Porter’s Five Forces- Bargaining Power of Suppliers — Valuation Academy

Porter’s Five Forces- Bargaining Power of Suppliers

Since its introduction in 1979, Porter’s Five Forces has become the de facto framework for industry analysis. The five forces measure the competitiveness of the market deriving its attractiveness. The analyst uses conclusions derived from the analysis to determine the company’s risk from in its industry (current or potential). The five forces are (1) Threat of New Entrants(2) Threat of Substitute Products or Services(3) Bargaining Power of Buyers(4) Bargaining Power of Suppliers(5) Competitive Rivalry Among Existing Firms. Don’t forget to check out our example of the Five Forces Model of Coca-Cola company.

4. Bargaining Power of Suppliers: The more powerful a seller is relative to the buyer, the more influence the seller has. This influence can be used to reduce the profits of the buyer through more advantageous pricing, limiting quality of the product or service, or shifting some costs onto the buyer (e.g. shipping costs). Suppliers are powerful if:

    • Suppliers are concentrated or differentiated: If there are only a few suppliers (or one) in the market, the suppliers will have more leverage because of the lack of available alternatives.
    • Significant costs involved in switching suppliers: Customers are less likely to switch suppliers if there are large costs associated with switching. For example, professional video editors are less likely switch from one system (Final Cut Pro) to another (Adobe Premier Pro) because of the costs associated with purchasing new hardware.
    • Suppliers can forward integrate: If a supplier has the power to or threatens to forward integrate, the buyer may be forced to accept influence from the supplier.