ACCA Applied Knowledge · Business and Technology · Competitive factors
A firm operates in an industry with many small suppliers of a standard raw material, but the firm's main component comes from a single supplier with a patented design and high switching costs. Which statement best assesses supplier power?
Supplier power is high for the key component. The single patented supplier offers no close alternatives and switching costs are high, giving it leverage on price and terms. The many small suppliers of the standard material do not offset dependence on this critical input.
- ASupplier power is low overall because most suppliers are small and numerous
- BSupplier power is high for the component, because the sole patented supplier and switching costs give it leverageCorrect
- CSupplier power is irrelevant because the firm can integrate forward
- DSupplier power is low because patents reduce the threat of new entrants
Explanation
Supplier power rises when there are few alternatives, the input is differentiated and switching costs are high. These apply to the component, so power is high there even though the standard material is easily sourced. Option one averages away the critical input, and forward integration does not address supply dependence.
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