Bargaining Power of Supplier and Threat of Substitue

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Date Submitted: 09/13/2012 10:15 AM

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Conditions that increase the threat of substitutes are:

* An attractive price of substitutes: The price of substitutes acts as a ceiling to the price of the subject product. An attractive price of a substitute acts inhibits an industry from reaching its profit potential.

* Increased quality of substitutes: If the quality of a substitute is high, there is increased pressure to increase the quality of the subject product. For example, products such as Netflix and Hulu have introduced video on demand services offered through the internet. Cable and internet companies have answered back by introducing fiber optic networks to not only compete in the video on demand space, but offer incredible picture quality not yet available to the new technologies.

* Low switching costs to consumers: Switching costs to consumers can come in the form of monetary costs (transferring cell phone service: termination and initiation fees) or lifestyle switching costs (switching from driving a car to public transportation). Monetary costs effectively increase the price of the substitute products whereas lifestyle costs are more subjective and difficult to identify. In either case, the easier and less costly it is to switch to a substitute, the higher threat of that substitute.

Suppliers are powerful if:

* Suppliers are concentrated or differentiated: If there are only a few suppliers (or one) in the market, the suppliers will have more leverage because of the lack of available alternatives.

* Significant costs involved in switching suppliers: Customers are less likely to switch suppliers if there are large costs associated with switching. For example, professional video editors are less likely switch from one system (Final Cut Pro) to another (Adobe Premier Pro) because of the costs associated with purchasing new hardware.

* Suppliers can forward integrate: If a supplier has the power to or threatens to forward integrate, the buyer may be forced...