Buyers - Strategic Management

This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company’s margins and volumes, then they hold substantial power. Here are a few reasons that customers might have power

  • Small number of buyers
  • Purchases of large volumes
  • Switching to another (competitive) product is simple
  • The product is not extremely important to the buyer, they can do without it for a period of time.
  • Customers are price sensitive
  • Buyer concentration to firm concentration ratio
  • Bargaining leverage
  • Buyer volume
  • Buyer switching costs relative to firm switching costs
  • Buyer information availability
  • Ability to backward integrate
  • Availability of existing substitute products
  • Buyer price sensitivity
  • Price of total purchase

Relative size
If the industry includes firms which are considerably larger than their customers, sheer weight of resources may put them in the dominant position. The opposite may apply when the buying organizations are the larger.

Dependencies
Bargaining strength may lie with the least dependent of the two parties. This is a composite of the number of industry firms contrasted with the number of buying firms, and the importance of the product to the profits of each party.

Profitability of the buying industry
Where buyers are unprofitable or have low profits there is likely to be stronger resistance against price increases. This resistance will increase when the buyer is facing an elastic demand curve, and cannot easily pass on his or her extra costs.

Experience of buyers
Buyers purchasing from a mature industry are likely to have more experience than those dealing with a new one. Thus, the more mature the industry, the weaker its bargaining position may become .Where the buying industry is also mature, there may be a tendency for the degree of product differentiation to fall, making it more difficult for the industry to sustain high margins.

Threat of integration
The industry firm that patently has the capability and strength to integrate into its buying industry possesses a key bargaining point. If the buying industry thwarts its profit aims, it has the potential to remove the blockage.


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