BUSINESS POLICY & STRATEGY MANAGEMENT BARGAINING POWER OF BUYERS SUBMITTED BY:SUBMITTED TO : AMAN SUDDr. JAYANT ANURAG AGRAWALMAHOPATRA ANUJ ANGIRISH PARTH CHADHA
INTRODUCTION• The Bargaining power of the buyers in an industry constitutes the ability of the buyers, individually or collectively, to• force a reduction in the prices of the products or services or• to demand a higher quality or better service or• seek more value for their purchases in any way.
PORTER’S FIVE FORCES ANALYSIS• Porters Five Forces is a framework for industry analysis & business strategy development formed by Michael E. Porter of Harvard Business School in 1979.• It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity & therefore attractiveness of a market.
PORTER’S FIVE FORCESANALYSIS (CONTD.)• The bargaining power of buyers comprises one of the five forces that determine the intensity of competition in an industry.• The others are barriers to entry, the threat of substitutes, the bargaining power of suppliers & industry rivalry.
DETERMINANTS OF BARAGAINING POWER OF BUYERS• To analyze the Bargaining Power of buyers, a few general criterias of a particular industry have to be considered & then reviewed, such as : 1)The differentiation of outputs 2)Switching costs 3)Presence of Substitutes 4)Industry concentration relative to buyer concentration 5)Importance of volume to buyers
6) Cost relative to total buyer purchases7) Impact of outputs on the cost of differentiation8) Buyer information about supplier productsThese are explained in detail in the following slides
1) THE DIFFERENTIATION OF OUTPUTS• If the buyers perceive that the products or services of one company are different from the competitors & if the buyer values that difference then the company have some protection during negotiations,• however, if the buyer perceives that the products/services are essentially the same as the competitors then they will have more bargaining power.• Most Marketing is aimed at differentiating a brand or product from that of the consumers
EXAMPLE :• CADBURY BOURNVILLE With the special packaging & impressive advertisement campaign, Cadbury has successfully differentiated Bournville from other chocolates in the market.
2) SWITCHING COSTS• A switching cost is a cost that a buyer would incur if they ceased buying from a company & started buying from one of the competitors. These costs could be anything like:• The cost for legal to prepare & review of new contracts• The cost of stocking spare parts specific to your competitors products• The cost of adopting a new ordering systems• The cost of retraining your employees
EXAMPLE :• You are using a SAMSUNG mobile and then you change your brand of Bluetooth headset to NOKIA. This will compel you to buy a new NOKIA mobile as NOKIA headsets generally don’t work with SAMSUNG mobiles.• The cost of switching brand of headset is the cost of buying a new mobile.
3) PRESENCE OF SUBSTITUTES• A substitute is a different product or service that can be used instead of your industries products or services. A substitute is not a competitor’s version of your product. Substitutes are typically products/services that are not in your industry.
EXAMPLE :• Electricity for petrol as a fuels in cars• Hiring a gardener instead of buying a lawnmower• Hiring a cleaner instead of buying a vacuum cleaner• Shopping on the internet instead of going to the shopping center
4) INDUSTRY CONCENTRATIONRELATIVE TO BUYER CONCENTRATION• By measuring the ratio of the No. of competitors to the no. of buyers, We get an idea of the likelihood that buyers can shop around & place you under commercial pressure.• As the number of buyers increases relative to the number of competitors the negotiating power of anyone buyer deceases.• Conversely as the number of buyers reduces relative to the number of competitors the power of the buyer increases
EXAMPLE :• When DVD’s were first released you could only get them in a few specialty shops who could set DVD prices, now, DVD’s are stocked in supermarkets, record shops, service stations, news agents this has significantly reduced the ability of any one stockist to set price.
5) IMPORTANCE OF VOLUME TO BUYERS• Buyers who buy only a few of one particular company’s products each year are less likely to shop around for price on those items.• In general terms the more frequent a particular company’s buyer purchases and the more they purchase each time the more they are likely to negotiate on price, quality and service.
EXAMPLE :• If a person has to buy one laptop, he will get a few prices & then place an order.. But if the same person has to buy 100 laptops, then he is more likely to ask “What can you do for me?”
6) COST RELATIVE TO TOTAL BUYERPURCHASES• Buyers tend to prioritize their negotiation efforts in the areas where they spend the most money. If your product or service is a large expense for your customer, then you are more likely to be the focus of their negotiations.• However, if your product or service is insignificant to your customers overall purchasing you are less likely to be the focus of their negotiations.
EXAMPLE :• A hospital would be expected to spend more time in negotiation with medical suppliers than with the glazier who was called to repair a cracked window, or the plumber who was called to clean a blocked drain.
7) IMPACT OF OUTPUTS ON THECOST OF DIFFERENTIATION• This is an interesting area for consideration, and it boils down to a simple question “Does a unique quality of your product or service help your customer to differentiate their product or service?”• If your product is a key component of your customer’s product then your customer will have less bargaining power.
EXAMPLE :• Consumers are becoming increasingly aware that their computer has an “Intel inside” as this awareness increases, some consumers may be wary of computers that don’t have an “Intel inside”.• Computer manufacturers will seek to ensure that they have an “Intel Inside” which will give some negotiating power back to Intel.
8) BUYER INFORMATION ABOUTSUPPLIER PRODUCTS• This tends to relate to technical products, where the technology in the product is different to the technology of the industry.
EXAMPLE :• In a factory where equipments about which no technical know how is available. Only what it does. This decreases the negotiating power of the buyer.• The buyer is not likely to negotiate on the price of the annual maintenance contract, unless a significant increase is asked for.• The buyer is restricted in asking for a price from a competitor as he probably don’t really know what the maintenance involves.
HIGH BARGAINING POWER OF BUYERS• High Bargaining power constitutes a negative feature for existing firms or new entrants of an industry.• Buyers will use their power to extract better terms (higher profit margins or ) at the expense of the market.• High bargaining power is favorable for the customers.
CONDITIONS FOR HIGH BARGAINING POWER OF BUYERS1) When buyers are few in number2) When Large Orders are placed3) When Alternative Suppliers are available & are willing to supply at lower costs or favourable selling conditions
CONDITIONS FOR HIGH BARGAINING POWER OF BUYERS (CONTD.)4) When the Switching Costs of buyers from one supplier to another is low.5) When the buyer charges low prices & is extremely sensitive to price changes.
EXAMPLES OF INDUSTRIES WITH HIGH BARGAINING POWER OF BUYERS• Defense contractors have a limited set of politically motivated buyers (governments).• Sub contractors to car makers have a limited set of potential clients, each commanding a large share of their market.
LOW BARGAINING POWER OF BUYERS• Low Bargaining power enables a firm to pass on the increase in costs to the buyers or to make the buyers accept a lower quality of product & service at a higher rate.
CONDITIONS FOR LOW BARGAININGPOWER OF BUYERS1)When there are many buyers2)When there are a few suppliers3)When Switching Costs for buyers from one supplier to another are high.
EXAMPLE OF INDUSTRIES WITHLOW BARGAINING POWER• Retailers face individual consumers with little or no power at all.