Porter’s Five Forces
Bargaining Power of Suppliers
According to Wikipedia:
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors include:
- Impact of Supplier’s inputs on Buyer’s Cost and Differentiation
- Concentration of Suppliers relative to the Buyers
- Supplier Competition – the ability of Suppliers to vertically integrate and cut out the buyer
Suppliers have bargaining power when there are few substitutes or when a supplier offers features and benefits that differentiated it from other competitors. A supplier may also have bargaining power when it can uniquely help the buyer lower costs or increase product differentiation to the end consumer.
DuPont is one of the world’s largest chemical companies. The nylon fiber it developed for carpet manufacturers would have been considered a commodity product. However, DuPont created enormous Supplier Bargaining Power by developing the brand ‘Stainmaster’ and promoting the brand to downstream consumers. Many consumers demand Stainmaster carpet even though DuPont is not a carpet manufacturer.
DuPont’s unbranded Carpet Fiber is a Commodity Product that must compete on Price.
Before DuPont introduced the ‘Stainmaster’ brand, consumers couldn’t distinguish the carpet fibers offered by any supplier. And, as consumers didn’t care, the Buyer-manufacturers considered the upstream Suppliers as undifferentiated commodities.
Here DuPont’s cost was the same as their competitors and, having no other source of differentiation, they needed to compete on price. Note here that ‘Price’ is really the ‘Starting Price’ for the downstream competitive ‘Price War’ node.
In fact, some carpet fiber differentiation is added as Buyer-manufacturers will also take into account other factors (such as closeness of the Supplier and speed of delivery). Here, manufacturers consider the vendors to be only 80% similar.
When DuPont started promoting the ‘Stainmaster’ brand to end consumers it raised its Supplier Power with respect to the Buyer manufacturers of carpet.
After promoting their new brand, DuPont’s value to the Buyer carpet manufactures increases from the undifferentiated value of nylon fiber to include the consumer demand for the Stainmaster brand. But this also raises DuPont’s cost to supply the nylon fiber.
Each Supplier-competitor in this Market Simulation enters a Price War in an attempt to find their Profit Maximizing Price.
DuPont took advantage of the fact that they could impact the carpet manufacturers’ ability to differentiate their products. They created enormous Supplier Bargaining Power by developing the ‘Stainmaster’ brand and promoting it directly to end consumers.