0:01
We're talking about the five forces analysis, which is a tool for thinking
carefully about these five competitive forces, that can have a negative impact on
the long run profitability potential, of a particular industry or market segment.
Right now, we're gonna focus on the bargaining power of suppliers.
Now the dynamics here are very similar, to the bargaining power of buyers.
We're just sort of on the other side of the coin.
And just like with the bargaining power of the buyer,
we want the bargaining power of suppliers to be low.
If we're operating in this industry, it's a favorable thing for the industry.
For the bargaining power of suppliers to be low.
So how do we know if it's low.
Supplier bargaining power is going to be lower, when sellers are not concentrated?
In other words, the degree to which sellers don't approach monopoly power,
then we're gonna be in a better situation in the industry.
If there's only a few sellers, then they have a much greater ability,
to set the price for the goods or services that are changing hands in the industry.
But if there are many, many sellers, and
it's more of a commodity product in our supply chain,
then those suppliers are not gonna have as much power, and that's a good thing.
So that's the first idea.
Second idea is that supplier power is gonna be lower,
when firms have many alternatives, right?
So that might be that there are many suppliers as I mentioned just a second
ago, but it might also be that there are many different kinds of substitutes for
the supplier's products.
Right?
So if a particular supplier raise his price, and
the competitors also raise their price, but we can also use a sort of similar but
not exactly the same product in our value chain as a supply,
then that removes the bargaining power of those suppliers.
It's also true that when firms face low switching costs,
that the bargaining power of the suppliers is also going to be diminished.
I we have a supplier that's locked us in via some sort of long term contract, or
something that's gonna cost us to get out of that contract.
Then that's going to increase the bargaining power of that supplier.
2:08
Again, if it's sort of commodity products and
it doesn't cost us anything to switch from one supplier to another, easy.
And that means that the supplier's bargaining power
is going to be much lower.
It's also going to be lower if the supplier doesn't have the ability to
forward integrate into doing what we do in our business, right?
So, again, firms are often looking to sort of backward or
forward integrate along their own value chain and
that's one of the ways that they can kind of Increase their bargaining power.
But if our suppliers in our industry don't really have the ability to forward
integrate, then I think that their bargaining power is gonna be much lower.
All right, there's also this idea of price segmentation, price discrimination.
And to the degree to which sellers can price discriminate,
they're gonna have more power.
But if they're not able to treat different classes of buyers or different segments of
their market differently, than they won't have as much bargaining power and so
oftentimes that's accomplished by price information being widely available and
transparent, and that removes the ability
of sellers in our value chain to be able to price discriminate In our industry.
So let's take a couple of examples that might just illustrate
a couple of these things.
For instance, if we think about personal computers, so, if we're
in the PC manufacturing industry, if we're a Dell or a Compaq or an HP or a Lenovo.
3:33
You know, who are our suppliers?
Well, the biggest suppliers, are the suppliers of the chip and
the operating systems.
So this is Intel and Microsoft.
And if we are in a Windows based PC environment,
guess who has all the bargaining power?
Microsoft and, to a degree, Intel.
So if we're a PC manufacturer, those sellers
are gonna have more bargaining power, because they have near monopoly power.
It's always an option for us as a computer maker,
to use a different operating system or a different chip set, but
the marketplace will often times view that as an inferior product.
Microsoft Office and Intel chips are sort of viewed as the industry standard.
And so that means that those companies have a lot of bargaining power
in that supply chain.
What's another example?
We might think of groceries.
So if we think, as trends have changed over the last few years.
More and more consumers are interested in healthy,
organic, even locally sourced produce, fruits and vegetables, right?
So this is given rise to companies like Whole Foods.
Other fortune 500 retailers who really cater to that segment.
So if take Whole Foods for an example lets think of their supply chain.
They have to buy their organic spinach from somebody, right.
So if there are many,
many suppliers, then those suppliers are not gonna be concentrated and
they won't really have power over setting the price on Whole Foods is negotiating
with them on procuring that spinach to sell in their stores.
On the other hand, if there's one particular supplier that
supplies a lot of Whole Foods produce, so for example Earthbound Farms.
That's a big, large, organic produce producer.
And they might wield a little more power than the smaller localized organic
farms and that sort of thing, simply because, depending on the market,
they might be a little more concentrated and supply a greater percentage of
the produce that's on Whole Foods or some other store's shelves.
Again, all of these are ways in which sellers bargaining power might be impacted
and if sellers are not concentrated, if firms have many alternatives and
sellers are just sort of selling commodity products, or
sellers do not have the ability to do price discrimination.
Their bargaining power is gonna be lower.
Which is good for the industry.
Michael LenoxSenior Associate Dean and Chief Strategy Officer
Jared HarrisSamuel L. Slover Research Chair in Business Administration
