Evaluating a Firm's External Environment - Illinois State University

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Chapter 2: Evaluating a Firm’s External Environment 45
dominated by a small number of firms. In this setting, a firm has little choice but
to purchase supplies from these firms. These few firms thus have enormous flexibility
to charge high prices, to reduce quality, or in other ways to squeeze the profits
of the firms to which they sell. Much of Microsoft’s power in the software
industry reflects its dominance in the operating system market, where Windows
Vista remains the de facto standard for most personal computers. For now, at least,
if a company wants to sell personal computers, it is going to need to interact with
Microsoft. It will be interesting to see if Linux-based PCs become more powerful,
thereby limiting some of Microsoft’s power as a supplier.
Conversely, when a firm has the option of purchasing from a large number
of suppliers, suppliers have less power to threaten a firm’s profits. For example, as
the number of lawyers in the United States has increased over the years (up 40
percent since 1981, currently over 1 million), lawyers and law firms have been
forced to begin competing for work. Some corporate clients have forced law firms
to reduce their hourly fees and to handle repetitive simple legal tasks for low
flat fees. 31
Second, suppliers are a greater threat when what they supply is unique or
highly differentiated. There was only one Michael Jordan, as a basketball player,
as a spokesperson, and as a celebrity (but not as a baseball player). Jordan’s unique
status gave him enormous bargaining power as a supplier and enabled him to
extract much of the economic profit that would otherwise have been earned by the
Chicago Bulls and Nike. Currently, there is only one LeBron James. In the same
way, Intel’s unique ability to develop, manufacture, and sell microprocessors
gives it significant bargaining power as a supplier in the personal computer
industry.
The uniqueness of suppliers can operate in almost any industry. For example,
in the highly competitive world of television talk shows, some guests, as suppliers,
can gain surprising fame for their unique characteristics. For example, one woman
was a guest on eight talk shows. Her claim to fame: She was the tenth wife of a gay,
con-man bigamist. Talk show hosts can also exercise significant power as suppliers.
King World, the distributor of the Oprah talk show, has depended on Oprah for as
much as 40 percent of its revenues. This, of course, has given the show’s host,
Oprah Winfrey, significant leverage in negotiating with King World. 32
Third, suppliers are a greater threat to firms in an industry when suppliers
are not threatened by substitutes. When there are no effective substitutes, suppliers
can take advantage of their position to extract economic profits from firms they
supply. Both Intel (in microprocessors) and Microsoft (in PC operating systems)
have been accused of exploiting their unique product positions to extract profits
from customers.
When there are substitutes for supplies, supplier power is checked. In the
metal can industry, for example, steel cans are threatened by aluminum and plastic
containers as substitutes. In order to continue to sell to can manufacturers, steel
companies have had to keep their prices lower than would otherwise have been
the case. In this way, the potential power of the steel companies is checked by the
existence of substitute products. 33
Fourth, suppliers are a greater threat to firms when they can credibly
threaten to enter into and begin competing in a firm’s industry. This is called
forward vertical integration; in this situation, suppliers cease to be suppliers only
and become suppliers and rivals. The threat of forward vertical integration is partially
a function of barriers to entry into an industry. When an industry has high
barriers to entry, suppliers face significant costs of forward vertical integration,