Question

Which player is likely to have higher bargaining power: a large, established company shopping around for a new parts supplier, or a start-up company trying to sell its parts? Explain your answer. \([\mathrm{LO} 9.7]\)

Short answer

The large, established company is likely to have higher bargaining power.

Step-by-step solution

Understanding Bargaining Power

Bargaining power refers to the ability of one party to influence the terms and conditions of a transaction to their advantage. In business, it often results in better pricing, quality, or other favorable terms.

Analyze the Large Established Company's Position

A large, established company typically has more resources, a stable customer base, and established brand recognition. This provides them with more leverage when negotiating terms with new suppliers. They can compare offers from multiple suppliers, yielding them better prices or contract terms due to their buying capacity.

Analyze the Start-Up Company's Position

A start-up company, on the other hand, likely lacks established brand recognition and may have limited financial resources and sales history. This implies lesser influence when trying to sell its products, as potential buyers may perceive the risk to be higher due to lack of proven capabilities or reliability.

Compare Both Scenarios

Comparing both scenarios, the large, established company likely has greater bargaining power owing to its market position and potential for bringing business to suppliers. In contrast, the start-up company would have less bargaining power as its position in the market is relatively weaker.

Key concepts

Business Negotiation

Business negotiation is a critical skill where parties involved aim to reach agreements that are favorable to all. It involves communication where both sides attempt to steer the terms according to their needs and business goals. When negotiating, parties need to understand their strengths and the leverage they hold. This leverage can come from various factors, such as their past experience, resources, and reputation in the industry.
In a negotiation, knowing your objectives and the objective of the other party is key. Successful negotiators often prepare by identifying what they can offer and what they expect to gain. Tracking market trends, understanding competitive positions, and tech advancements might give negotiators the upper hand.

• Communication Skills: Clear communication aids in presenting terms effectively.
• Understanding Needs: Knowing your needs and their needs helps find the middle ground.
• Adaptability: Being flexible if new information changes the terms can be crucial.

Overall, the effectiveness of business negotiation hinges on the ability of all parties to find a win-win solution.

Market Position

Market position refers to how a company is perceived in the marketplace in relation to its competitors. It dictates the influence a business has when negotiating transactions. A strong market position generally indicates a well-established brand, reliable products, and a loyal customer base.
A firm with a dominant market position can often dictate terms in negotiations due to its perceived reliability and demand for its products or services. Market position is crucial in determining bargaining power as it directly affects a company’s ability to contract with favorable terms.
Factors that contribute to a strong market position include:

• Brand recognition: Recognizable brands often have positive public perceptions.
• Customer loyalty: Businesses with a loyal customer base can command better terms.
• Financial stability: Companies with solid financials are seen as less risky.

A strong market position typically results in increased bargaining power.

Transaction Terms

Transaction terms are the specific details agreed upon during a business negotiation. These include price, delivery schedules, quality specifications, and payment conditions. Understanding and defining these terms is crucial in any business negotiation.
Companies with greater bargaining power, often due to a strong market position, can secure more favorable transaction terms. This might include discounts, longer payment periods, or exclusive rights. Transaction terms are not static and can evolve based on negotiations over time.
Key transaction terms elements involve:

• Pricing: Negotiating based on volume or brand strength.
• Delivery: Securing preferred delivery times or increased frequency.
• Payment terms: Obtaining extended timeframes for payments.

In a competitive environment, having advantageous transaction terms can differentiate a business and solidify its economic position.