Earn your certification as a Financial Modeling & Valuation Analyst (FMVA)®. Register today!

Bargaining Power of Suppliers

Pressure exerted by suppliers on companies

What is Bargaining Power of Suppliers?

The Bargaining Power of Suppliers, one of the forces in Porter’s Five Forces Industry Analysis Framework, is the mirror image of the bargaining power of buyers and refers to the pressure suppliers can put on companies by raising their prices, lowering their quality, or reducing the availability of their products. This framework is a standard part of business strategy.

The bargaining power of the supplier in an industry affects the competitive environment and profit potential of the buyers. The buyers are the companies and the suppliers are those who supply the companies.

The bargaining power of suppliers is one of the forces that shape the competitive landscape of an industry and helps determine the attractiveness of an industry. The other forces include competitive rivalry, bargaining power of buyers, the threat of substitutes, and the threat of new entrants.

 

 

Learn more in CFI’s Corporate & Business Strategy Course.

 

Types of Suppliers

Depending on the industry, there are various types of suppliers. A list of suppliers include:

  • Manufacturers and Vendors: Sells products to distributors, wholesalers, and retailers.
  • Distributors and Wholesalers: Purchases goods in medium/high quantity for sale to retailers or local distributors.
  • Independent Suppliers / Independent Craftspeople: Sells unique products directly to retailers or agents.
  • Importers and Exporters: Purchase products from manufacturers in one country and export to a distributor in a different country.
  • Drop shippers: Suppliers of products for different kinds of companies.

 

Determining Factors: Bargaining Power of Suppliers

There are five major factors when determining the bargaining power of suppliers:

  1. Number of suppliers relative to buyers
  2. Dependence of a supplier’s sale on a particular buyer
  3. Switching cost (switching costs of supplier)
  4. Availability of suppliers for immediate purchase
  5. Possibility of forward integration by suppliers

 

When is Bargaining Power of Suppliers High/Strong?

  • Switching costs of buyers are high
  • Threat of forward integration is high
  • Small number of suppliers relative to buyers
  • Low dependence of a supplier’s sale on a particular buyer
  • Switching costs of suppliers are low
  • Substitutes are unavailable
  • Buyer relies heavily on sales from suppliers

 

When is Bargaining Power of Suppliers is Low/Weak?

  • Switching costs of buyers are low
  • Threat of forward integration is low
  • Large number of suppliers relative to buyers
  • High dependence of a supplier’s sale on a particular buyer
  • Switching costs of suppliers are high
  • Substitutes are available
  • Buyer does not rely heavily on sales from suppliers

 

Purpose of Bargaining Power of Suppliers Analysis

When doing an analysis of supplier power in an industry, low supplier power creates a more attractive industry and increases profit potential as buyers are not constrained by suppliers. High supplier power creates a less attractive industry and decreases profit potential as buyers rely more heavily on suppliers.

Learn more in CFI’s Corporate & Business Strategy Course.

 

Bargaining Supplier Power in the Fast Food Industry

To determine whether McDonald’s face high or low bargaining power from suppliers in the fast food industry, consider the following analysis:

  1. The number of suppliers relative to buyers: There are a significant amount of suppliers relative to buyers (companies). Therefore, supplier power is low.
  2. Dependence of a supplier’s sale on a particular buyer: If we assume that suppliers have few customers (i.e. a small/medium-sized firm), they are likely to give into the demands of buyers. On the other hand, if we assume suppliers have several customers, they have more power over buyers. Since we do not know whether these suppliers have few or many buyers, a middle ground would be a reasonable answer. Therefore, supplier power is medium.
  3. Switching costs: Since there are a significant amount of suppliers in the fast food industry, switching costs are low for buyers. Supplier power is low.
  4. Forward Integration: There is low forward integration in the fast food industry.

 

Overall, McDonald’s faces low bargaining power of suppliers. Therefore, supplier power is not an issue for McDonald’s in the fast food industry.

However, bargaining power of suppliers alone does not determine the overall attractiveness of an industry. The remaining forces (bargaining power of buyers, rivalry among existing competitors, the threat of new entrants, and the threat of substitutes) must be taken into consideration when determining overall industry attractiveness.

 

More Resources

Thank you for reading this guide on the bargaining power of suppliers. CFI is the official provider of the FMVA Financial Analyst Designation, using financial modeling courses to turn anyone into a great financial analyst.

  • Absolute Advantage
  • Market Economy
  • Monopoly
  • Law of Supply

CFI's Corporate & Business Strategy Course

Learn to perform Strategic Analysis in CFI’s online Business Strategy Course! The comprehensive course covers all the most important topics in corporate strategy!