## Porter's Five Forces: Bargaining Power of Suppliers

Porter's Five Forces model identifies five competitive pressures that collectively determine the profit potential (attractiveness) of an industry. One critical force is the Bargaining Power of Suppliers.

### What is Bargaining Power of Suppliers?

When suppliers have high bargaining power, they can raise prices, reduce quality, or limit supply, squeezing the profitability of firms that depend on them.

### Factors That Increase Supplier Power

1. Crucial input with no substitutes: If the supplier's material/component is essential and no alternative exists, they hold significant leverage.

2. Few alternative suppliers: A concentrated supplier base means buyers cannot easily switch.

3. High switching costs: If changing suppliers involves significant cost, time, or operational disruption, the buyer is locked in.

4. Supplier can forward integrate: If the supplier could potentially enter the buyer's industry, their power increases.

5. Buyer is small/new: Start-up or small firms have less negotiating leverage than large established buyers.

### Strategies to Counter High Supplier Power

Strategy	Description
Identify alternative suppliers	Even for unique inputs, other suppliers in adjacent industries may exist
Develop substitute inputs	Invest in R&D to find alternative materials
Backward vertical integration	Acquire or develop in-house production of critical inputs
Diversify supplier base	Avoid single-source dependency

> Key insight: If a raw material is used across multiple industries (not just one), multiple suppliers likely exist across those industries — this reduces any single supplier's bargaining power over the long term.

Worked example

### Example 1

Scenario: Baby Turtle — Washable Diapers and Supplier Bargaining Power

Facts:

Baby Turtle makes washable diapers; not many competitors exist (new market).
Core material needed for production is also used in many other waterproofing products across various industries.
Baby Turtle sources this material from a single renowned supplier at comparatively low prices.

Which Five Force applies?

Bargaining Power of Suppliers — Baby Turtle is currently dependent on one renowned supplier for a crucial, hard-to-substitute input.

Factors creating this pressure:

1. The supplier's product is crucial to Baby Turtle; no immediate substitutes for the material.

2. Baby Turtle is at an inception stage — small and with limited negotiating leverage; supplier can manipulate switching costs.

3. Supplier is renowned — suggesting limited alternatives at this quality level.

Baby Turtle's advantage:

The core material is used across multiple industries (waterproofing products in various sectors).
This means other suppliers of the same material exist across those industries.
Baby Turtle can source from alternative suppliers in the short term, even if there is temporary operational disruption.
Over time, this cross-industry supplier availability weakens the current supplier's bargaining power.

Conclusion: While Baby Turtle currently faces high supplier bargaining power due to single-source dependency, the cross-industry nature of the material provides a viable path to diversifying its supplier base and reducing that power.

⚠️ Common exam mistakes

Misidentifying the relevant Five Force: Read scenarios carefully — supplier power relates to inputs purchased FROM suppliers; buyer power relates to customers purchasing FROM the firm; these are opposite directions.
Overlooking that a material used across multiple industries implies multiple potential suppliers — this is the key mitigation argument that reduces long-run supplier power.
Confusing 'few competitors' (threat of new entrants / rivalry) with 'few suppliers' (supplier power) — the absence of competitors for Baby Turtle's product is irrelevant to supplier power.
Ignoring the firm's stage of development: being a new/small firm increases supplier power because the buyer has less negotiating leverage — this is an important contextual factor.

Reference:

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Porter's Five Forces — Bargaining Power of Suppliers

Worked example

⚠️ Common exam mistakes