Bargaining Power of Suppliers

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Bargaining Power of Suppliers

Bargaining Power of Suppliers

Bargaining Power of Suppliers Suppliers’ bargaining power can reduce a firm’s options and ultimately its profitability. Suppliers often strive to “lock in” customers through the use of systems (and other mechanisms). For example, there are many options for individuals to back up their laptop data, including many “cloud” options. The power of any one supplier is low because there are a number of options. But Apple’s operating system enables easy creation of backups and increases Apple’s bargaining power. Millions of customers find it easy to use the iCloud, and they do.

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The force of bargaining power is strongest when a firm has few suppliers from which to choose, the quality of supplier inputs is crucial to the finished product, or the volume of purchases is insignificant to the supplier. For example, steel firms lost some of their bargaining power over the automobile industry because car manufacturers developed technologically advanced quality control systems for evaluating the steel they purchase. Manufacturers can now reject steel from suppliers when it does not meet the required quality levels.

Through the Internet, firms continue to provide information for free as they attempt to increase their share of visitors to their Web sites and gather information about them. This decision reduces the power of information sup- pliers and necessitates finding new ways for content providers to develop and distribute information. Many Internet firms are integrating backward or sideways within the industry, that is, creating their own information supply and reselling it to other Internet sites. Well‐funded firms simply acquire these content providers, which is often quicker than building the capability from scratch. One example of this was Amazon.com’s purchase of Zappos, the shoe retailer. More recently, in 2015 LinkedIn acquired online learning company Lynda.com to add a capability to offer professional development to the company’s business of networking, recruitment, and advertising.

Threat of Substitute Products The potential of a substitute product in the marketplace depends on the buyers’ willingness to substitute, the relative price‐to‐performance ratio of the substitute, and the level of switching costs a buyer faces. Information resources can create advantages by reducing the threat of substitution. Substitutes that cause a threat come from many sources. Internal innovations can cannibalize existing revenue streams for a firm. For example, new iPhones motivate current customers to upgrade, essentially cannibalizing the older product line revenue. Of course, this is also a preemptive move to keep customers in the iPhone product family rather than to switch to another competi- tor’s product. The threat might come from potentially new innovations that make the previous product obsolete. Tablets have reduced the market for laptops and personal computers. GPS systems have become substitutes for paper maps, digital cameras have made film and film cameras obsolete, and MP3 music has sharply reduced the market for vinyl records, record players, CDs, and CD players. Free Web‐based applications are a threat to soft- ware vendors who charge for their products and who do not have Web‐based delivery. Revolutions of many kinds and levels of maturity seem to be lurking everywhere. Cloud services are a substitute for data centers. Uber offers a substitute for taxicabs. Managers must watch for potential substitutes from many different sources to fully manage this competitive threat.

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