Supplier bargaining power is weaker when
Multiple Choice
A. suppliers are not dependent on the industry for a large portion of their revenues.
B. industry members have the potential to integrate backward and self-manufacture their own requirements
C. the supplier industry is more concentrated than the industry it sells to
D. supplier services are critical to industry members’ production process.
E. supplier products are differentiated and short in supply
The Correct Answer and Explanation is :
The correct answer is B. industry members have the potential to integrate backward and self-manufacture their own requirements.
Explanation:
In Porter’s Five Forces model, supplier bargaining power refers to the ability of suppliers to influence the prices and terms of supply to an industry. Suppliers have strong bargaining power when they can dictate prices, quality, and delivery terms due to limited options for buyers. Conversely, supplier bargaining power is weaker when buyers have more leverage, which is the case when industry members have the potential to integrate backward and self-manufacture their own requirements.
Why is B the correct answer?
When industry members (buyers) have the ability to produce the inputs or components themselves (backward integration), they can reduce or eliminate their dependence on external suppliers. This makes suppliers weaker because they lose their leverage, as buyers can switch to internal production instead of relying on the supplier for necessary materials, components, or services. In essence, the threat of backward integration reduces the power of suppliers, because it makes suppliers aware that they are not the only option for the buyer.
Why the other options are incorrect:
- A. Suppliers are not dependent on the industry for a large portion of their revenues.
If suppliers are not highly dependent on the industry, they might have less incentive to accommodate the buyers. However, this doesn’t necessarily weaken their bargaining power with respect to a single industry unless they are not offering critical products or services. - C. The supplier industry is more concentrated than the industry it sells to.
If the supplier industry is more concentrated, it generally implies that there are fewer suppliers, which would actually increase the supplier’s bargaining power because buyers have limited choices. - D. Supplier services are critical to industry members’ production process.
If supplier services are critical, the suppliers have higher bargaining power, not weaker. This is because industry members are more dependent on those services for their operations. - E. Supplier products are differentiated and short in supply.
When products are differentiated and short in supply, suppliers tend to have stronger bargaining power because they can offer unique products that are hard to replace.
In summary, backward integration by industry members reduces the bargaining power of suppliers because it gives the buyers the option to self-supply, reducing their dependency on external suppliers.