Bargaining power of suppliers
| Bargaining power of suppliers |
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The bargaining power of suppliers is a competitive force that can reduce its efficiency by raising prices or reducing the quality of the supplier's product. In many cases, profits are reduced, so that the company can not recover costs from raw materials. It is the difference of inpuls and matrix when input and matter when the organization process needs a rare commodity. When the costs of switching to an alternative supplier are high, suppliers are relatively powerful, because the organization would have to incur significant costs if it left them. When substitute suppliers are available, the supplier's power decreases. The higher the concentration of suppliers, the higher the supplier's strength. If suppliers have to achieve high sales, then they have less bargaining power. The supplier's power is low when the costs of the delivered goods are high in relation to the total costs of the purchasing industry. The strength of the supplier is significant for the buyer's chances of differentiating products. When suppliers will have easy integration with the buyer's industry, they will have bargaining power.
Conditions increasing Bargaining Power of Suppliers
The conditions that increase the strength of the supplier are a concentrated group of suppliers, no substitute products available, the industry is an irrelevant customer for the supplier, the supplier's product is essential for the sector's activity, the supplier's product is diversified and the legitimate threat of its further integration.
- If industry suppliers are concentrated, then the supplier has more bargaining power in the industry. Suppliers of chocolate and cocoa have significant bargaining power in the industry due to the limited number of these suppliers. Because the cocoa tree is grown in areas that have a tropical climate, many players in the industry are forced to import the product. Tropical climates often pose a risk of natural disasters, such as hurricanes, which significantly reduce the number of suppliers. In addition, social unrest in the areas where the cocoa tree is located can have a negative impact on the number of suppliers for the industry. The bargaining power of industrial suppliers increases due to the limited number of these suppliers.
- In addition to concentrated suppliers, the bargaining power of the group of suppliers is increased if there are no substitute products that they have to deal with in the market.Since cocoa beans is a required component in the chocolate industry and cocoa suppliers do not have any substitute products, which have to fulfill . This lack of substitutes increases the bargaining power of chocolate and cocoa suppliers.
- The supplier's bargaining power increases because the industry is not an important customer of the supplier. Chocolate and cocoa industry is a very important client of its group of suppliers . The cocoa is an important export of countries producing cocoa beans. The bargaining power of suppliers is diminishing due to the important role of the chocolate and cocoa industry as a customer.
- Another condition that increases the bargaining power of a group of suppliers is the dependence of the industry product on the supplier's product. If the product provider is not available or does not meet the expected quality, the industry relies on suppliers to provide products with high quality, compliance with the provisions of food and consumer taste test. If the product provider is not available or does not meet the expected quality, the industry suffers a lot. This dependence on the supplier's product increases the bargaining power of the supplier.
- Bargaining power of a group of suppliers increases if the product supplied is varied or costs associated with the conversion. If there differentiation or switching costs, the industry has a limited ability to increase competition between suppliers. It is important that the product provider or a specific quality class. however, if the product meets the class guidelines, it is relatively undifferentiated. This applies to all industry suppliers, including suppliers of cocoa beans, milk and sugar.
- In addition, the bargaining power of the supplier increases if the supplier can threaten the integration. If a supplier can become a producer of a special product, then he can increase his bargaining power. Suppliers of the product industry do not pose a reasonable threat to integration. As already mentioned, the market entry threat is low. Suppliers will have to spend a considerable amount of money on research and development, capital demand and acquisition of customer contacts. They will also have to overcome strong industry leaders who have significant brand identification and customer loyalty. the lack of threat to future integration reduces the bargaining power of the supplier. The supplier's bargaining power has decreased because the industry is an important client of the supplier group and the supplier does not pose a threat of integration. but the bargaining power of the supplier is moderate to high, because the group of suppliers is specific, they are the naive products and the importance of the supplier's product to the industry.
References
- Ahern K. R. (2012). Bargaining power and industry dependence in mergers, " Journal of Financial Economics ", col 103, page 530-550
- Chew E. K.., Gottschalk P. (2013). Knowledge Driven Service Innovation and Management: IT Strategies for Business Alignment and Value Creation
- Di Biase S. A. (2014). Applied Innovation
- Dringoli A. (2016). Merger and Acquisition Strategies. How to create
- Fabbri D., Klapper L. F. (2016). Bargaining Power and Trade Credit, " Journal of Corporate Finance ", vol 41, page 66-80
- Nair A., Narasimhan R., Bendoly E. (2011). Coopetitive Buyer- Supplier Relationship: An Investigation of Bargaining Power, Relational Context and Investment Strategies, " A Journal of Decision Science Institute ", vol 42, page 93-127
Author: Justyna Galon
