DSpace at Khazar University

When there is a real risk that the buyer's firm may decide to integrate
backwards: that is, to make the product itself rather than buy it in.
Thus where buyers are faced with many alternatives, and the cost of switching is
low or non-existent, buyers have power. The more concentrated the buyers, the greater
their power. Buyer power is normally evidenced by the ability of the buyer to bargain
the price downwards.
Bargaining power of suppliers
Correspondingly, the ability of suppliers to increase prices without losing sales
illustrates their power. Such power may come about in the lowing circumstances:
When the purchase is important to the buyer.
When buyers have high switching costs.
When there are few alternative sources of supply.
When any particular buyer is not an important customer of the supplier.
When there is the real risk that the supplier may integrate forward: for instance,
instead of the car maker supplying its independent dealers, it may decide to set
up its own dealer subsidiary.
Examples of powerful supplier relationships would be gas supply to the glass
container industry, and microchip suppliers to the computer industry.
The term "suppliers" includes the providers of capital and of specialist skills.
Hence, if an industry is dependent on particularly skilled people, these individuals can
bargain up their pay levels: for example, advertising agencies are highly dependent on a
few creative individuals, and their pay is accordingly high.
If suppliers are powerful they can increase the prices of their inputs, thus
extracting potential profits from the industry. If firms are facing both powerful suppliers
and buyers, profits will be severely squeezed, as input cost increases cannot be passed
on in higher prices to buyers. Such a situation is likely to make the industry unattractive
to potential entrants.
Threat of substitutes
Industries are usually defined in terms of the products or services they provide.
Hence, we have the aluminum can industry, the sugar industry, or the pizza restaurant
52