To sustain their success and make a profit, business companies must carefully formulate their strategies. According to Porter, the basis of any strategy is coping with competitors. On this assumption, he built his approach by defining five forces that form a competitive environment in the industry. These forces include the bargaining powers of customers and suppliers, the threat of new entrants, the threat of substance products and services, and jockeying for the position among the current customers.
The 5 Forces model can be used to analyze the competitive environment and then create strategies, but it faces widespread criticism. Nevertheless, following the approach, all forces are influential and important, and various studies prove their effect. In relation to the power of suppliers, the business is faced with the task of finding and collaborating with the supplier, which has fewer opportunities to harm.
The power of suppliers is a significant factor affecting the activities of the industry, in particular decision-making in various companies. The power of suppliers implies their ability to set prices, manage product quality, and choose how many resources to supply. Such authority can provide suppliers with an opportunity to manipulate their customers. At the same time, their strength largely depends on the number of suppliers of the same resource – the fewer suppliers, the greater the pressure.
Moreover, the power of suppliers depends on their size and the availability of potential customers. These factors give suppliers’ customers more flexibility – they can look for better offers or lower the price if there are few or no other customers at all and competition among suppliers. The quality, quantity, and cost of resources required for the operation of the enterprise determine its decisions on the functioning and prices.
Suppliers are essential in all industries – from food to technology. An example of demonstrating supplier power is the creation of electric vehicles. The company that produces and launches them on the market depends on the lithium supply for car batteries. A separate organization provides lithium, it is difficult to enlist the support of other suppliers, and the car manufacturer cannot do this. Moreover, the lithium supplier has many customers, does not depend on the car manufacturer, and can put the maximum price on the resource.
Rising prices for raw materials can increase the cost of production, leading to higher prices in the market. However, it is crucial to consider the offers of competitors – after all, too high a price can discourage customers. If the price rise cannot offset the increase in value, then the profitability decreases.
Since the agreement with other suppliers is not available, the manufacturer cannot terminate cooperation with the supplier. Thus, the operation and pricing decision-making of various firms may depend on the supplier of resources necessary for their functioning, up to the possibility of bankruptcy.