The Suppliers Bargaining Power (Porter’s 5 Forces)
August 9, 2014 1 Comment
Supplier power is an evaluation of how easy it is for providers to drive costs up. The supplier power is driven by the singularity of the product or service; the number of suppliers; relative size and strength of the supplier; and price of changing from one supplier to another.
Located in London and South Africa, DeBeers controls 58 percent of all rough, uncut diamonds sold worldwide until 2004. DeBeers had to pay a $10 million to settle a 10-year-old indictment. The settlement was huge but gives DeBeers a bigger marketing presence and greater legitimacy with U.S. consumers. However, DeBeers market share eroded as new profitable mines were discovered in Russia, Australia, and Canada and those miners started selling to the market directly without the help of DeBeers.
The suppliers power increase if there are fewer suppliers in the market who can form a monopoly or duopoly on the buyers. The same power will decrease if there are alternatives to what the suppliers are selling to the buyer. For example, if natural rubber farmers form coalitions and start raising their prices, then the buyers may switch to synthetic rubber as a suitable alternative. However, if both producers of natural and synthetic rubber form a consortium and start raising their prices then the buyers are forced to accept the higher prices (or pass the additional cost to their customers) until the buyers can find a good and reliable alternative for rubber.
Sometime the alternative is available, but the switching cost from one supplier to another is higher than accepting the original supplier’s prices. Professional video editors are on the look for the latest tools and gadgets to improve their skills and performance. However, the cost of abandoning Final Cut Pro and switching to Adobe Premier Pro maybe too much because of the price they paid to buy the editing software. Another cost to consider is the skill and experience they build up by using one system and they have to re-learn again for the new software. Similar situation is faced by international organisations when they consider switching from Oracle to SAP or for the airline companies to switch from Airbus to Boeing.
The supplier may not decide to raise the price but forward integrate its business. A fishing company that has boats to catch fish in the sea is a supplier to the fish market and the local distributors. The same fish supplier may decide to integrate its business to catch the fish then open stores in the same neighbourhood to sell the fish directly to the customers. The supplier will disrupt the market by taking the distributor’s business and competing with the local fish stores. The same example may apply to Airbus or Boeing if they chose to build the plane and then set up their own airline company.