The performance and profitability of individual firms depends to a very large extent on the conditions of the industrial sector in which the given firm operates. According to Michael Porter there are five powerful forces that have a major impact on the profitability of a given industry. They are the bargaining power of the suppliers, the bargaining power of the customers, the intensity of rivalry among existing competitors, the threat of available substitutes and the threat of new entrants.
The main factor that determines powerful suppliers is the number of suppliers supplying the product or service to the given industry. If the number of suppliers is few then the suppliers become very powerful. The second factor that determines the power of the supplier is its ability to integrate forward. If the supplier has the financial and technological strength to integrate forward then it becomes powerful. The absence of substitute inputs that can be used by the buyer also enhances the power of the supplier.
The factors that result in increase of the power of the buyer are: relatively fewer numbers of buyers consuming a given product or service and the purchase of the product or service in very large volumes by a given buyer. The buyer becomes powerful if the switching costs incurred are relatively lower. The financial and technological ability of the buyer to integrate backwards is yet another factor that increases the power of the buyer.
As a manager I would definitely prefer to operate in an environment where the buyers and suppliers are less powerful. Such a situation reduces the dependency on the buyers and suppliers. It will provide me with better bargaining power during negotiations with the supplier to reduce the prices of inputs. Similarly it will help me to negotiate with the buyers for better prices for our products. This will be a great help to enhance the profitability of our firm.