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Terms in this set (23)

Power of Buyers (Customers) bargaining power

- Lowers industry profit potential if:
•Buyers obtain price discounts, which reduces revenue.
•Buyers demand higher quality / service, which raises production costs.

- Situations when buyers are price sensitive:
•The buyer's purchase represents a significant portion of its procurement budget.
•Buyers earn low profits or are strapped for cash.
•The quality (cost) of the buyers' products and services is not affected much by the quality (cost) of their inputs.

- Buyers are the customers of an industry.

The power of buyers is high when:

✓There are a few buyers and each buyer purchases large quantities relative to the size of a single seller.

✓The industry's products are standardized or undifferentiated commodities.

✓Buyers face low or no switching costs.

✓Buyers can credibly threaten to backwardly integrate into the industry.

Ex: The retail giant Walmart provides perhaps the most potent example of tremendous buyer power. Walmart is not only the largest retailer worldwide (with over 12,000 stores and 2 million employees), but it is also one of the largest companies in the world (with $530 billion in revenues in 2019).
- Walmart is one of the few large big-box global retail chains and frequently purchases large quantities from its suppliers.
- Walmart leverages its buyer power by exerting tremendous pressure on its suppliers to lower prices and to increase quality or risk losing access to shelf space at the largest retailer in the world. Walmart's buyer power is so strong that many suppliers co-locate offices directly next to Walmart's headquarters in Bentonville, Arkansas, because such proximity enables Walmart's managers to test the supplier's latest products and negotiate prices.