In earlier blogs we have given an overview of Porter’s Five Forces and discussed the first three in more detail: Potential Entrants, Substitutes and Buyer Power. In this blog we are looking at another of Porter’s Five Forces: Suppliers.
Understanding the elements of this business strategy can help companies and other organisations remain competitive and plan for the future.
What are suppliers?
Every organisation has suppliers of some kind, whether of raw materials, energy (eg. electricity, gas, compressed air suppliers), workers (eg. recruitment agencies) or other resources essential for the running of the business.
Like customers, suppliers can potentially have powerful bargaining power over a business or organisation.
What are the risks and opportunities posed by suppliers?
There are three key elements that can affect supply, sometimes in combination. These are:
The price of products or services offered by suppliers can vary depending on factors such as availability.
For example, if a manufacturing company can easily source raw materials from a number of companies, it can shop around for the best price or put pressure on its current supplier to drop prices. If it requires a specialist product that is only supplied by one company, there is little scope to negotiate on price.
This availability can be affected by local or global political, economic and other factors (see our blog on What is Pestle Analysis?).
There is also a risk to business when the supply of products or services are interrupted, for example if a supplier goes bust or there is a lack of supply, such as bad weather affecting crops required for food manufacture.
Finally, suppliers can affect your business positively or negatively by changing the quality of the products and services they offer. For example, a company may develop a new model of machinery that increases productivity or reduces energy bills for the businesses it supplies.
Conversely, a supplier might try to increase its own profit margins by using cheaper materials without dropping the price of its products; this could adversely affect the companies it supplies if the products don’t work as well or last as long.
What other factors might come into play?
Another factor to consider is how easy it is to switch from one supplier to another.
Suppliers might use tactics such as tying a customer into a long-term contract with penalties built in for those who want to leave early. This can often be the case with financial products.
Equally, a supplier might offer benefits to new customers who switch to their products or services. An example would be a bank offering preferential rates to a business moving its account over.
Although offering excellent customer service can both help a supplier win business and benefit the buyer, the relationship can be affected by who wields the most power when it comes to factors such as price, availability, quality and ease of switching.
While an organisation will naturally seek out the best suppliers in order to increase profitability and help secure its future, it’s worth remembering that the supplier will have the same aim.