Cummins Inc. Equity Valuation and Analysis

Also, buyers have relatively higher bargaining power compared to firms. While
there are many buyers, there are many suppliers as well. Since each buyer
tends to buy high volumes, the cost of not doing business is higher for firms in
the industry than to the buyer. Other major factors include the high number of
alternatives along with the low switching costs. Many buyers manufacture
similar products which leaves the door open for reverse engineering by buyers.
With buyers’ sensitivity to price high as well as their overall bargaining power, we
consider the bargaining power of buyers as a high threat.
Bargaining Power of Suppliers
To stay competitive, diversified machinery manufacturers need to be able to
negotiate lower prices with their suppliers. Cummins Inc, with 2006 sales of
$9.92 billion in their engine segment, competes with companies like Caterpillar
who had 2006 sales in the engine segment of $11.08 billion. With the large
volume of sales, this allows companies in the industry to have a strong
bargaining power over their suppliers.
Furthermore, a main supply purchased by firms in the industry, metals, is a
commodity so many substitutes are available and the switching costs are low.
For finished components required for their projects, firms have developed
strategic alliances with a number of companies internationally which help to
maintain lower costs. Due to their relative size, firms in the industry can
negotiate for the lowest price possible allowing firms to keep prices as low as
possible and maintain current relationships thus attracting new buyers.
Due to the large amount of sales that firms in this industry create, we contend
that the bargaining power of suppliers is low.
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