The Five Forces of the Porter Model: Supplier's Power

This is the third in a series of articles about the Porter Five Forces Model for Market Positioning. This article is preceded by an article with the title "Porter's Five Forces Model: The Degree of Rivalry" by the same author. To best grasp the content of this article it is advised to first read the preceding articles.

The bargaining power of suppliers constitutes one of the five forces that influence the amount of competition that is present in an industry or industry sector.

The bargaining power of suppliers as meant in the five forces model of Porter is the ability of suppliers of goods and services to influence the establishment of prices of these commodities.

In this article one of the five forces namely the power of suppliers will be discussed.

The Five Forces

By now it should be clear that the five forces model is focused on exploiting the opportunities and mitigating threats in the business environment outside the business.

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services.

In a monopolistic or quasi-monopolistic supplier environment suppliers will be in a position to use their power to obtain better prices that normally result in elevated profit margins that can be negative to the market as a whole. This can be further explained by evaluating the classic supply and demand curve in a micro economic environment. If the supply is controlled for any given level of demand the rule is that the buyers will be prepared to pay a higher price for the commodity.

The power of the suppliers is influenced by a number of factors. In a really competitive market, no single supplier will have the power to set the price of any commodity. It should therefore be clear that the more concentrated and controlled the supply of any commodity, the more power the supply agent will be able to exercise in the market. It is illegal in most countries for suppliers to explicitly or implicitly form a cartel, association or alliance to control prices. This can be achieved by so called price binding agreements or through controlling the supply of the article of trade. This in turn will result in too few goods being sought by too many buyers, resulting in an artificial increase in price.

Advantages could result for any supplier whose goods are unique or highly differentiated, especially if there are only a limited number or no substitutes available. , In situations where suppliers are forward integrated by acquiring the companies in its distribution chain in order to acquire the channels of distribution of its production to achieve greater economies of scale or an increase in market share similar advantages

The power of suppliers will also be increased in situations where a high cost is associated with switching from one supplier to another. Suppliers in these positions normally demand prices that are significantly higher than normal.

Conclusion

The complexities of micro economic demand and supply theory are significantly increased by market specific dimensions as explained by the bargaining power in the Porter five factor model.

The bargaining power of suppliers are normally higher than expected in situations where the market primarily consists of a few sizeable suppliers rather than a fragmented source of supply. Another factor that significantly influences the power of suppliers is the importance of volume to supplier. In cases where volume is less important the bargaining power of the suppliers will be higher. As the suppliers customers are fragmented, so their bargaining power will be improved as the customers may not be aware of the conditions given to other customers. The threat to buyers of forward integration by suppliers is especially increased in an industry where the buying industry has a higher profitability than the supplying industry and forward integration provides the opportunity for economies of scale for the supplier.

This article is followed by another article with the title "The Five Forces of the Porter Model: Buyer's Power" by the same author.

© Carl Marx