Explanation
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry. Supplier is weak if:
- Substitutes are available and easy to access
- Suppliers are small and fragmented
- The industry is important to the seller
- The sellers' product or service is not an important of the industry's value chain
- The sellers' product or service is undifferentiated
- There are no significant switching costs
- There is no threat of forward integration.
Suppliers may have more power:
- If they are in concentrated numbers compared to buyers.
- If there are high switching costs associated with a move to another supplier.
- If they are able to integrate forward or begin producing the product themselves.
- If they have specific expertise or technology needed to manufacture goods.
- If their product is highly differentiated.
- If there are many buyers and none make up significant portions of sales.
- If there are no substitutes available.
- If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2
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