Costs and the pace of investment needed to compete, as well as the arrival of other markets with new capacity and cash flows that shake up competition, in this publication I will move on to the second threat facing the industrial sector.
For those of you who read my previous contribution, you already know that the first force is the threat of new entrants that generate capacity and want to increase market share by putting pressure on prices.
The threat of new entrants puts a limit on the profit potential of the industry, when the threat is high, entrants must keep their prices low and accelerate their investments to deter new entrants, below we will discuss the bargaining power of suppliers as a threat.
Bargaining power of suppliers, this force refers to the bargaining power of suppliers, who define in part the positioning of a company in the market, according to their bargaining power with those who supply them with the inputs for the production of their goods, for example, the fewer the number of suppliers, the greater their bargaining power, as there is not so much supply of inputs, they can easily increase their prices.
The second force is the power of suppliers who capture more value by increasing prices, limiting quality and services, and shifting costs among industry participants, such a situation can occur due to the industry's ability to access multiple suppliers to purchase its materials and inputs and therefore achieve lower costs and may have competitive advantages over other competitors.
Having bargaining power allows suppliers better prices, but also better delivery times, compensation, payment methods, in a company the bargaining power of suppliers can hinder their competitiveness, so it is another factor to take into account, the bargaining power of suppliers will depend on market conditions, other suppliers and the importance of the product they supply, and the most significant variables of this force are as follows:
a) Concentration of suppliers: It is necessary to identify whether most of the supply of inputs or resources for the companies in the sector is carried out by a few or many companies.
b) Importance of volume to suppliers: This is the importance of the volume of purchases made by companies in the sector from suppliers, i.e. sales to the sector in relation to total sales of suppliers.
c) Differentiation of inputs: Whether or not the products offered by suppliers are differentiated.
d) Switching costs: Refers to the costs incurred by the buyer in switching suppliers. The existence of high switching costs can give relative power to suppliers.
e) Availability of substitute inputs: The existence, availability and access to substitute inputs that, due to their characteristics, can replace traditional inputs.
f) Impact of inputs: Identifies whether the inputs offered maintain, increase or improve the quality of the good.
As can be understood from the above variables, the supplier will be in an advantageous position if the product it offers is scarce and buyers need to acquire it for their processes, if on the contrary, the product it offers is standard and easily available in the market, i.e. there are a large number of suppliers, its influence will be diminished, in this case the buyer will be in a good position to choose the best offer.