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The presence of powerful suppliers reduces the profit potential in an industry. Suppliers increase competition within an industry by threatening to raise prices or reduce the quality of goods and services. As a result, they reduce profitability in an industry where companies cannot recover cost increases in their own prices.
Porter’s five forces
The bargaining power of suppliers comprises one of the five forces that determine the intensity of competition in an industry. The others are barriers to entry, industry rivalry, the threat of substitutes and the bargaining power of buyers.
Power of supplier group
The following conditions indicate that a supplier group is powerful:
- It is dominated by a small number of companies and is more concentrated than the industry to which it sells
- It is not required to contend with substitute products for sale in the industry
- The industry is not one of the supplier’s important customers
- Its products are an important part of the buyer’s business
- Its products are differentiated or there are built-up switching costs
- It poses a definite threat of forward integration
Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 27-29.