Bargaining power of buyers

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Do curso por Copenhagen Business School

Formulação da Estratégias

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Copenhagen Business School

Formulação da Estratégias

803 ratings

Curso 2 de 4 em Specialization Gestão Estratégica e Inovação

The purpose of this course is to present, analyze and discuss the different facets of business strategy formulation. Emphasizing that strategy can be seen as a unified theme that provides coherence and direction to the actions and decisions of a firm, we will cover a variety of business strategy topics concerned with firm positioning in the context of different markets, industries and locations. At the end of the course, you will be able to: - Identify why a strong strategy is essential for the future business success - Formulate a business strategy that suits the needs and visions of your organization - Explain why managers too often formulate sub-optimal strategies - Extrapolate measures to optimize current business strategies Workload: 2-4 hours per week.

Na lição

Industry analysis

Building on the insights generated in the first session, in the second module we explore different industrial organization frameworks and discuss the importance of industry effects on firm performance. Keywords of this module include competition, industry attractiveness, and the ‘Five forces’-framework.

Competition from substitutes3:11

Threat of entry3:38

Rivalry between established competitors2:39

Bargaining power of buyers3:52

Bargaining power of suppliers2:02

Conheça os instrutores

Marcus Møller Larsen
Assistant Professor, Strategic Management and Globalization
Department of Strategic Management and Globalization

Let's turn to the bargaining power of buyers and

its influence on industry attractiveness.

Since firms eventually need to sell their goods, be it products,

be it services, they need to engage in the transaction with buyers.

In this respect, it is important to understand how much bargaining power

the buyer has vis a vis you as a firm.

Eventually, the valid distribution between you as a seller and the customer,

which can be an individual, it can be companies, it can be governments,

eventually depends on the bargaining power relationship between the two of you.

For example, whenever Vestas sells wind turbines to a government, one

could assume that the buyer has a lot of bargaining power in terms of negotiating,

in terms of sale, in regards to price, delivery, and future service.

However, though, how do you actually understand the bargaining power of buyers?

Here, we need to consider two interrelated factors.

One, the buyers' price sensitivity and two, their relative bargaining power.

First of all, buyer's price sensitivity can be defined as the extent to which

buyers are sensitive to the prices charged by the firm in the given industry.

This, in turn, depends on a number of factors such was whether the product is

differentiated or no.

In other words, do the buyers at all care about whether products carries your brand

instead of the brand of another manufacturer?

Also, is the product essential to the buyer?

For example, think of the pharmaceutical industry as many buyers,

or patients, are highly dependent upon the medicine being produced.

Then, of course, buyers are not really sensitive to the price and

would basically pay whatever they should pay to get hold of the products.

As a result, their bargaining power is low and

the medicine companies can charge high prices for their medicine.

Second of all,

we also need to understand the relative bargaining power of the buyers.

For example, if you, as a seller, are highly dependent upon

the purchases of a single customer, then your bargaining power decreases.

Take, for example, the wind turbine industry.

In the wind turbine industry,

there are large clusters of suppliers of different parts of the wind turbines whose

main clients are the large wind turbine manufacturers.

Since these suppliers are highly dependent upon their clients,

their relative bargaining power is substantially lower.

Another way to explain this is the information asymmetry between the buyer

and the seller.

Now, if the buyer has a low degree of information about the product that he or

she is buying, then that person is no real position to start

bargaining about the price of the product.

In contrast, if a car mechanic decides to buy a used vehicle, then he or

she would have the necessary knowledge to judge the real price of the used car, and

could, therefore, exploit his or her bargaining power.

Finally, if a buyer has the opportunity to vertically integrate the product that he,

or she, or the company is buying.

In other words, to make the product, instead of buying it on the market,

then the bargaining power of the buyer increases.

So taken together, it is therefore pertinent to understand the bargaining

power of the buyer when judging whether your industry is attractive or not.

If the buyer has a lot of bargaining power, then it's more difficult for

you as a producer of a certain good to determine the conditions on

which the transaction with the buyer should take place.

And it almost goes without saying that this will make life much more difficult

for the producing firm.

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