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The rivals diverse strategies

  • It is concentrated or purchases in large volumes. Large volume buyers are particularly potent forces if heavy fixed costs characterize the industry—as they do in metal containers, corn refining, and bulk chemicals, for example—which raise the stakes to keep capacity filled.
  • The products it purchases from the industry are standard or undifferentiated. The buyers, sure that they can always find alternative suppliers, may play one company against another, as they do in aluminum extrusion.
  • The products it purchases from the industry form a component of its product and represent a significant fraction of its cost. The buyers are likely to shop for a favorable price and purchase selectively. Where the product sold by the industry in question is a small fraction of buyers’ costs, buyers are usually much less price sensitive.
  • It earns low profits, which create great incentive to lower its purchasing costs. Highly profitable buyers, however, are generally less price sensitive (that is, of course, if the item does not represent a large fraction of their costs).
  • The industry’s product is unimportant to the quality of the buyers’ products or services. Where the quality of the buyers’ products is very much affected by the industry’s product, buyers are generally less price sensitive. Industries in which this situation obtains include oil field equipment, where a malfunction can lead to large losses, and enclosures for electronic medical and test instruments, where the quality of the enclosure can influence the user’s impression about the quality of the equipment inside.
  • The industry’s product does not save the buyer money. Where the industry’s product or service can pay for itself many times over, the buyer is rarely price sensitive; rather, he is interested in quality. This is true in services like investment banking and public accounting, where errors in judgment can be costly and embarrassing, and in businesses like the logging of oil wells, where an accurate survey can save thousands of dollars in drilling costs.
  • The buyers pose a credible threat of integrating backward to make the industry’s product. The Big Three auto producers and major buyers of cars have often used the threat of self-manufacture as a bargaining lever. But sometimes an industry engenders a threat to buyers that its members may integrate forward.

Most of these sources of buyer power can be attributed to consumers as a group as well as to industrial and commercial buyers; only a modification of the frame of reference is necessary. Consumers tend to be more price sensitive if they are purchasing products that are undifferentiated, expensive relative to their incomes, and of a sort where quality is not particularly important.

The buying power of retailers is determined by the same rules, with one important addition. Retailers can gain significant bargaining power over manufacturers when they can influence consumers’ purchasing decisions, as they do in audio components, jewelry, appliances, sporting goods, and other goods