bpsm bargaining power of buyers

BUSINESS POLICY BUSINESS POLICY & STRATEGY & STRATEGY

MANAGEMENTMANAGEMENT

BARGAINING POWER OF BARGAINING POWER OF BUYERSBUYERS

SUBMITTED TO :SUBMITTED TO :Dr. JAYANT Dr. JAYANT MAHOPATRAMAHOPATRA

SUBMITTED BY:SUBMITTED BY:AMAN SUDAMAN SUDANURAG AGRAWALANURAG AGRAWALANUJ ANGIRISHANUJ ANGIRISHPARTH CHADHAPARTH CHADHA

INTRODUCTIONINTRODUCTION

• The Bargaining power of the buyers in an industry The Bargaining power of the buyers in an industry constitutes the ability of the buyers, individually or constitutes the ability of the buyers, individually or collectively, tocollectively, to

• force a reduction in the prices of the products or force a reduction in the prices of the products or services or services or

• to demand a higher quality or better service orto demand a higher quality or better service or

• seek more value for their purchases in any way.seek more value for their purchases in any way.

PORTER’S FIVE FORCES PORTER’S FIVE FORCES ANALYSISANALYSIS

• Porter's 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 FORCES PORTER’S FIVE FORCES ANALYSIS (CONTD.)ANALYSIS (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.

• To analyze the Bargaining Power of buyers, a few general criteria's 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

DETERMINANTS OF BARAGAINING DETERMINANTS OF BARAGAINING POWER OF BUYERSPOWER OF BUYERS

6) Cost relative to total buyer purchases

7) Impact of outputs on the cost of differentiation

8) Buyer information about supplier products

These are explained in detail in the following slides

• 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

1) THE DIFFERENTIATION OF OUTPUTS1) THE DIFFERENTIATION OF OUTPUTS

• CADBURY BOURNVILLE

With the special packaging & impressive advertisement campaign, Cadbury has successfully differentiated Bournville from other chocolates in the market.

EXAMPLE :EXAMPLE :

• 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

2) SWITCHING COSTS2) SWITCHING COSTS

• 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.

EXAMPLE :EXAMPLE :

• 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.

3) PRESENCE OF SUBSTITUTES3) PRESENCE OF SUBSTITUTES

• 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

EXAMPLE :EXAMPLE :

• 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

4) INDUSTRY CONCENTRATION 4) INDUSTRY CONCENTRATION RELATIVE TO BUYER CONCENTRATIONRELATIVE TO BUYER CONCENTRATION

• 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.

EXAMPLE :EXAMPLE :

• 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.

5) IMPORTANCE OF VOLUME TO BUYERS5) IMPORTANCE OF VOLUME TO BUYERS

• 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?”

EXAMPLE :EXAMPLE :

• 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.

6) COST RELATIVE TO TOTAL BUYER 6) COST RELATIVE TO TOTAL BUYER PURCHASESPURCHASES

• 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.

EXAMPLE :EXAMPLE :

• 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.

7) IMPACT OF OUTPUTS ON THE 7) IMPACT OF OUTPUTS ON THE COST OF DIFFERENTIATIONCOST OF DIFFERENTIATION

• 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.

EXAMPLE :EXAMPLE :

• This tends to relate to technical products, where the technology in the product is different to the technology of the industry.

8) BUYER INFORMATION ABOUT 8) BUYER INFORMATION ABOUT SUPPLIER PRODUCTSSUPPLIER PRODUCTS

• 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.

EXAMPLE :EXAMPLE :

HIGH BARGAINING POWER HIGH BARGAINING POWER OF BUYERSOF 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 CONDITIONS FOR HIGH BARGAINING POWER OF BUYERSBARGAINING POWER OF BUYERS

1) When buyers are few in number

2) When Large Orders are placed

3) When Alternative Suppliers are available & are willing to supply at lower costs or favourable selling conditions

CONDITIONS FOR HIGH CONDITIONS FOR HIGH BARGAINING POWER OF BUYERS BARGAINING POWER OF BUYERS

(CONTD.)(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 EXAMPLES OF INDUSTRIES WITH HIGH BARGAINING POWER OF BUYERSBARGAINING 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 LOW BARGAINING POWER OF BUYERSOF 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 BARGAINING CONDITIONS FOR LOW BARGAINING POWER OF BUYERSPOWER OF BUYERS

1)When there are many buyers

2)When there are a few suppliers

3)When Switching Costs for buyers from one supplier to another are high.

EXAMPLE OF INDUSTRIES WITH LOW BARGAINING POWER

• Retailers face individual consumers with little or no power at all.

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