Hello everybody. This is Dr. Zhao. In this video, you will learn the Bargain Power Analysis. The objective of bargain power analysis is to find out what is my leverage, what is my supplier's leverage, and who has the bargain power? This knowledge is important in negotiation because you will know, if you or the supplier should concede in making the deal. You will learn how to quantify that leverages, either buying or selling. The bargain Power Index, which measures the relative bargain power. The ratio of payable days over receivable days is also an important indicator of the bargain power. We shall leave it to supplier analysis. First, we consider a special case, a monopolized market. As a buyer in this market, you have no power to negotiate. You can either take it or leave it. An example of a monopolized market is the US railroads. There are four major railway companies in the US, each covers a specific region, and thus there's no alternative suppliers for rail freight services, so you can either take it or leave it. The second special case is the duopolised market, with two dominant players. An example of the duopoly market is the US air freight with two major players, UPS and FedEx, splitting nearly 70 percent of the market. How to take down two giants at one time, when you cannot handle even one of them. The only way is to create competition between the two for your business. Of course, the more value your business has, the better the result would be. In a general competitive market with multiple suppliers, you can use the bargain power analysis to assess the leverages of the buyer and supplier. Intuitively, if I buy 50 percent of your volume, which is only five percent on my spend in this category, then I have a bargain power over you. For example, Walmart may buy a significant portion of a small company's yearly output, which may only be a small fraction of what Walmart sold or bought in this category. The buyer has the bargain power, because if there's no deal, the supplier loses 50 percent of its sales while the buyer only lose five percent of the supply. Conversely, if I buy five percent of your volume, which is 50 percent of my spend in this category, then you have a bargain power over me. For example, Intel is the largest semiconductor manufacturer selling its microchips to many customers. Being a relatively smaller customer, Huawei heavily depends on Intel's chip supply for its notebooks and cell phones. In this case, the supplier has the bargain power, because if there's no deal, supplier loses five percent of the sales, but the buyer losses 50 percent of the supply. Following the intuition and example, we can calculate the leverages as follows. Consider a buyer, a supplier, and a category. The buyer's leverage can be measured by the buyer's spend on the supplier as a percentage of the supplier's sales, or equivalently, the buyer's contribution to the supplier's revenue. The supplier's leverage is the buyer spend on the supplier as a percentage of the buyer's total spent in a category. Or equivalently, the supplier's contribution to the buyer's category. The Bargain Power Index, BPI, is defined to be the ratio between the buyer's leverage and the supplier's leverage. If BPI is much smaller than one, then the supplier has the bargain power. Because the buyer needs the supplier more than any other way around. If BPI is much greater than one, then the buyer has the bargain power, because the supplier needs the buyer more than the other way around. If the BPI is about one, then the bargain power is balanced. They need each other equally. In what follows, I shall use some examples to explain the BPI. To exemplify BPI, let's consider Huawei, and its purchase of semiconductors. Huawei is one of the biggest communication equipment manufacturers in China. Its top global suppliers include 33 US companies, such as Qualcomm, Intel, Micron, Broadcom, and Texas Instruments. We shall use Huawei's data to calculate Huawei's leverages and US suppliers' leverages. 2015 data shows that Huawei's total spend on microchips or semiconductors is 14 billion dollars, among which 1.8 billion on Qualcomm, 680 million on Intel, 580 million on Micron, 600 million on Broadcom and 400 million on Texas instruments. The 2015 revenues of these suppliers are also listed here. The supplier's leverage can be calculated by dividing the spent on a supplier with the total spent. For instance, Intel's leverage over Huawei is 680 million over 14 billion, which is 4.86 percent. Huawei's leverage can be calculated by dividing the spent on the supplier with the supplier's revenue. For example, Huawei's leverage over Intel is 680 million over 55 billion dollars, which is 1.23 percent. Finally, the BPI for Intel and Huawei is 0.25, which implies that Intel has a bargain power over Huawei. We can see that Qualcomm also has a bargain power over Huawei. But Huawei has a bargain power over Broadcom. Huawei's leverage over Texas Instruments and Micron is about the same as these suppliers' leverages over Huawei, so their bargain power is about the same. We can do the same analysis for Apple with its major semiconductor suppliers. Apple's total semiconductor spend in year 2016 is about 15.7 billion dollars. You can see that after the calculation, Apple has a bargain power over many suppliers, such as Skyworks. But Qualcomm and TSMC, Taiwan Semiconductor Manufacturing Company, had a bargain power over Apple. Before we conclude this video, let us discuss how to improve the bargain power. For the buyer to increase on her leverage, she can increase her spend on the supplier by increasing her sales volume or consolidating the purchases. For the supplier to increase her leverage, she can increase her supply market dominance, for example, her supply as a percentage of the total market supply, by exclusivity, such as technology, innovation, and patent. In summary, we discussed in this video how to quantify the buyer's leverage, the supplier's on leverage, and use the bargain power index to determine who has the bargain power in negotiation.
