Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the power of suppliers typically refer to in Porter's Five Forces?

1. Ability to influence product pricing

2. Control over distribution channels

3. Market entry barriers

4. Consumer purchasing power

The correct answer is: Ability to influence product pricing

The power of suppliers in Porter's Five Forces framework refers to their ability to influence product pricing. When suppliers have significant power, they can affect the cost of raw materials and components, which directly impacts the pricing structure for companies that depend on these supplies. High supplier power often leads to increased costs for businesses, as suppliers can demand higher prices or impose unfavorable terms. This dynamic can limit the ability of firms to maintain profitability and competitiveness in the market. In this context, the other options, while relevant to market analysis, do not capture the essence of supplier power as articulated in the framework. Control over distribution channels relates more to the power of distributors rather than suppliers. Market entry barriers address the challenges new competitors face when entering an industry, which is a separate concern from supplier relationships. Consumer purchasing power focuses on the ability of consumers to influence demand and pricing, again distinct from the category of supplier power. Understanding the power of suppliers is crucial for businesses as it informs strategic decisions around sourcing and pricing.