Balancing The Scales: Counteracting Excess Supplier Power

Today, we're going to talk about Porter's competitive forces and how they affect small businesses. Specifically, we'll dive into the bargaining power of suppliers, the risks that it poses for small businesses, an example of how this power can manifest in real life and what can be done to mitigate the risks.

The Five Competitive Forces That Shape Strategy

First, let's talk about Porter's competitive forces. Developed by Michael Porter in 1979, this strategic framework is still used to analyze the competitive environment in which a company operates. The five forces are:

1. Threat of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Threat of substitutes

5. Rivalry among existing competitors

Each of these forces can have a significant impact on a company's profitability and success. However, today we'll be focusing specifically on the bargaining power of suppliers.

Bargaining Power of Suppliers

So, what exactly does bargaining power of suppliers mean? It refers to the degree of influence that a supplier has over the price and quality of goods or services that a company purchases from them. In other words, if a supplier has a high degree of bargaining power, they can demand higher prices or provide lower quality products without fear of losing the business of the company they're supplying.

Obviously, this can be a significant problem for small businesses, as they often have fewer resources and less bargaining power than larger companies. Small businesses may rely on a single supplier for a critical component of their products or services, which means that if that supplier decides to raise their prices or provide lower quality products, the small business may be forced to accept those terms or risk going out of business.

Additionally, small businesses may not have the same level of access to information about the market or negotiating power as larger companies. This can make it difficult to identify alternative suppliers or negotiate better terms with existing suppliers.

The above examples of supplier power are often provided as simple explanations of this force in the framework, but the truth is that dealing with supplier power is a more subtle and complex issue. This is especially true with technology, where small businesses implement tools that become critical to their operation without an understanding of where a supplier’s leverage exists.

Understanding Technology Supplier Power

Like all strategic decisions, every supplier choice you make for the business cascades into a subsequent, dependent decision. For example, you grew up using Microsoft Office, you’re personally familiar with its features and so you want Office 365 (O365) to be the productivity software for your business. Whether you realize it or not, this single choice necessitates a series of subsequent decisions such as:

• How to centralize the administration and billing of multiple O365 accounts in a back-end infrastructure;

• Will the business hire a certified Microsoft administrator internally to create the infrastructure or outsource to a third party Managed Services Provider (MSP);

• How you find a third party MSP and determine market price for the service;

• Determining who in your organization will be administrating the accounts internally (ie. adding/removing accounts, managing passwords etc.);

• And the list goes on

Going back to supplier power, a simplistic analysis says Microsoft holds all the bargaining power. While that’s academically true, there isn’t really anything your small business can do about that other than maybe negotiate some pricing…maybe. So Microsoft’s bargaining power is not relevant to your business since you have already made the decision to accept the cost of dealing with Microsoft, because that’s the tool you want.

But look at some of those choices again and you can see that a secondary supplier has been put into place with a much more intimate relationship with your business. The internal IT staff or MSP that manages the back-end of your infrastructure is one of the most critical suppliers to your business.

Why?

Because they can instantly disable your ability to conduct any business at all by shutting off access to communication and critical infrastructure.

And yes you can threaten to sue or call the police or break their legs, but there is nothing you can do in real time to change the situation, which leaves your business disabled until they decide otherwise. That middle-tier supplier — your IT guy, or MSP — knows you and your business intimately, which gives them outsized supplier power relative to what they are actually paid by your business for their service.

Mitigating Technology Supplier Power

So, what can small business owners do to mitigate the risks posed by the bargaining power of middle-tier tech suppliers? Here are a few tips:

1. Build strong relationships with suppliers: Building a strong relationship with your suppliers can help improve communication and build trust. This can include regular check-ins, sharing market data and trends, and being transparent about your business goals and needs.

2. Identify critical system components: This may sound trite, but find out which software or system tools are actually critical to your business and make a list of what they are, what they do, and who are the internal expert users. Know what your business can’t afford to live without - usually you can count these items on one hand.

3. Eliminate single point of failure: Make sure that you hold the highest level administration possible to key tech accounts and don’t let other people manage that level of access without your knowledge. Barring that, have processes in place that put you in the workflow so you know what is happening at all times with your critical infrastructure.

4. Keep an eye on the market: Stay informed about the market and any changes in supplier prices or quality. This can help you identify potential risks early on and make informed decisions about your supplier relationships.

In conclusion, while the bargaining power of suppliers can be a risk, middle-tier technology suppliers should be the real concern for small businesses. However, by building strong relationships with suppliers, identifying critical system components, eliminating the single point of failure and keeping an eye on the market, small businesses can mitigate these risks and thrive in a competitive environment.