Business policy and strategy management..

1. BUSINESS POLICY
& STRATEGY
MANAGEMENT
BARGAINING POWER OF
BUYERS
SUBMITTED BY:
SUBMITTED TO : AMAN SUD
Dr. JAYANT ANURAG AGRAWAL
MAHOPATRA ANUJ ANGIRISH
PARTH CHADHA

2. INTRODUCTION
• The Bargaining power of the buyers in an industry
constitutes the ability of the buyers, individually or
collectively, to
• force a reduction in the prices of the products or
services or
• to demand a higher quality or better service or
• seek more value for their purchases in any way.

3. PORTER’S FIVE FORCES
ANALYSIS
• Porter's Five Forces is a framework for
industry analysis & business strategy
development formed by Michael E. Porter of
Harvard Business School in 1979.
• It draws upon Industrial Organization (IO)
economics to derive five forces that determine
the competitive intensity & therefore
attractiveness of a market.

4. PORTER’S FIVE FORCES
ANALYSIS (CONTD.)
• The bargaining power of buyers comprises
one of the five forces that determine the
intensity of competition in an industry.
• The others are barriers to entry, the threat of
substitutes, the bargaining power of suppliers &
industry rivalry.

6. DETERMINANTS OF BARAGAINING
POWER OF BUYERS
• To analyze the Bargaining Power of buyers, a few
general criteria's of a particular industry have to be
considered & 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

7. 6) Cost relative to total buyer purchases
7) Impact of outputs on the cost of differentiation
8) Buyer information about supplier products
These are explained in detail in the following slides

8. 1) THE DIFFERENTIATION OF OUTPUTS
• If the buyers perceive that the products or services of
one company are different from the competitors & if
the buyer values that difference then the company
have some protection during negotiations,
• however, if the buyer perceives that the
products/services are essentially the same as the
competitors then they will have more bargaining
power.
• Most Marketing is aimed at differentiating a brand or
product from that of the consumers

9. EXAMPLE :
• CADBURY BOURNVILLE
With the special packaging & impressive
advertisement campaign, Cadbury has
successfully differentiated Bournville from other
chocolates in the market.

10. 2) SWITCHING COSTS
• A switching cost is a cost that a buyer would incur if
they ceased buying from a company & started buying
from 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 your
competitors products
• The cost of adopting a new ordering systems
• The cost of retraining your employees

11. EXAMPLE :
• You are using a SAMSUNG mobile and then you
change your brand of Bluetooth headset to NOKIA.
This will compel you to buy a new NOKIA mobile as
NOKIA headsets generally don’t work with SAMSUNG
mobiles.
• The cost of switching brand of headset is the cost of
buying a new mobile.

12. 3) PRESENCE OF SUBSTITUTES
• A substitute is a different product or service that can
be used instead of your industries products or
services. A substitute is not a competitor’s version of
your product. Substitutes are typically
products/services that are not in your industry.

13. 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 the
shopping center

14. 4) INDUSTRY CONCENTRATION
RELATIVE TO BUYER CONCENTRATION
• By measuring the ratio of the No. of competitors to the
no. of buyers, We get an idea of the likelihood that
buyers can shop around & place you under
commercial pressure.
• As the number of buyers increases relative to the
number of competitors the negotiating power of
anyone buyer deceases.
• Conversely as the number of buyers reduces relative
to the number of competitors the power of the buyer
increases

15. EXAMPLE :
• When DVD’s were first released you could only get
them in a few specialty shops who could set DVD
prices, now, DVD’s are stocked in supermarkets,
record shops, service stations, news agents this has
significantly reduced the ability of any one stockist to
set price.

16. 5) IMPORTANCE OF VOLUME TO BUYERS
• Buyers who buy only a few of one particular
company’s products each year are less likely to shop
around for price on those items.
• In general terms the more frequent a particular
company’s buyer purchases and the more they
purchase each time the more they are likely to
negotiate on price, quality and service.

17. EXAMPLE :
• If a person has to buy one laptop, he will get a few
prices & then place an order..
But if the same person has to buy 100 laptops, then
he is more likely to ask “What can you do for me?”

18. 6) COST RELATIVE TO TOTAL BUYER
PURCHASES
• Buyers tend to prioritize their negotiation efforts in the
areas where they spend the most money. If your
product or service is a large expense for your
customer, then you are more likely to be the focus of
their negotiations.
• However, if your product or service is insignificant to
your customers overall purchasing you are less likely
to be the focus of their negotiations.

19. EXAMPLE :
• A hospital would be expected to spend more time in
negotiation with medical suppliers than with the glazier
who was called to repair a cracked window, or the
plumber who was called to clean a blocked drain.

20. 7) IMPACT OF OUTPUTS ON THE
COST OF DIFFERENTIATION
• This is an interesting area for consideration, and it
boils down to a simple question
“Does a unique quality of your product or service help
your customer to differentiate their product or
service?”
• If your product is a key component of your customer’s
product then your customer will have less bargaining
power.

21. EXAMPLE :
• Consumers are becoming increasingly aware that their
computer has an “Intel inside” as this awareness
increases, some consumers may be wary of
computers that don’t have an “Intel inside”.
• Computer manufacturers will seek to ensure that they
have an “Intel Inside” which will give some negotiating
power back to Intel.

22. 8) BUYER INFORMATION ABOUT
SUPPLIER PRODUCTS
• This tends to relate to technical products,
where the technology in the product is different
to the technology of the industry.

23. EXAMPLE :
• In a factory where equipments about which no
technical 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 the
annual maintenance contract, unless a significant
increase is asked for.
• The buyer is restricted in asking for a price from a
competitor as he probably don’t really know what the
maintenance involves.

24. HIGH BARGAINING POWER
OF BUYERS
• High Bargaining power constitutes a negative
feature for existing firms or new entrants of an
industry.
• Buyers will use their power to extract better
terms (higher profit margins or ) at the expense
of the market.
• High bargaining power is favorable for the
customers.

25. CONDITIONS FOR HIGH
BARGAINING POWER OF BUYERS
1) When buyers are few in number
2) When Large Orders are placed
3) When Alternative Suppliers are available & are
willing to supply at lower costs or favourable
selling conditions

26. CONDITIONS FOR HIGH
BARGAINING POWER OF BUYERS
(CONTD.)
4) When the Switching Costs of buyers from one
supplier to another is low.
5) When the buyer charges
low prices & is extremely
sensitive to price changes.

27. EXAMPLES OF INDUSTRIES WITH HIGH
BARGAINING POWER OF BUYERS
• Defense contractors have a limited set of
politically motivated buyers (governments).
• Sub contractors to car makers have a limited
set of potential clients, each commanding a
large share of their market.

28. LOW BARGAINING POWER
OF BUYERS
• Low Bargaining power enables a firm to pass
on the increase in costs to the buyers or to
make the buyers accept a lower quality of
product & service at a higher rate.

29. CONDITIONS FOR LOW BARGAINING
POWER OF BUYERS
1)When there are many buyers
2)When there are a few suppliers
3)When Switching Costs for buyers from one
supplier to another are high.

30. EXAMPLE OF INDUSTRIES WITH
LOW BARGAINING POWER
• Retailers face individual consumers with little or
no power at all.

32. THANK
YOU