key determinants of buyer´s power. part i. bargaining leverage. · 2017. 10. 13. · wedding...
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Key Determinants of Buyer´s Power. Part I.
Bargaining Leverage.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
“The company´s choice of buyers should be
viewed as a crucial strategic decision. A
company can improve its strategic posture by
finding buyers who possess the least power to
influence it adversely”.
Determinants of Buyer´s Power
BARGAINING LEVERAGE or PRICE SENSITIVITY
1. Differentiation of Products
2. Buyer Switching costs relative to the firm switching costs
3. Presence of Substitute Products
4. Buyer Concentration vs. Firm Concentration
5. Buyer Volume
6. Price/Total Purchases
7. Buyer Information
8. Ability to backward integrate
9. Brand Identity
10. Impact on quality/performance
11. Buyer Profits
12. Decision makers´ incentives
13. Pull-Through
Key Determinants of Buyer´s Power
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 2
Today we will continue with the Key
determinants of Buyers power from
the point of view of Bargaining
leverage…
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved 3
Buyer Switching
costs relative to
the firm
switching costs
Presence of
Substitute
Products
Buyer
Concentration
vs. Firm
Concentration
Buyer
Volume
Buyer
Information
Ability
To Backward
Integrate
Pull-Through
Key
Determinants
of Buyer´s
Power.
Bargaining
Leverage
Key Determinants of Buyer´s Power. Bargaining Leverage
SAP ERP has higher switching
costs vs other software Starbucks vs. Costa Coffee or
Nero. Lower switching costs
Gasoline from Shell, Texaco
or Exxon: Lower switching
costs
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
The lower the cost of switching products
The more effective is the buyer power
1. Switching Costs
ExamplesSwitching Costs:
4
Key Determinants of Buyer´s Power. Bargaining Leverage
“Higher
switching costs
(defined earlier)
lock the buyer to
particular sellers
and mitigate
buyer power”
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
When there are substitutes
The buyer can consider to replace the seller
or the product itself for another one
2. Presence of Substitute Products
ExamplesPresence of Substitutes
A book can be replaced
by a video from YouTube
Cow Milk substituted by
vegan milk
Securities can be replaced
by alternative inv. funds
5
Key Determinants of Buyer´s Power. Bargaining Leverage
“Identifying
substitute
products entails
searching for
other products
that can perform
the same function
as the product of
the industry”.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
The bigger the purchases of the customer
The greater is the damage from losing that
customer
3. Buyers Volume
ExamplesBuyers Volume
Supermarket Chain
buying all production
beef to a Nicaraguan firm
An investment banking
boutique without
diversity of clients
Bombardier losing a top
big client
6
Key Determinants of Buyer´s Power. Bargaining Leverage
“A buyer
group will be
powerful if it
purchases large
volumes
relative to seller
sales. Retaining
its business is
financially
important to
the seller”.
“Large volume buyers are
particularly potent forces if heavy
fixed costs characterize the
industry (as in corn refining and
bulk chemicals) and raise the
stakes to keep capacity occupied”.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
The smaller the number of buyers
The difficult is it for the seller firm to find
alternative buyers if one is lost
4. Buyers Concentration
ExamplesBuyers
ConcentrationQuota Sugar Exports
Latin Countries to the
world
High-end buyers for
luxury apartments in
Guangdong
Luxury yachts above $200
Millions price
7
.
Key Determinants of Buyer´s Power. Bargaining Leverage
“If a buyers group
represents only a
few concentrated
number, it will be
able to exert
considerable
influence on prices,
quality and terms
to the sellers”.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
The better informed buyers are about
producers and their relative price
The better are they able to bargain
5. Buyers Information
ExamplesBuyers
informationDoctors and Lawyers do
not display prices to
buyers
Investment advisors for
Financial Structuring
More informed the buyer
about used car
8
Key Determinants of Buyer´s Power. Bargaining Leverage
“Buyer power is
also increased if
buyers have a lot
of information
about market
conditions,
supplier costs and
offers to other
buyers”.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
If the buyer refuses to deal with producers
The alternative for the buyer
is to DIY
6. Ability Backward Integration
ExamplesThreat of Backward
IntegrationBride refusing to deal with a
Wedding Planner
Coffee clients refusing to buy
at Starbucks in order DIY
coffee at home
Vegetable buyers refusing to
buy and growing their own
veggies
9
DIY: Do it
yourself
Key Determinants of Buyer´s Power. Bargaining Leverage
“If buyers are
either already
partially integrated
or pose a strong
threat of backward
integration, they
are in a position to
demand
bargaining
concessions”.
Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services
© 2017 Eleonora Escalante-all rights reserved
If the buyer purchases orders to companies
who use pull-through production
The buyer benefits of product customization
for his specific needs
7. Pull-Through (Make to order)
ExamplesPull Through
Atelier Versace: Made To
Order Evening Gala
dresses
Cartier Personalized and
unique design wedding
rings
Maison Tamboite Custom
made bicycles
10
Key Determinants of Buyer´s Power. Bargaining Leverage
“Since products are
made as they are
ordered, it is possible
to cost-effectively
tailor an order to
each customer's
specific needs,
instead of only
offering a generic
product”.
Key Determinants of Buyer´s Power. Bargaining Leverage
11