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Technological innovation

Powerful suppliers & buyers

Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased 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, soft drink concentrate producers have contributed to the erosion of profitability of bottling companies because the bottlers, facing intense competition from powdered mixes, fruit drinks, and other beverages, have limited freedom to raise their prices accordingly. Customers likewise can force down prices, demand higher quality or more service, and play competitors off against each other—all at the expense of industry profits.

The power of each important supplier or buyer group depends on a number of characteristics of its market situation and on the relative importance of its sales or purchases to the industry compared with its overall business.

supplier group is powerful if:

  • It is dominated by a few companies and is more concentrated than the industry it sells to.
  • Its product is unique or at least differentiated, or if it has built up switching costs. Switching costs are fixed costs buyers face in changing suppliers. These arise because, among other things, a buyer’s product specifications tie it to particular suppliers, it has invested heavily in specialized ancillary equipment or in reaming how to operate a supplier’s equipment (as in computer software), or its production lines are connected to the supplier’s manufacturing facilities (as in some manufacture of beverage containers).
  • It is not obliged to contend with other products for sale to the industry. For instance, the competition between the steel companies and the aluminum companies to sell to the can industry checks the power of each supplier.
  • It poses a credible threat of integrating forward into the industry’s business. This provides a check against the industry’s ability to improve the terms on which it purchases.
  • The industry is not an important customer of the supplier group. If the industry is an important customer, suppliers’ fortunes will be closely tied to the industry, and they will want to protect the industry through reasonable pricing and assistance in activities like R&D and lobbying.