Bargaining Strength(Power) of suppliers refers to the relative influence and leverage that suppliers have in a particular market or industry.

What is the Bargaining strength(power) of Suppliers?

The bargaining power of suppliers is their ability to sell their products at the prices and terms that are favorable to them.

In an industry where suppliers have high bargaining power, they will be able to increase their prices without much pushback. They can also lower the quality of the products, to reduce its cost of production, and they can dictate payment and shipping terms that are in their favor.

The bargaining strength or power of suppliers refers to the relative influence and leverage that suppliers have in a particular market or industry. It is determined by several factors that impact their ability to negotiate favorable terms, prices, and conditions with buyers.

Here are some key factors that contribute to the bargaining strength of suppliers :

Concentration of suppliers :

When there are few suppliers dominating the market or industry, they often have stronger bargaining power. They can dictate terms, prices, and conditions as buyers have limited alternative sources to choose from.

Uniqueness of products or services :

If suppliers offer unique, innovative, or highly differentiated products or services, they have an advantage in negotiations. Buyers may be willing to pay a premium or accept less favorable terms to obtain those exclusive offerings.

Availability of substitutes :

Suppliers with products or services that have limited substitutes or alternatives can have more bargaining power. Buyers have less flexibility to switch suppliers, giving suppliers the upper hand in negotiations.

Supplier switching costs :

High switching costs for buyers to switch from one supplier to another can strengthen the bargaining power of suppliers. If it is expensive or time-consuming for buyers to change suppliers, they may be more dependent on existing suppliers and have limited negotiation power.

Supplier reputation and relationships :

Suppliers with a strong reputation for quality, reliability, and customer service can have greater bargaining power. Buyers may value the relationship and be more willing to accept higher prices or less favorable terms to maintain a trusted supplier partnership.

Supply scarcity or uniqueness :

If the supply of a particular product or resource is scarce or limited, suppliers can exert more bargaining power. Buyers may be forced to accept higher prices or less favorable terms due to the limited availability of the desired product or resource.

Forward integration potential :

Suppliers with the potential to integrate forward into the value chain by becoming competitors to their buyers may have increased bargaining power. The threat of competition can give suppliers an advantage in negotiations, as buyers may be more willing to meet their demands to avoid future competition.

Industry dynamics :

The overall dynamics of the industry can impact the bargaining power of suppliers. For example, in an industry with low competition among suppliers or high demand for their products/services, suppliers may have stronger bargaining power.

Example of Bargaining Power of Suppliers :

The petroleum manufacturing industry in energy, known as oilfield services, is a competitive industry with major multi-product suppliers organized by decentralized subsidiary units. Suppliers in the oilfield services industry include major players, Baker Hughes, Schlumberger, and Halliburton, and smaller suppliers that sell products and services to oil & gas exploration companies, refiners, and pipeline companies.

The petroleum manufacturing industry in energy, known as oilfield services, is a competitive industry with major multi-product suppliers organized by decentralized subsidiary units. Suppliers in the oilfield services industry include major players, Baker Hughes, Schlumberger, and Halliburton, and smaller suppliers that sell products and services to oil & gas exploration companies, refiners, and pipeline companies.

Oil & gas prices, which fluctuate with changing supply levels, influence industry supply and demand.

Unless these oilfield services suppliers offer a particular product not offered by their competitors, oil & gas customers will face moderate-strength industry suppliers in a stable market. There are at least three formidable suppliers in the oil & gas industry, which is less than one or two controlling the industry. Because these suppliers offer differentiated products rather than commodities, they aren’t considered weak suppliers.

However, if these customers have extensive purchasing history of products with a supplier or the goods are custom-made, the cost of switching from one supplier to another for certain products may be high, increasing the bargaining power of the supplier.

Product substitution is probably unlikely unless new technology makes this possible.

In this example, the buyer may find a bargain supply offered by suppliers in this highly cyclical industry if the industry is experiencing a cycle of high supply and low demand, which decreases the bargaining power of suppliers.