How to Increase Your Bargaining Power with Suppliers: 5 Practical Examples
Bargaining power is the ability to influence the terms of a deal or a negotiation in your favor. Bargaining power can be affected by various factors, such as the number of suppliers, the uniqueness of their products, the switching costs, and the threat of forward or backward integration.
In this article, we will explore five practical examples of how to increase your bargaining power with suppliers, based on the concepts of Porter’s Five Forces framework. We will also provide some tips and key takeaways for each example.
Key Takeaways
Bargaining power is the ability to influence the terms of a deal or a negotiation in your favor.
Bargaining power can be affected by various factors, such as the number of suppliers, the uniqueness of their products, the switching costs, and the threat of forward or backward integration.
Buyers can increase their bargaining power with suppliers by reducing supplier concentration, increasing supplier substitutability, lowering switching costs, reducing supplier’s threat of forward integration, and increasing industry’s threat of backward integration.
Increasing bargaining power with suppliers can result in lower costs, higher quality, better service, more innovation, and more competitive advantage.
Example 1: Reduce Supplier Concentration
One way to increase your bargaining power is to reduce the supplier concentration, which is the degree to which a few large suppliers dominate the market. A high supplier concentration means that suppliers have more leverage over buyers, as they can charge higher prices, offer lower quality, or limit the availability of their products.
To reduce supplier concentration, you can:
- Seek alternative sources of supply, such as new entrants, foreign suppliers, or online platforms.
- Diversify your supplier base, by working with multiple suppliers instead of relying on one or a few.
- Collaborate with other buyers, by forming alliances, cooperatives, or purchasing groups to increase your collective bargaining power.
For example, Bolt, an electric car manufacturer, reduced its supplier concentration by sourcing its batteries from multiple suppliers in different countries, instead of depending on a single supplier from South Korea. This gave Bolt more flexibility and bargaining power in terms of price, quality, and delivery.
Example 2: Increase Supplier Substitutability
Another way to increase your bargaining power is to increase the supplier substitutability, which is the degree to which alternative products or services can replace the supplier’s products or services. A high supplier substitutability means that buyers have more options and can easily switch to another supplier if they are dissatisfied with the current one.
To increase supplier substitutability, you can:
- Research and compare different suppliers and their offerings, such as price, quality, features, and service.
- Negotiate with multiple suppliers simultaneously, to create a competitive bidding environment and leverage the best deal.
- Invest in product development or innovation, to create your own substitutes or reduce your dependence on the supplier’s products.
For example, Starbucks increased its supplier substitutability by developing its own coffee roasting facilities and sourcing its own coffee beans from various regions around the world. This reduced its reliance on external coffee suppliers and gave it more control over its product quality and cost.
Example 3: Lower Switching Costs
A third way to increase your bargaining power is to lower the switching costs, which are the costs or difficulties associated with changing from one supplier to another. A high switching cost means that buyers are more likely to stay with their current supplier, even if they are unhappy with the price or quality.
To lower switching costs, you can:
- Standardize your product specifications or requirements, so that they are compatible with different suppliers and their products.
- Avoid long-term contracts or exclusivity agreements with suppliers, as they can limit your flexibility and mobility.
- Build relationships with potential suppliers, by maintaining regular communication, sharing information, and providing feedback.
For example, Walmart lowered its switching costs by standardizing its product specifications for various categories of goods. This enabled it to switch easily between different suppliers without compromising its product quality or consistency.
Example 4: Reduce Supplier’s Threat of Forward Integration
A fourth way to increase your bargaining power is to reduce the supplier’s threat of forward integration, which is the possibility that the supplier may enter the buyer’s industry and compete directly with them. A high threat of forward integration means that buyers face more competition and pressure from their suppliers.
To reduce the supplier’s threat of forward integration, you can:
- Strengthen your customer loyalty and brand reputation, by offering superior value, service, and experience to your customers.
- Differentiate your products or services from those of your suppliers, by adding unique features, benefits, or customization options.
- Establish strategic partnerships with your suppliers, by creating win-win situations, sharing risks and rewards, and aligning your goals and interests.
For example, Netflix reduced its supplier’s threat of forward integration by strengthening its customer loyalty and brand reputation through its original content production. This differentiated its service from those of its content providers (such as studios and networks), who could potentially enter the streaming market and compete with Netflix.
Example 5: Increase Industry’s Threat of Backward Integration
A fifth way to increase your bargaining power is to increase the industry’s threat of backward integration, which is the possibility that the buyer may enter the supplier’s industry and produce their own inputs. A high threat of backward integration means that suppliers face more competition and pressure from their buyers.
To increase the industry’s threat of backward integration, you can:
- Acquire or merge with your suppliers, to gain direct access to their resources, capabilities, and technologies.
- Develop or acquire your own production facilities or capabilities, to produce your own inputs or components.
- Outsource or contract your production to third-party providers, to reduce your dependence on your suppliers.
For example, Apple increased its industry’s threat of backward integration by acquiring or developing its own production facilities and capabilities for various components of its products, such as processors, displays, and cameras. This reduced its dependence on external suppliers and gave it more bargaining power in terms of price, quality, and innovation.
Tip
To increase your bargaining power with suppliers, you need to understand their strengths and weaknesses, as well as your own. You also need to communicate clearly and effectively with them, and build trust and mutual respect.
Bargaining Power of Suppliers: An Example from the Electric Car Industry
Bargaining power of suppliers is one of the five forces in Porter’s industry analysis framework that determines the attractiveness and profitability of an industry. It refers to the ability of suppliers to influence the price, quality, or availability of their products or services to their buyers.
In this post, we will look at an example of how bargaining power of suppliers affects the electric car industry, using a hypothetical case study of Bolt, a company that manufactures electric cars and operates in five countries.
Factors Affecting Bargaining Power of Suppliers
According to Porter, there are several factors that affect the bargaining power of suppliers, such as:
- Number of suppliers relative to buyers
- Dependence of a supplier’s sale on a particular buyer
- Switching cost for supplier’s products
- Availability of substitutes for the supplier’s products
- Uniqueness of supplier’s products or services (differentiation)
- Supplier’s threat of forward integration
- Industry threat of backward integration
These factors can be used to assess the bargaining power of suppliers in any industry.
Bargaining Power of Suppliers in the Electric Car Industry
Using the factors above, we can analyze the bargaining power of suppliers in the electric car industry, based on the case study of Bolt.
Number of suppliers relative to buyers
The number of suppliers relative to buyers is low in the electric car industry, as there are few suppliers that can provide the specialized components and materials needed for electric car production, such as batteries, motors, controllers, and chargers. This gives the suppliers more bargaining power, as they can charge higher prices or offer lower quality or availability to their buyers.
Dependence of a supplier’s sale on a particular buyer
The dependence of a supplier’s sale on a particular buyer is high in the electric car industry, as each supplier has a limited number of buyers that can use their products. For example, Bolt relies on LG Chem for its battery supply, which accounts for 80% of LG Chem’s sales in the electric car segment. This reduces the bargaining power of suppliers, as they have to maintain good relationships with their buyers and offer competitive prices and quality to retain their business.
Switching cost for supplier’s products
The switching cost for supplier’s products is high in the electric car industry, as changing suppliers would require significant investments in redesigning, testing, and certifying the electric car models. For example, Bolt would have to incur substantial costs and delays if it decided to switch from LG Chem to another battery supplier. This increases the bargaining power of suppliers, as they can lock in their buyers and deter them from switching to alternative sources.
Availability of substitutes for the supplier’s products
The availability of substitutes for the supplier’s products is low in the electric car industry, as there are few alternatives that can match the performance, efficiency, and safety of the current components and materials used for electric car production. For example, there are no viable substitutes for lithium-ion batteries that can offer the same energy density, durability, and cost-effectiveness. This increases the bargaining power of suppliers, as they can exploit their unique value proposition and charge premium prices or offer lower quality or availability to their buyers.
Uniqueness of supplier’s products or services (differentiation)
The uniqueness of supplier’s products or services is high in the electric car industry, as each supplier has developed its own proprietary technology, design, and know-how that differentiate its products from those of its competitors. For example, LG Chem has patented its battery cell chemistry and structure that give its batteries a competitive edge in terms of capacity, lifespan, and safety. This increases the bargaining power of suppliers, as they can leverage their differentiation and charge premium prices or offer lower quality or availability to their buyers.
Supplier’s threat of forward integration
The supplier’s threat of forward integration is low in the electric car industry, as it is unlikely that suppliers would enter the electric car manufacturing business themselves. This is because entering the electric car industry would require huge capital investments, regulatory approvals, distribution channels, and customer loyalty that are difficult to obtain for new entrants. Moreover, entering the electric car industry would create conflicts of interest with their existing buyers and jeopardize their current sales. This reduces the bargaining power of suppliers, as they have less leverage over their buyers and have to focus on their core competencies.
Industry threat of backward integration
The industry threat of backward integration is medium in the electric car industry, as some electric car manufacturers have attempted to produce some of their components and materials in-house or acquire some of their suppliers. For example, Tesla has built its own battery factory (Gigafactory) in partnership with Panasonic and has acquired Maxwell Technologies (a battery technology company) and Grohmann Engineering (a manufacturing automation company). This reduces the bargaining power of suppliers, as they face the risk of losing their buyers or being acquired by them.
Based on the analysis above, we can conclude that the bargaining power of suppliers is moderate in the electric car industry, as there are both factors that increase and decrease their influence over their buyers. The suppliers have more bargaining power due to the low number of suppliers, high switching cost, low availability of substitutes, and high uniqueness of their products. However, the suppliers have less bargaining power due to the high dependence of their sales on their buyers, low threat of forward integration, and medium threat of backward integration.
The bargaining power of suppliers affects the electric car industry in several ways. For example, it affects the cost structure, profitability, and competitive advantage of the electric car manufacturers. It also affects the innovation, quality, and availability of the components and materials used for electric car production. Therefore, it is important for the electric car manufacturers to monitor and manage their relationships with their suppliers and seek to reduce their dependence on them or increase their bargaining power over them.
Frequently Asked Questions
Q: What is bargaining power of suppliers?
A: Bargaining power of suppliers is the ability of suppliers to influence the terms of a deal or a negotiation in their favor, such as by raising prices, lowering quality, or reducing availability.
Q: What are the factors that affect bargaining power of suppliers?
A: The factors that affect bargaining power of suppliers are the number of suppliers, the uniqueness of their products, the switching costs, and the threat of forward or backward integration.
Q: How can buyers increase their bargaining power with suppliers?
A: Buyers can increase their bargaining power with suppliers by reducing supplier concentration, increasing supplier substitutability, lowering switching costs, reducing supplier’s threat of forward integration, and increasing industry’s threat of backward integration.
Q: What are the benefits of increasing bargaining power with suppliers?
A: The benefits of increasing bargaining power with suppliers are lower costs, higher quality, better service, more innovation, and more competitive advantage.
Q: What are the challenges of increasing bargaining power with suppliers?
A: The challenges of increasing bargaining power with suppliers are finding alternative sources of supply, negotiating with multiple suppliers, investing in product development or innovation, maintaining customer loyalty and brand reputation, and establishing strategic partnerships with suppliers.
References:
http://web.mit.edu/bwerner/www/papers/AResource-BasedViewoftheFirm.pdf
https://hbr.org/1979/03/how-competitive-forces-shape-strategy
https://corporatefinanceinstitute.com/resources/management/bargaining-power-of-suppliers/
Porter’s Five Forces
https://harappa.education/harappa-diaries/bargaining-power-of-suppliers/
https://en.wikipedia.org/wiki/Bargaining_power
Essential Topics You Should Be Familiar With:
- type of business example
- example of business to business
- example of b2b e commerce
- legal form of business example
- 10 types of entrepreneur with example
- example of business to consumer e commerce
- b2b example
- wholesale example
- wholesaling example
- types of merger
