firm's choice of buyers-groups should be regarded as an important element in strategic decision-making.

Bargaining Power Of Suppliers

Supplier power refers to the ability of providers of inputs to determine the price and terms of supply. Suppliers can exert power over firms an industry by raising prices or reducing the quality of purchased goods and services, so reducing profitability.

The extent to which this potential impact is realized depends upon a number of factors; in general, a group of suppliers is more powerful if the following apply:

  • It is dominated by a few firms and is more concentrated than the industry its sells to.
  • When suppliers' products are differentiated to such an extent that it is difficult or costly for buyers to switch from one suppliers to another.
  • When the buying firms are not important customers of the suppliers group.
  • When the suppliers of an input do not have to compete with the substitute inputs of suppliers in other industries.
  • When one or more suppliers pose a credible threat of forward integration into the business of the buyer industry.
  • When the buying firms display no inclination toward backward integration into the suppliers' business.

It is important to recognise that labour is a supplier, and may exert a considerable degree of power in some situation. The power of suppliers can be an important economic factor in the marketplace because of the impact they can have on customer profits.


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