Question
Understanding the bargaining power of buyers and suppliers is crucial for a business's strategic planning as it helps in assessing the competitive landscape. If buyers have strong bargaining power, they can demand lower prices or higher product quality, affecting a company's profitability. Similarly, if suppliers have high bargaining power, they can increase their prices or reduce the quality of goods, impacting the cost structure. By understanding these dynamics, businesses can develop strategies to mitigate these risks, such as diversifying supplier base or enhancing customer value proposition.
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In his book , Michael Porter wrote that the competition in an industry and the ultimate profitability of a firm depend on five fundamental competitive forces: ease of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among competitors. Competitive strategy aims to create a defensible position for the firm against these five competitive forces with offensive or defensive tactics.
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