bpsm bargaining power of buyers

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Business policy and strategy management..



2. INTRODUCTION The Bargaining power of the buyers in an industryconstitutes the ability of the buyers, individually orcollectively, to force a reduction in the prices of the products orservices or to demand a higher quality or better service or seek more value for their purchases in any way. 3. PORTERS FIVE FORCES ANALYSIS Porters Five Forces is a framework forindustry analysis & business strategydevelopment formed by Michael E. Porter ofHarvard Business School in 1979. It draws upon Industrial Organization (IO)economics to derive five forces that determinethe competitive intensity & thereforeattractiveness of a market. 4. PORTERS FIVE FORCESANALYSIS (CONTD.) The bargaining power of buyers comprisesone of the five forces that determine theintensity of competition in an industry. The others are barriers to entry, the threat ofsubstitutes, the bargaining power of suppliers &industry rivalry. 5. DETERMINANTS OF BARAGAININGPOWER OF BUYERS To analyze the Bargaining Power of buyers, a fewgeneral criterias of a particular industry have to beconsidered & 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. 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 7. 1) THE DIFFERENTIATION OF OUTPUTS If the buyers perceive that the products or services ofone company are different from the competitors & ifthe buyer values that difference then the companyhave some protection during negotiations, however, if the buyer perceives that theproducts/services are essentially the same as thecompetitors then they will have more bargainingpower. Most Marketing is aimed at differentiating a brand orproduct from that of the consumers 8. EXAMPLE : CADBURY BOURNVILLE With the special packaging & impressiveadvertisement campaign, Cadbury hassuccessfully differentiated Bournville from otherchocolates in the market. 9. 2) SWITCHING COSTS A switching cost is a cost that a buyer would incur ifthey ceased buying from a company & started buyingfrom 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 yourcompetitors products The cost of adopting a new ordering systems The cost of retraining your employees 10. EXAMPLE : You are using a SAMSUNG mobile and then youchange your brand of Bluetooth headset to NOKIA.This will compel you to buy a new NOKIA mobile asNOKIA headsets generally dont work with SAMSUNGmobiles. The cost of switching brand of headset is the cost ofbuying a new mobile. 11. 3) PRESENCE OF SUBSTITUTES A substitute is a different product or service that canbe used instead of your industries products orservices. A substitute is not a competitors version ofyour product. Substitutes are typicallyproducts/services that are not in your industry. 12. 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 theshopping center 13. 4) INDUSTRY CONCENTRATIONRELATIVE TO BUYER CONCENTRATION By measuring the ratio of the No. of competitors to theno. of buyers, We get an idea of the likelihood thatbuyers can shop around & place you undercommercial pressure. As the number of buyers increases relative to thenumber of competitors the negotiating power ofanyone buyer deceases. Conversely as the number of buyers reduces relativeto the number of competitors the power of the buyerincreases 14. EXAMPLE : When DVDs were first released you could only getthem in a few specialty shops who could set DVDprices, now, DVDs are stocked in supermarkets,record shops, service stations, news agents this hassignificantly reduced the ability of any one stockist toset price. 15. 5) IMPORTANCE OF VOLUME TO BUYERS Buyers who buy only a few of one particularcompanys products each year are less likely to shoparound for price on those items. In general terms the more frequent a particularcompanys buyer purchases and the more theypurchase each time the more they are likely tonegotiate on price, quality and service. 16. EXAMPLE : If a person has to buy one laptop, he will get a fewprices & then place an order.. But if the same person has to buy 100 laptops, thenhe is more likely to ask What can you do for me? 17. 6) COST RELATIVE TO TOTAL BUYERPURCHASES Buyers tend to prioritize their negotiation efforts in theareas where they spend the most money. If yourproduct or service is a large expense for yourcustomer, then you are more likely to be the focus oftheir negotiations. However, if your product or service is insignificant toyour customers overall purchasing you are less likelyto be the focus of their negotiations. 18. EXAMPLE : A hospital would be expected to spend more time innegotiation with medical suppliers than with the glazierwho was called to repair a cracked window, or theplumber who was called to clean a blocked drain. 19. 7) IMPACT OF OUTPUTS ON THECOST OF DIFFERENTIATION This is an interesting area for consideration, and itboils down to a simple questionDoes a unique quality of your product or service helpyour customer to differentiate their product orservice? If your product is a key component of your customersproduct then your customer will have less bargainingpower. 20. EXAMPLE : Consumers are becoming increasingly aware that theircomputer has an Intel inside as this awarenessincreases, some consumers may be wary ofcomputers that dont have an Intel inside. Computer manufacturers will seek to ensure that theyhave an Intel Inside which will give some negotiatingpower back to Intel. 21. 8) BUYER INFORMATION ABOUTSUPPLIER PRODUCTS This tends to relate to technical products,where the technology in the product is differentto the technology of the industry. 22. EXAMPLE : In a factory where equipments about which notechnical 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 theannual maintenance contract, unless a significantincrease is asked for. The buyer is restricted in asking for a price from acompetitor as he probably dont really know what themaintenance involves. 23. HIGH BARGAINING POWER OF BUYERS High Bargaining power constitutes a negativefeature for existing firms or new entrants of anindustry. Buyers will use their power to extract betterterms (higher profit margins or ) at the expenseof the market. High bargaining power is favorable for thecustomers. 24. 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 25. CONDITIONS FOR HIGH BARGAINING POWER OF BUYERS (CONTD.)4) When the Switching Costs of buyers from onesupplier to another is low.5) When the buyer chargeslow prices & is extremely sensitive to price changes. 26. EXAMPLES OF INDUSTRIES WITH HIGHBARGAINING POWER OF BUYERS Defense contractors have a limited set ofpolitically motivated buyers (governments). Sub contractors to car makers have a limitedset of potential clients, each commanding alarge share of their market. 27. LOW BARGAINING POWER OF BUYERS Low Bargaining power enables a firm to passon the increase in costs to the buyers or tomake the buyers accept a lower quality ofproduct & service at a higher rate. 28. CONDITIONS FOR LOW BARGAININGPOWER OF BUYERS1)When there are many buyers2)When there are a few suppliers3)When Switching Costs for buyers from onesupplier to another are high. 29. EXAMPLE OF INDUSTRIES WITHLOW BARGAINING POWER Retailers face individual consumers with little orno power at all. 30. THANK YOU