Bargaining Power of Suppliers
The cost leader operates with margins greater than those of competitors. Cost leaders
want to constantly increase their margins by driving their costs lower. Big Lots’s gross
margin increased from 39.7 percent in 2008 to 40.4 percent in 2009, 74 an indication the
firm was effectively using the cost leadership strategy. Among other benefits, higher gross
margins relative to those of competitors make it possible for the cost leader to absorb its
suppliers’ price increases. When an industry faces substantial increases in the cost of its
supplies, only the cost leader may be able to pay the higher prices and continue to earn
either average or above-average returns. Alternatively, a powerful cost leader may be
able to force its suppliers to hold down their prices, which would reduce the suppliers’
margins in the process.
Wal-Mart uses its power with suppliers (gained because it buys such large quantities
from many suppliers) to extract lower prices from them. These savings are then passed
on to customers in the form of lower prices, which further strengthens Wal-Mart’s position
relative to competitors lacking the power to extract lower prices from suppliers. The
fact that Wal-Mart is the largest retailer in North America is a key reason the firm has
a great deal of power with its suppliers. Another indicator of this power is that with 25
percent of the total market, Wal-Mart is the largest supermarket operator in the United
States; and its Sam’s Club division is the second largest warehouse club in the United
States. Collectively, this sales volume and the market penetration it suggests (over 100
million people visit a Wal-Mart store each week) create the ability for Wal-Mart to gain
access to low prices from its suppliers.