Here is a recapitulation on the five competitve forces driving industry competition to a perfectly competitive level based on my previous posts.
1. Bargaining power of buyers (customers)
2. Bargaining power of suppliers
3. Threat from potential entrants
4. Threat from substitutes of products or services
5. Intense competition among existing companies in an industry
I have provided a discussion on the first three forces based on my previous posts. I shall continue to provide a simple discussion on the last two forces namely, intense competition among existing companies in an industry and threat from substitutes of products or services.
Intense competition among existing companies in an industry
Existing companies in an industry are always in a state of competition for market share and profits. When competiton gets more intense, the rate of returns in an industry decreases. This is due to companies competing on the prices of their products or services, increased marketing efforts, increased costs of researching to come up constantly with innovative and better products one step ahead of their competition.
When an industry is not dominated by any leaders, competition may be more intense resulting in price wars. In an industry that has an established leader with dominant market share, the leader may have strong influence on product prices and is able to lead it's other smaller competiton to establish product prices in an industry. An industry that has less vigourous competition is considered a stable industry with relatively stable product prices.
There are some factors which promote intense competition in an industry as follows:
1. Many equal strength competitors: In an industry where there are many equal strength competitors, intense competition may take place as companies compete for market share and profits. Such intense competition is beneficial to customers in an industry, but not for the competitors as it drives down rate of return in the industry. On the other hand, an industry with a dominant player or some extent of coorperation among companies will result in less intense competition and help to increase profitability in the industry.
2. Slow growth industry: An industry where growth is slow will promote more intense competition among companies to compete for sales. On the other hand, in a fast growing industry, companies can increase their sales without necessarily taking away sales from their competition.
3. Capital intensive industry: In a capital intensive industry, companies need to have high turnover in sales to maintain profitability. As such, competition may intensify as companies reduce prices to achieve high turnover in sales. Examples of such industries include paper and steel manufacturers.
4. Commodity type products: If products or services in an industry is commodity-like (every company is selling similar undifferentiated products or services), companies will compete intensely based on prices and additional services provided to their buyers. This will drive down margins and rates of return in the industry. Examples include sellers of bricks, cement, food crops and fertilisers.
5. Companies can only increase their capacity in large steps: In industries whereby companies can only increase their capacity in large steps (e.g. by building large scale plants each time), this will result in tendency for more intense competition as rival companies reduce their prices to compete against a significant increased capacity (from periods of sudden significant increase in supply) in the industry each time.
6. When different companies in an industry have different strategies and objectives: When companies in an industry have very different strategies and objectives, there is less likelihood for coorperation and understanding between companies and thus more intense competition. In such environment, it is harder to establish a set of game rules whereby companies in an industry can play by to earn high returns since every company is doing their own things. For example, some companies may be willing to accept lower returns seeing the industry as only part of a wider strategy of their overall businesses while others try to gain maximum returns seeing the industry as a cash-cow.
7. High barriers to exiting an industry: In a low return industry, it make sense that companies should exit such an industry. This will reduce the supply in the industry and benefit remaining companies. However, there are many possible barriers to their exit and thus many companies stay on despite low returns in an industry. This continues to promote competition and depress returns in the industry of low profitability.
One possible barrier to exit is that companies in a particular industry may have invested in high cost and specialised assets (e.g. production plants specific to the industry and cannot be used in other businesses) and it will be uneconomic to stop the business running even if such existing business has low returns.
Another barrier may be a high cost in exiting an industry for certain companies. Some companies may need to pay some forms of compensation to their employees, customers and suppliers upon closing down the business. Some businesses may be bonded by contracts to service their employees by retraining and reassigning them new jobs, and also to continue providing after-sales service to customers even after closing down the business. Thus, the cost of exiting is high.
Another barrier to exiting is the incurring of strategic loss to the company. A business segment in a company may be underperforming, but the company may be reluctant to close down the business segment if the business helps to boost the overall image or quality of the company's relationships with it's customers, suppliers or government. Also, an underperforming business segment may share facilities with other business segments and it will be uneconomic to close down the underperforming segment. The underperforming business segment may be an important link in a vertically integrated chain. Example, oil companies have different business segments in a vertically integrated chain such as oil exploration, oil extraction, oil refinining, and oil retailing. Even if one segment for example, the oil retailing has low returns, the company may still keep it for wider strategic objective.
Another barrier to exit is because of emotional reasons. Some managers of businesses have spend much effort and time to build a business over years, and they have form an emotional attachment to or pride over their businesses and so find it difficult to close down the underperforming business. While other managers find it difficult to close down their underpeforming businesses so as not to affect families of employees who depend on the continuation of the business for their livelihood.
Another barrier to exit is due to government stepping in to prevent a low return business from closing in order to protect the welfare of the workers and community at large who depend heavily on the business for their survival or it's products and services.
Threat from substitutes of products or services
Companies in an industry may also face competition from threat of substitutes of their products or services. If another rival company can offer a different product that have similar functions to an existing product at a cheaper price, this will reduce returns for the company with the original product due to competition. The rival company may also offer a substitute product that is more expensive but has much better functions than the existing product in a bid to compete and replace the original product. E.g. the internet has now become a threat to certain retailers of goods as shoppers can buy their products over the internet instead of buying from retail shops. Thus, internet has become a threat of substitute of conventional retailing that reduces margin of some retailers.
In conclusion, an investor has to consider in his assessment of a company whether it is facing much intense competition with rival companies in an industry based on different possible factors promoting competition. Intense competition reduces returns in an industry. One also need to consider any potential threat from substitutes of products or services to an existing company to see whether the company has downside pressure to it's margins due to such threats.
Showing posts with label Industry analysis. Show all posts
Showing posts with label Industry analysis. Show all posts
Wednesday, December 9, 2009
Monday, December 7, 2009
The Five Competitive Forces Driving Industry Competition (Part 2 of 3)
I have mentioned in my previous post about five competitive forces (based on Michael Porter's work, Competitive Strategy, 1980) that drive industry competition to a perfectly competitive level. The five forces are as follows:-
1. Bargaining power of buyers (customers)
2. Bargaining power of suppliers
3. Threat from potential entrants
4. Threat from substitutes of products or services
5. Intense competition among existing companies in an industry
In my previous post, I have provided a simple presentation on his work on two of these forces namely bargaining power of buyers (customers) and bargaining power of suppliers. In this post, I shall present another competitive force, threat from potential entrants that also drive industry competition to a perfectly competitive level, restraining any company in an industry from achieving supernormal returns.
Threat from potential entrants
Any industry that shows better rate of returns than other industries (of similar amount of risks) will attract potential entrants into that industry. The potential entrants also want a portion of the pie in the lucrative industry. By having new entrants into the industry, the existing companies in that industry will meet with falling prices and rising costs of doing businesses when they spend more on marketing and extending favourable credit terms for customers, etc. to fight off increased competition and protect their market share.
To slow down or put in check the advancement of new entrants, existing companies engage in two general strategies, putting barriers in the path of new entrants, and sending clear message to the new entrants that if they cross over a certain tolerance line they will be subjected to strong retaliatory attack until they are driven out of the industry.
Sending clear message of strong retaliation by existing companies should new entrants cross their lines
The message of the threat of strong retaliatory attack by existing companies should new entrants cross their lines must be based on strong grounds to keep these new entrants at bay. To gain strong grounds on the message of retaliation, existing companies must show that they have defended agressively against past entrants into the industry. Also, existing companies must show they have a large amount of resources to fight off the new entrants (e.g. large cash reserves, strong borrowing capacity, strong working relationships with their suppliers and customers). Existing companies must also show they are strongly commited to the industry by having their assets mainly deployed within the industry.
Putting barriers in the path of new entrants
Existing companies in an industry can put barriers in the path of new entrants in the following ways:-
1. Having large economies of scale and scope: Existing companies that are operating at a large scale have the advantage of lower product costs since they are producing their products on an efficient scale. Smaller entrants are disadvantaged by incurring relatively higher product costs since their production is not yet on an efficient scale. Some existing companies may have economies of scope by being able to share their costs between different product lines (e.g. food manufacturers can add increased product lines making use of same distribution network and retailers). In order to compete against smaller entrants, sometimes larger existing companies may take advantage of their large economies of scale and scope to engage in price wars that will drain out the available financial resources of the smaller entrants when they try to keep up to the competition with the larger existing companies.
2. Difficulty in imitation: It is not always easy for new entrants to imitate how existing successful companies are being run. For example, existing successful companies may already learn a great deal about their industry, their suppliers' and buyers' industries. They may also know how to reduce their cost of doing business by experience. All these technical experience and knowledge is a barrier to entry into the industry for potential entrants.
3. Difficulty in accessing distribution channels: New entrants often find it difficult to break into existing distribution channels for their products. The existing companies in the industry would have established strong relationship with their retailers or buyers of products. New entrants may have to reduce the prices of their products in order to compete for retailers to carry their products or buyers to buy their products which is costly to the new entrants.
4. High switching costs for buyers: Buyers of certain products of existing companies may have high switching costs should they change companies to buy their products from. If the switching costs is high involving time and expenses in retraining their employees to use the new products offered by new entrants, buyers may not want to do a switch (e.g. hospital involving costs and time in retraining it's staffs to use medical equipment from a new entrant supplier). This puts the new entrants at disadvantage as they have to reduce their product price and introduce other significant attractive offers to convince buyers to do a switch which may not be easy.
5. Product differentiation and branding: Existing companies may have established differentiated product of strong branding offering high value for their buyers. It is not always easy for new entrants to compete against such strong brands and differentiated products. E.g. A new entrant carbonated beverage company will find it almost impossible to compete against established companies like Coca-Cola or Pepsi-Cola to gain market share even after draining large financial resources in research, marketing and distributing their products.
6. Government legislation and patents: Government legislation may prevent entry into an industry. This may protect the existing company/ies from new entrants. For example, limited number of transport or private healthcare companies in a country. Patents can also protect existing companies (e.g. pharmaceutical companies having patents over their products have exclusive rights on the making, distribution and sale of their products).
7. Control over suppliers and customers: Some existing companies may have control over their suppliers to sell to them and customers to buy from them (e.g. certain retailers may have strong power over their suppliers to sell through them). This makes it difficult for new entrants to compete against existing companies to persuade suppliers to supply to them or buyers to buy from them.
For an investor, he may check whether his invested company has a strong competitive position and economic moat by the ability to send clear credible message of retaliation to potential new entrants into it's industry or put barriers to stop or slow down the advancement of new entrants.
1. Bargaining power of buyers (customers)
2. Bargaining power of suppliers
3. Threat from potential entrants
4. Threat from substitutes of products or services
5. Intense competition among existing companies in an industry
In my previous post, I have provided a simple presentation on his work on two of these forces namely bargaining power of buyers (customers) and bargaining power of suppliers. In this post, I shall present another competitive force, threat from potential entrants that also drive industry competition to a perfectly competitive level, restraining any company in an industry from achieving supernormal returns.
Threat from potential entrants
Any industry that shows better rate of returns than other industries (of similar amount of risks) will attract potential entrants into that industry. The potential entrants also want a portion of the pie in the lucrative industry. By having new entrants into the industry, the existing companies in that industry will meet with falling prices and rising costs of doing businesses when they spend more on marketing and extending favourable credit terms for customers, etc. to fight off increased competition and protect their market share.
To slow down or put in check the advancement of new entrants, existing companies engage in two general strategies, putting barriers in the path of new entrants, and sending clear message to the new entrants that if they cross over a certain tolerance line they will be subjected to strong retaliatory attack until they are driven out of the industry.
Sending clear message of strong retaliation by existing companies should new entrants cross their lines
The message of the threat of strong retaliatory attack by existing companies should new entrants cross their lines must be based on strong grounds to keep these new entrants at bay. To gain strong grounds on the message of retaliation, existing companies must show that they have defended agressively against past entrants into the industry. Also, existing companies must show they have a large amount of resources to fight off the new entrants (e.g. large cash reserves, strong borrowing capacity, strong working relationships with their suppliers and customers). Existing companies must also show they are strongly commited to the industry by having their assets mainly deployed within the industry.
Putting barriers in the path of new entrants
Existing companies in an industry can put barriers in the path of new entrants in the following ways:-
1. Having large economies of scale and scope: Existing companies that are operating at a large scale have the advantage of lower product costs since they are producing their products on an efficient scale. Smaller entrants are disadvantaged by incurring relatively higher product costs since their production is not yet on an efficient scale. Some existing companies may have economies of scope by being able to share their costs between different product lines (e.g. food manufacturers can add increased product lines making use of same distribution network and retailers). In order to compete against smaller entrants, sometimes larger existing companies may take advantage of their large economies of scale and scope to engage in price wars that will drain out the available financial resources of the smaller entrants when they try to keep up to the competition with the larger existing companies.
2. Difficulty in imitation: It is not always easy for new entrants to imitate how existing successful companies are being run. For example, existing successful companies may already learn a great deal about their industry, their suppliers' and buyers' industries. They may also know how to reduce their cost of doing business by experience. All these technical experience and knowledge is a barrier to entry into the industry for potential entrants.
3. Difficulty in accessing distribution channels: New entrants often find it difficult to break into existing distribution channels for their products. The existing companies in the industry would have established strong relationship with their retailers or buyers of products. New entrants may have to reduce the prices of their products in order to compete for retailers to carry their products or buyers to buy their products which is costly to the new entrants.
4. High switching costs for buyers: Buyers of certain products of existing companies may have high switching costs should they change companies to buy their products from. If the switching costs is high involving time and expenses in retraining their employees to use the new products offered by new entrants, buyers may not want to do a switch (e.g. hospital involving costs and time in retraining it's staffs to use medical equipment from a new entrant supplier). This puts the new entrants at disadvantage as they have to reduce their product price and introduce other significant attractive offers to convince buyers to do a switch which may not be easy.
5. Product differentiation and branding: Existing companies may have established differentiated product of strong branding offering high value for their buyers. It is not always easy for new entrants to compete against such strong brands and differentiated products. E.g. A new entrant carbonated beverage company will find it almost impossible to compete against established companies like Coca-Cola or Pepsi-Cola to gain market share even after draining large financial resources in research, marketing and distributing their products.
6. Government legislation and patents: Government legislation may prevent entry into an industry. This may protect the existing company/ies from new entrants. For example, limited number of transport or private healthcare companies in a country. Patents can also protect existing companies (e.g. pharmaceutical companies having patents over their products have exclusive rights on the making, distribution and sale of their products).
7. Control over suppliers and customers: Some existing companies may have control over their suppliers to sell to them and customers to buy from them (e.g. certain retailers may have strong power over their suppliers to sell through them). This makes it difficult for new entrants to compete against existing companies to persuade suppliers to supply to them or buyers to buy from them.
For an investor, he may check whether his invested company has a strong competitive position and economic moat by the ability to send clear credible message of retaliation to potential new entrants into it's industry or put barriers to stop or slow down the advancement of new entrants.
Friday, December 4, 2009
The Five Competitive Forces Driving Industry Competition (Part 1 of 3)
Through my research, I came across a discussion on the five competitive forces driving industry competition (based on Michael Porter's work, Competitive Strategy (1980)). These forces drive returns in an industry to a perfectly competitive level, thus constraining any companies in an industry from achieving supernormal returns. As such, managers of companies have to constantly battle against these five forces to gain a competitive edge in an industry, thus steering their companies away from the perfectly competitive level.
These forces are:-
1. Bargaining power of buyers (customers)
2. Bargaining power of suppliers
3. Threat from potential entrants
4. Threat from substitutes of products or services
5. Intense competition among existing companies in an industry
I shall provide a simple discussion on two of these forces namely "Bargaining power of buyers (customers)" and "Bargaining power of suppliers" in this post.
Bargaining power of buyers (customers)
Buying power provides customers the chance to negotiate for cheaper prices, ask for better quality on the products they are buying or ask for better and more services they are receiving. All these will squeeze margins of companies in an industry.
There are different situations whereby buyers in an industry are in a strong bargaining position. This is disadvantageous to the company which is selling it's products or services in the particular industry. The different situations advantageous to buyers arise as follows when:-
1. There is concentration of buyers: It is disadvantegous to sellers of products if the number of buyers is lacking in the particular industry. The worst case is many sellers trying to sell their similar products to only one buyer (monopsony). In this case, the sole buyer has a strong bargaining power over the many sellers and the sellers in a bid not to lose businesses may coorperate with the requests of this buyer.
2. Product is undifferentiated: If many companies are selling similar undifferentiated products to their buyers, buyers of the products may take chance to negotiate for cheaper prices and better services. Buyers may also play one company against another to negotiate for better prices and services. Such cases are found in commodity types of products, e.g. raw materials, food crops whereby buyers are in strong bargaining position over the many sellers of commodity products which are undifferentiated.
3. Product takes up a large cost for the buyer: A buyer is more aggressive at negotiating for cheaper prices on products that are costly to them. This is disadvantageous to the sellers. On the other hand, a buyer of small cost or one-off purchase products may not be as price-sensitive.
4. Buyer has low switching cost: A buyer that can easily switch suppliers with minimal costs of switching may be inclined to do so if another supplier offers better prices for similar products and services. Of course, switching suppliers also involves breaking a long-standing relationship with an existing supplier which is a consideration the buyer has to think over carefully.
5. Buyer is concerned with cost-cutting: A buyer that belongs to a company or industry that has high cost of doing business is sensitive to cost-cutting. As such, the buyer will be inclined to negotiate for cheaper prices on products and services from it's suppliers. The buyer may even at extreme case threaten to close down their business due to reason of high cost, thus in turn threatening the supplier with a discontinuation of their business with the buyer. This is especially significant when the supplier depends heavily on the sale of their products to the particular buyer who is threatening them.
6. Buyer can make the products themselves: Sometimes, a buyer may have the expertise to make the product they are buying from a supplier. As such, the buyer may threaten the supplier asking for better prices on the product they are buying, failing which they will not buy from the supplier but instead make the product themselves.
7. Quality of product buyer is buying is of low importance: A buyer that is not particular about the quality of a product may choose to shop around different suppliers for better prices. This gives bargaining power to the buyer over the suppliers. On the other hand, a buyer that is sensitive to the quality of a product may be less price-sensitive and willing to even pay a price premium for quality products. For example, a hospital will be more focused on quality of medical equipment purchased over prices.
8. Buyer has information on their suppliers: A buyer that knows about their suppliers' margins, costs and order books will be more prepared when negotiating for purchasing prices on products. Such informed buyer will be less likely to be taken advantage by overpaying for products sold by their suppliers.
Bargaining power of suppliers
Even as buyers have strong bargaining position based on the above discussed situations, suppliers can also tip the scale in their favour when the following situations arise. Thus, suppliers of goods/ services facing the following situations can command better prices for their goods/ services and thus better margins.
1. There is concentration of sellers: When there are not many sellers around with many buyers, the sellers have a significant advantage over their buyers. An example is Coca Cola company whereby they have the most significant market share for their products. There are many eager buyers (retailers of Coca Cola products) including fast food chains, restaurant chains, supermarket chains and other local franchises. Thus, the seller (Coca Cola) can negotiate for better prices and terms from it's many buyers (retailers) to carry it's products since there is only one seller (Coca Cola) selling their famous branded carbonated beverage (the coke) to many buyers competing to carry the product.
2. The product is unique and has strong branding: A seller selling a unique product (that has no substitute) has bargaining power over it's buyers since the buyers can only buy from one seller. For example in the local context, we have the unique local newspapers produced from SPH. Of course, there are also other considerations such as regulations from governments and authorities that may prevent a particular company in a particular industry from exerting it's dominance over prices of it's unique products especially if the product is widely used.
3. The supplier can supply it's products over many different industries: The supplier that can supply it's products/ services which are used over many different industries can have a strong bargaining power for the price of it's products/ services. In such case, the supplier can choose between many buyers from different industries that use it's products and so being able to bargain for good prices over it's products/ services.
4. The product supplied by the supplier is very important to buyer: A product/ service provided by a supplier that has great importance and is critically essential to the survival of the businesses of it's buyers will allow the supplier bargaining power over it's buyers on the price of it's products/ services.
5. The supplier can take over the operations and tasks of it's buyers: If a supplier can threaten to easily take over the operations and tasks of it's buyers in their industry (forward integrate into the buyers' industry) and enter as a potential competitor to it's buyer should the buyer not coorperate with the requests of the supplier, the supplier may have a strong bargaining power for the price of it's products/ services over it's buyers.
6. There is high switching cost for the buyers: When there is high switching cost for buyers of a product supplied by a particular supplier, the supplier will have strong bargaining position for the price of it's products/ services. For example, a hospital that buys medical equipments from a particular supplier may not easily change it's supplier since it may involve high cost of switching in time and expenses on retraining it's medical staffs to use new different medical equipment from another different supplier.
As one can see, the situations for strong bargaining power of suppliers is a direct contrast to the situations for strong bargaining power of buyers. It is important to know the relative bargaining powers of a company as both a supplier of it's own goods/ services and buyers of goods/ services. For an investor of a company, one can look out for his invested company to have strong bargaining powers both as a supplier and buyer. This may help to provide a better competitive position and margins for the company.
These forces are:-
1. Bargaining power of buyers (customers)
2. Bargaining power of suppliers
3. Threat from potential entrants
4. Threat from substitutes of products or services
5. Intense competition among existing companies in an industry
I shall provide a simple discussion on two of these forces namely "Bargaining power of buyers (customers)" and "Bargaining power of suppliers" in this post.
Bargaining power of buyers (customers)
Buying power provides customers the chance to negotiate for cheaper prices, ask for better quality on the products they are buying or ask for better and more services they are receiving. All these will squeeze margins of companies in an industry.
There are different situations whereby buyers in an industry are in a strong bargaining position. This is disadvantageous to the company which is selling it's products or services in the particular industry. The different situations advantageous to buyers arise as follows when:-
1. There is concentration of buyers: It is disadvantegous to sellers of products if the number of buyers is lacking in the particular industry. The worst case is many sellers trying to sell their similar products to only one buyer (monopsony). In this case, the sole buyer has a strong bargaining power over the many sellers and the sellers in a bid not to lose businesses may coorperate with the requests of this buyer.
2. Product is undifferentiated: If many companies are selling similar undifferentiated products to their buyers, buyers of the products may take chance to negotiate for cheaper prices and better services. Buyers may also play one company against another to negotiate for better prices and services. Such cases are found in commodity types of products, e.g. raw materials, food crops whereby buyers are in strong bargaining position over the many sellers of commodity products which are undifferentiated.
3. Product takes up a large cost for the buyer: A buyer is more aggressive at negotiating for cheaper prices on products that are costly to them. This is disadvantageous to the sellers. On the other hand, a buyer of small cost or one-off purchase products may not be as price-sensitive.
4. Buyer has low switching cost: A buyer that can easily switch suppliers with minimal costs of switching may be inclined to do so if another supplier offers better prices for similar products and services. Of course, switching suppliers also involves breaking a long-standing relationship with an existing supplier which is a consideration the buyer has to think over carefully.
5. Buyer is concerned with cost-cutting: A buyer that belongs to a company or industry that has high cost of doing business is sensitive to cost-cutting. As such, the buyer will be inclined to negotiate for cheaper prices on products and services from it's suppliers. The buyer may even at extreme case threaten to close down their business due to reason of high cost, thus in turn threatening the supplier with a discontinuation of their business with the buyer. This is especially significant when the supplier depends heavily on the sale of their products to the particular buyer who is threatening them.
6. Buyer can make the products themselves: Sometimes, a buyer may have the expertise to make the product they are buying from a supplier. As such, the buyer may threaten the supplier asking for better prices on the product they are buying, failing which they will not buy from the supplier but instead make the product themselves.
7. Quality of product buyer is buying is of low importance: A buyer that is not particular about the quality of a product may choose to shop around different suppliers for better prices. This gives bargaining power to the buyer over the suppliers. On the other hand, a buyer that is sensitive to the quality of a product may be less price-sensitive and willing to even pay a price premium for quality products. For example, a hospital will be more focused on quality of medical equipment purchased over prices.
8. Buyer has information on their suppliers: A buyer that knows about their suppliers' margins, costs and order books will be more prepared when negotiating for purchasing prices on products. Such informed buyer will be less likely to be taken advantage by overpaying for products sold by their suppliers.
Bargaining power of suppliers
Even as buyers have strong bargaining position based on the above discussed situations, suppliers can also tip the scale in their favour when the following situations arise. Thus, suppliers of goods/ services facing the following situations can command better prices for their goods/ services and thus better margins.
1. There is concentration of sellers: When there are not many sellers around with many buyers, the sellers have a significant advantage over their buyers. An example is Coca Cola company whereby they have the most significant market share for their products. There are many eager buyers (retailers of Coca Cola products) including fast food chains, restaurant chains, supermarket chains and other local franchises. Thus, the seller (Coca Cola) can negotiate for better prices and terms from it's many buyers (retailers) to carry it's products since there is only one seller (Coca Cola) selling their famous branded carbonated beverage (the coke) to many buyers competing to carry the product.
2. The product is unique and has strong branding: A seller selling a unique product (that has no substitute) has bargaining power over it's buyers since the buyers can only buy from one seller. For example in the local context, we have the unique local newspapers produced from SPH. Of course, there are also other considerations such as regulations from governments and authorities that may prevent a particular company in a particular industry from exerting it's dominance over prices of it's unique products especially if the product is widely used.
3. The supplier can supply it's products over many different industries: The supplier that can supply it's products/ services which are used over many different industries can have a strong bargaining power for the price of it's products/ services. In such case, the supplier can choose between many buyers from different industries that use it's products and so being able to bargain for good prices over it's products/ services.
4. The product supplied by the supplier is very important to buyer: A product/ service provided by a supplier that has great importance and is critically essential to the survival of the businesses of it's buyers will allow the supplier bargaining power over it's buyers on the price of it's products/ services.
5. The supplier can take over the operations and tasks of it's buyers: If a supplier can threaten to easily take over the operations and tasks of it's buyers in their industry (forward integrate into the buyers' industry) and enter as a potential competitor to it's buyer should the buyer not coorperate with the requests of the supplier, the supplier may have a strong bargaining power for the price of it's products/ services over it's buyers.
6. There is high switching cost for the buyers: When there is high switching cost for buyers of a product supplied by a particular supplier, the supplier will have strong bargaining position for the price of it's products/ services. For example, a hospital that buys medical equipments from a particular supplier may not easily change it's supplier since it may involve high cost of switching in time and expenses on retraining it's medical staffs to use new different medical equipment from another different supplier.
As one can see, the situations for strong bargaining power of suppliers is a direct contrast to the situations for strong bargaining power of buyers. It is important to know the relative bargaining powers of a company as both a supplier of it's own goods/ services and buyers of goods/ services. For an investor of a company, one can look out for his invested company to have strong bargaining powers both as a supplier and buyer. This may help to provide a better competitive position and margins for the company.
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