“What is the Bargaining Power of Suppliers in finance”?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is the Bargaining Power of Suppliers?
  2. Types of Suppliers
  3. Determining Factors
  4. When is Bargaining power Strong/Weak?
  5. Bargaining Power in Fast Food Industry
  6. Conclusion

What is the Bargaining Power of Suppliers?

The Bargaining Power of Suppliers is one of the forces in Porter’s Five Forces Industry Analysis Framework. The bargaining power of suppliers refers to the pressure that suppliers can put on companies by raising their prices, lowering their quality, or reducing the availability of their products. This bargaining power in an industry may affect the competitive environment and profit potential of the buyers. The bargaining power of suppliers is one of the forces that shape the competitive landscape of an industry. They also help in determining the attractiveness of an industry. Porter’s other forces include competitive rivalry, bargaining power of buyers, the threat of substitutes, and the threat of new entrants. 

Types of Suppliers

According to different industries, suppliers are segregated into different types. They are as follows:

  • Manufacturers and Vendors: Sells their products to distributors, retail and/or wholesalers
  • Distributors and Wholesalers: They purchase goods in high quantity to sell it to retailers or local distributors
  • Independent Suppliers: They sell unique products directly to retail
  • Importers/Exporters: They purchase a product in one country and sell it in another country
  • Drop Shippers: Suppliers of products for different kinds of companies

Determining Factors

There are 5 main factors when determining the bargaining power of suppliers:

  1. Number of suppliers as compared to the buyers
  2. How much a buyer is dependent on the supplier’s sale
  3. Switching cost of the suppliers
  4. Availability of the suppliers for immediate purchase
  5. Possibility of forward integration by suppliers

What is Bargaining Power Strong/Weak?

Strong:

  • Switching cost of buyers is High
  • The threat of forward integration is high
  • Suppliers are less in comparison with the buyers
  • Low dependence of supplier’s sale on buyers
  • Switching cost of suppliers is low
  • Substitutes are unavailable
  • Buyers heavily rely on sales from suppliers

Weak:

  • Switching cost of buyers is low
  • The threat of forward integration is low
  • Suppliers are more in comparison with the buyers
  • High dependence of supplier’s sale on buyers
  • Switching cost of suppliers is high
  • Substitutes are available
  • Buyers do not rely heavily on sales from suppliers

Bargaining Supplier Power in the Fast-Food Industry

Let us consider the following analysis in order to determine whether McDonald’s faces high or low bargaining power from suppliers

  1. The number of suppliers compared to buyers: There is a significant amount for suppliers relative to buyers. Therefore, supplier power is low. 
  2. Dependence of a supplier’s sale on a particular buyer: If we consider that the suppliers have few customers, they are likely to give in to the demands of buyers. On the other hand, if we assume suppliers have several customers, they have more power over buyers. Since we do not know whether these suppliers have few or many buyers, a middle ground would be a reasonable answer. Therefore, supplier power is medium.
  3. Switching Costs: Switching costs are low as there are a significant number of suppliers in the fast-food industry. As a result, Supplier power is low.
  4. Forward integration: There is low forward integration in the fast-food industry

After analyzing all these factors, McDonald’s faces low bargaining power of suppliers. Hence, supplier power is not an issue for McDonald’s in the fast-food industry. 

Conclusion

The bargaining power of suppliers alone does not determine the overall attractiveness of an industry. The remaining forces (bargaining forces of buyers, rivalry among existing customers, the threat of new entrants, and the threat of substitutes) must be taken into consideration when determining overall industry attractiveness.

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Sarthak Bhalerao

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