Marketing Strategy and Competitive Positioning pdf ebook

The importance of understanding the balance of power
Notwithstanding the importance of strategic buyer–seller relationships, there seems a strong 
case that the party in the supply chain enjoying the balance of power will use that to their 
advantage. For example, in spite of surging raw material costs, the pricing power of sup-
pliers has continued to deteriorate in many markets. Producers may have to absorb most 
cost increases because they are unable to pass them fully through the supply chain, simply 
because powerful buyers will not permit it (Cave, 2005). It is illustrative that in the automo-
tive components market, notwithstanding escalating steel and raw material prices faced by 
producers, Volkswagen told its parts suppliers in 2005 it wanted 10 per cent cost savings 
over the following two years. At Chrysler, the CEO demanded an immediate 5 per cent price 
cut by suppliers, with a further 10 per over the following three years (Mackintosh, 2005).
Another example is a study of Tesco that suggested that at one point it had some 2,600 
suppliers providing £9 billion worth of goods. The largest supplier had less than 3 per cent 
of Tesco’s total sales and the median supplier less than one-hundredth of a per cent. If a 
contract is lost, the absolute maximum impact on Tesco’s sales would be 1–3 per cent, and 
normally far less. For the supplier, it could mean a loss of sales of 10–30 per cent of total 
revenue, without an alternative sales outlet (Giles and Tricks, 2005). Consider the negative 
impact on Premier Foods’ profitability and share price, when Tesco elected to de-list 11 out 
of 18 bread product lines that Premier produces, rather than accept a price rise (Kavanagh, 
2011). This neatly defines the relative power of buyer and seller.
For such reasons, in sectors such as automotive components, suppliers are actively seek-
ing to diversify their customer bases and to change product portfolios to reduce dependence 
on a small number of powerful accounts (Simon, 2005). The issue is becoming one of staying 
close to key customers, but reaching out to other customer groups as a route to reduced 
dependency on a few enhanced profits (Witzel, 2005b). Indeed, this shift in dependency may 
be one of the highest strategic priorities impacting on survival.