6.25.2012

Breaking Down Your Industry- The Bargaining Power of Your Network

Two of the most important parts of your network as an entrepreneur, are your suppliers and your customers. The framework of Porter's Five Forces analyzes these components through the lens of the power that they each have.

1. Buyer's Bargaining Power

-How much pressure can your customers put you under to reduce your prices?

This largely depends on how many options they believe that they have. The more substitutes that exist and the more information that they have about them, the more likely customers are to be sensitive to the price of your goods and therefore demand lower prices. Another element affecting the extent to which customers perceive the existence of options is how much it will cost them to switch from your product to another. This cost may be measured in a number of ways (for example monetary, inconvenience etc.). A good example is with Mac's and PC's. Until recently they required very different software, making it difficult for users to switch between the two.

2. Supplier's Bargaining Power

Suppliers are those who provide the inputs to your business. This can include suppliers of raw materials as well as suppliers of labor (your employees). The power your suppliers have over you depends on the number of alternatives you have. If you're a baker, can you buy flour somewhere else? Is your access to suppliers limited? The more limited you are, the easier it is for these suppliers to apply upward pressure on their prices. If you can only buy flour from only one supplier it is likely that they will charge whatever price the choose. If an employee is the only one that possesses a particular set of skills, they will bargain for the highest wage possible.

Supplier and buyer power in and of themselves are not negative things. As a business owner though, it's important to be aware of these forces and the impact that they can have on your business.


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