7 Power of Suppliers Examples That Can Impact Your Business
The power of suppliers is one of the five forces that shape the competitive environment of an industry. It refers to the ability of suppliers to influence the price, quality, availability, or delivery of the inputs that a business needs to produce its goods or services. Suppliers can have a significant impact on the profitability and performance of a business, especially if they have high bargaining power.
Key Takeaways
The power of suppliers is one of the five forces that shape the competitive environment of an industry.
The power of suppliers can affect the profitability and performance of a business by influencing the cost and quality of its inputs.
The power of suppliers depends on various factors, such as the number of suppliers, the uniqueness of their products or services, the switching costs for buyers, the threat of forward or backward integration, and the availability of substitutes.
A business can reduce the power of suppliers by diversifying the sources of supply, seeking alternative inputs, increasing vertical or horizontal integration, increasing customer loyalty or differentiation, increasing bargaining power or collaboration with other buyers, and increasing flexibility or adaptation.
Bargaining power is the relative advantage that one party has over another in a negotiation. It depends on various factors, such as the number of suppliers, the uniqueness of their products or services, the switching costs for buyers, the threat of forward or backward integration, and the availability of substitutes.
In this article, we will look at seven power of suppliers examples that can affect your business in different ways. We will also provide some tips on how to reduce the power of suppliers and increase your own bargaining power.
1: Oil and Gas Industry
The oil and gas industry is highly dependent on the supply of crude oil and natural gas from various regions around the world. The price and availability of these commodities are influenced by factors such as geopolitics, environmental regulations, natural disasters, production capacity, and demand. The power of suppliers in this industry is very high, as they can affect the cost and profitability of oil and gas companies.
One way to reduce the power of suppliers in this industry is to diversify the sources of supply and seek alternative energy sources. For example, some oil and gas companies are investing in renewable energy projects, such as solar, wind, and biofuels, to reduce their reliance on fossil fuels.
2: Automobile Industry
The automobile industry relies on a large number of suppliers for various components, such as engines, transmissions, tires, batteries, electronics, and software. The power of suppliers in this industry varies depending on the type and importance of the component. For example, suppliers of engines and transmissions have more power than suppliers of tires and batteries, as they provide more value-added and differentiated products that are harder to replace.
One way to reduce the power of suppliers in this industry is to increase the level of vertical integration and produce more components in-house. For example, some automobile companies are developing their own electric vehicles and batteries to reduce their dependence on external suppliers.
3: Retail Industry
The retail industry depends on a variety of suppliers for different products, such as clothing, footwear, electronics, groceries, and cosmetics. The power of suppliers in this industry depends on the degree of differentiation and brand loyalty of their products. For example, suppliers of luxury goods and exclusive brands have more power than suppliers of generic or commoditized products, as they can charge higher prices and attract more customers.
One way to reduce the power of suppliers in this industry is to increase the level of horizontal integration and acquire or partner with other retailers or distributors. For example, some retail companies are expanding their online presence and delivery capabilities to reach more customers and compete with e-commerce platforms.
4: Pharmaceutical Industry
The pharmaceutical industry relies on a number of suppliers for raw materials, active ingredients, packaging materials, equipment, and services. The power of suppliers in this industry depends on the degree of innovation and regulation of their products. For example, suppliers of patented drugs and specialized equipment have more power than suppliers of generic drugs and standard equipment, as they can offer more value-added and protected products that are harder to replicate.
One way to reduce the power of suppliers in this industry is to increase the level of research and development and create new drugs or devices that can offer better outcomes or lower costs. For example, some pharmaceutical companies are investing in biotechnology and gene therapy to develop novel treatments for various diseases.
5: Restaurant Industry
The restaurant industry depends on a range of suppliers for food ingredients, beverages, equipment, furniture, and services. The power of suppliers in this industry depends on the degree of quality and availability of their products. For example, suppliers of organic food and premium beverages have more power than suppliers of conventional food and generic beverages, as they can offer more quality and differentiation that can attract more customers.
One way to reduce the power of suppliers in this industry is to increase the level of customer loyalty and differentiation of your own products. For example, some restaurant companies are creating their own brands and menus that can offer unique experiences or values that can distinguish them from competitors.
6: Airline Industry
The airline industry depends on a few major suppliers for aircrafts, engines, fuel, and maintenance services. The power of suppliers in this industry is very high, as they can affect the cost and quality of air travel. For example, suppliers of aircrafts and engines have more power than suppliers of fuel and maintenance services, as they provide more critical and customized products that are harder to switch.
One way to reduce the power of suppliers in this industry is to increase the level of bargaining power and collaboration with other buyers. For example, some airline companies are forming alliances and partnerships with other airlines to increase their market share and negotiate better deals with suppliers.
7: Software Industry
The software industry relies on a number of suppliers for hardware, platforms, tools, libraries, and services. The power of suppliers in this industry depends on the degree of compatibility and innovation of their products. For example, suppliers of operating systems and cloud platforms have more power than suppliers of hardware and tools, as they provide more essential and integrated products that are harder to substitute.
One way to reduce the power of suppliers in this industry is to increase the level of flexibility and adaptation of your own products. For example, some software companies are developing their own cross-platform and open-source solutions that can run on multiple devices and environments.
Tips
- To reduce the power of suppliers, try to find ways to increase your own bargaining power or decrease their dependence on them.
- To increase your bargaining power, try to leverage your size, volume, reputation, or relationships with suppliers.
- To decrease your dependence on suppliers, try to find alternative sources, inputs, or solutions that can offer similar or better value.
Power of Suppliers in the Electric Car Industry
The electric car industry is one of the fastest growing and most competitive sectors in the world. However, it also faces some challenges, especially from the bargaining power of suppliers. Suppliers are the providers of any direct input into the product, such as raw materials, components, labor, distribution channels, and marketing. The bargaining power of suppliers refers to the ability of suppliers to influence the terms and conditions of the supply agreement, such as price, quality, quantity, delivery time, and service level.
The bargaining power of suppliers in the electric car industry depends on several factors, such as the number of suppliers relative to buyers, the dependence of a supplier’s sale on a particular buyer, the switching cost, the availability of substitutes, and the supplier’s threat of forward integration. These factors affect the costs, differentiation, and risk of electric car manufacturers. For example, there are only a few suppliers of lithium-ion batteries, which are essential for electric cars, and they have a high degree of control over the price and availability of these batteries. This increases the costs and risk for electric car manufacturers and reduces their differentiation from competitors that use the same batteries.
Electric car manufacturers can adopt various strategies to cope with or reduce the bargaining power of suppliers. Some of these strategies are diversifying suppliers, developing suppliers, integrating suppliers, or substituting suppliers. These strategies can help electric car manufacturers to increase their bargaining power and reduce their dependence and switching costs, improve their supplier relationships and loyalty, enhance their supply quality and reliability, increase their control over their supply chain, reduce their costs and risks, and increase their flexibility and innovation.
Frequently Asked Questions
Q: What is the power of suppliers?
A: The power of suppliers is the ability of suppliers to influence the price, quality, availability, or delivery of the inputs that a business needs to produce its goods or services.
Q: What factors affect the power of suppliers?
A: Some factors that affect the power of suppliers are the number of suppliers, the uniqueness of their products or services, the switching costs for buyers, the threat of forward or backward integration, and the availability of substitutes.
Q: How can a business reduce the power of suppliers?
A: Some ways that a business can reduce the power of suppliers are to diversify the sources of supply, seek alternative inputs, increase vertical or horizontal integration, increase customer loyalty or differentiation, increase bargaining power or collaboration with other buyers, and increase flexibility or adaptation.
References:
http://web.mit.edu/bwerner/www/papers/AResource-BasedViewoftheFirm.pdf
https://hbr.org/1979/03/how-competitive-forces-shape-strategy
https://harappa.education/harappa-diaries/bargaining-power-of-suppliers/
https://corporatefinanceinstitute.com/resources/management/bargaining-power-of-suppliers/
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