Bargaining power buyers and sellers

Bargaining power buyers and sellers


In this video, we’ll be looking at
analyzing the bargaining power of buyers and suppliers. The competitive environment of
any industry includes: rivalry among competitors, the threat from new entrants,
the bargaining power of customers, the bargaining power of suppliers, and the
availability of substitutes. This video will look at the bargaining power of
suppliers and the bargaining power of customers. So, a lemonade stand has both
buyers and suppliers. The suppliers of the lemonade stand include all the
ingredients to make lemonade. The buyers from the lemonade stand are the customer
who buys the lemonade. It’s important to take note that the buyers are not necessarily
always the end-users. Here’s an example: a large bakery that makes cakes has
suppliers – eggs, flour and milk that are necessary ingredients to make the cake. Who are the buyer’s of these cakes? For a
large bakery, the buyers might be a chain of grocery stores that will buy the
cakes and then resell them to the end consumer or if the bakery is selling
directly to the end consumer, the buyer could be that end consumer. It’s
important to identify which buyer we’re talking about so depending on whether we’re talking
about a chain of grocery stores that might be buying thousands of cakes or
one consumer who’s buying a single cake, the level of power will be very
different. Also remember that when we’re analyzing
the end consumer, we’re literally analyzing the bargaining power of that
one person. When we go out and buy a cake, we mostly go out and buy one single cake.
We’re not coordinating the purchase with all our friends, so it’s not all of our
friends going out and negotiating on the best possible price and service for a
cake or alone. So, some of the factors that affect bargaining power: the number
and size of the buyers and sellers, the importance of the buyer, how important or
vital the product being negotiated is, and the ability of each of the parties
to enter each other’s industry. Who has the power, when we look at the bakery
versus the individual consumer? So let’s apply those factors that we just looked at. So the number
and size of buyers and sellers – there’s one large bakery. If that’s the only
large bakery in town and the only place to get cake, they’d have a lot more power. Compare that to one small consumer who’s
going to buy one cake. The bargaining power will be in favor of the factory. How important is the buyer? It’s one
little buyer. He’s going to buy one cake. If that buyer decided not to buy a cake, it wouldn’t have very much of an impact
on the bakery. So it gives the bakery a lot more bargaining power. They’re less
likely to lower their price to sell one extra cake. Is the item vital to the
buyer? There’s probably other substitutes. If that
buyer just wants something sweet, they could buy cookies or they could buy doughnuts or
they could buy ice creams or they could buy chocolates. There’s lots of substitutes. It’s not
essential to have that cake. This gives the consumer a little bit of
power, at least. And, this last question isn’t as relevant, but could they enter
each other’s industries? The only way this might apply here might be if the
consumer decides to bake their own cake at home. So, i’ll give that a half-size
ticky. So overall, the amount of bargaining power in this analysis tends
to somewhat favour the bakery. Let’s do that same kind of analysis, but
this time it’s the bakery compared to a large chain of grocery stores. Who has the
power in this case? Let’s look at the number and size of buyers and sellers. A
large grocery chain could potentially approach any number of bakeries and ask
for quotes on supplying cakes, and, if we’re looking at chains of grocery
stores and volume purchases of cakes, there’s really not that many large
chains of grocery stores to sell to. So this is going to give a little bit
more power to the grocery store chain when they’re negotiating to buy cakes at
a pretty good price that they can resell. How important is the buyer? Well, grocery
stores sell a lot more than just cakes, so if the grocery store couldn’t get a good
deal on the cake, it wouldn’t put them out of business.
They’ve got lots of other options. Whereas the bakery really needs to sell
that cake in order to stay in business. This makes the grocery store pretty
important and it gives them more negotiating power. Is the item vital?
Similar to what we looked at before, grocery stores sell a lot more than cake,
so it’s not really all that important that they are able to buy the cake. The
grocery store can then continue to sell all the other food items. This gives the
chain of grocery stores that much more power still. And finally, could they enter
each other’s industries? Potentially the bakery could open up its own stores and
sell directly to consumers, and, I suppose potentially the grocery store
could also bake its own cupcakes – unlikely that it would want to do that.
In a sense, it probably gives a little bit of power. I’ll give a small check
mark to the bakery. Overall though, it’s clear that most of
the bargaining power that takes place in this negotiation would be held by the
grocery stores. Let’s look at a few more examples: pet
owners really want to keep their pets safe and so one technology that’s
becoming more popular is to insert a small microchip under the skin of cats
and dogs about the size of a grain of rice and it’s got a computer chip inside
of it that can transmit data that will provide authorities with the name and
address of the pet’s owner, if the pet should get lost. So the industry that’s producing these
small microchips for pets needs to buy the actual chips from one of the current
players that produces microchips. So it turns out that probably over ninety
percent of all the microchips produced are produced by one of two extremely
large companies. Let’s look at the analysis. So there’s very few large
suppliers of microchips. Those supplier’s microchips have many possible customers.
They’re used in computers, and cellphones, and any number of toys and devices.
The producers of the chips that go into protecting our pets, are very small. So
they don’t purchase a lot of microchips. They really represent a small percentage
of the business of companies like Intel and AMD. So they’d become unimportant. This
would give much more bargaining power to the microchip suppliers. And, the
microchip is vital. So this would give the bargaining power
of the microchip suppliers such as Intel and AMD an incredible amount of power. One last
example: the buyer would be McDonalds, whose purchasing potatoes, and the supplier
would be small farmers. So, there’s very few large fast food chains available
that would purchase large quantities of potatoes from the farmers. So this would
give fast food restaurants such as McDonald’s a lot of bargaining power.
Because of their size and the amount that they buy, they’d be very important customers.
They’d have more bargaining power. There are hundreds of small little farmers, so
many possible suppliers from McDonalds to buy from. It would give them a lot more bargaining
power. So, just to conclude some of the factors that we looked at that affect
bargaining power: the number and size of buyers and sellers, the importance of the
buyer, how vital the item being negotiated is to the buyer, and ability
of each of the players to enter the other’s industry

5 Comments

  • Nicky Despi

    January 13, 2016

    very informative, thank you!

    Reply
  • Freaky filly

    June 30, 2016

    great explanation.. thanks !

    Reply
  • Kotte Saikumar

    November 10, 2016

    Thank you very much Simple and very clear……..

    Reply
  • Francis Farihin

    March 16, 2019

    Thanks a lot's….Great Explanation

    Reply
  • Daniel Hernández

    October 4, 2019

    Thank you Jeff

    Reply

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