Suppliers can exert bargaining power over participants in an in-dustry by threatening to raise prices or reduce the quality of pur-chased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, for example, chemical companies have contributed to the erosion of profitability of contract aerosol packagers because the packagers, facing intense competition from self-manufacture by their buyers, accordingly have limited freedom to raise their prices.
The conditions making suppliers powerful tend to mirror those making buyers powerful. A supplier group is powerful if the follow-ing apply:
// is dominated by a few companies and is more concentrated than the industry it sells to. Suppliers selling to more fragmented buyers will usually be able to exert considerable influence in prices, quality, and terms.
It is not obliged to contend with other substitute products for sale to the industry. The power of even large, powerful suppliers can be checked if they compete with substitutes. For example, suppliers producing alternative sweeteners compete sharply for many applica-tions even though individual firms are large relative to individual buyers.
The industry is not an important customer of the supplier group. When suppliers sell to a number of industries and a particular industry does not represent a significant fraction of sales, suppliers are much more prone to exert power. If the industry is an important customer, suppliers’ fortunes will be closely tied to the industry and they will want to protect it through reasonable pricing and assistance in activities like R&D and lobbying.
The suppliers’ product is an important input to the buyer’s bus-iness. Such an input is important to the success of the buyer’s man-ufacturing process or product quality. This raises the supplier power. This is particularly true where the input is not storable, thus enabling the buyer to build up stocks of inventory.
The supplier group’s products are differentiated or it has built up switching costs. Differentiation or switching costs facing the buyers cut off their options to play one supplier against another. If the supplier faces switching costs the effect is the reverse.
The supplier group poses a credible threat of forward integra-tion. This provides a check against the industry’s ability to improve the terms on which it purchases.
We usually think of suppliers as other firms, but labor must be recognized as a supplier as well, and one that exerts great power in many industries. There is substantial empirical evidence that scarce, highly skilled employees and/or tightly unionized labor can bargain away a significant fraction of potential profits in an industry. The principles in determining the potential power of labor as a supplier are similar to those just discussed. The key additions in assessing the power of labor are its degree of organization, and whether the sup-ply of scarce varieties of labor can expand. Where the labor force is tightly organized or the supply of scarce labor is constrained from growing, the power of labor can be high.
The conditions determining suppliers’ power are not only sub-ject to change but also often out of the firm‘s control. However, as with buyers’ power the firm can sometimes improve its situation through strategy. It can enhance its threat of backward integration, seek to eliminate switching costs, and the like. (Chapter 6 will ex-plore some implications of suppliers’ power for purchasing strategy more fully.)
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.