Supplier Strategies for Analysing Supply Markets
Michael Porter’s ‘Five Forces Model of Competition’ provide a framework that can be used by suppliers to analyse supply markets.
Supply markets are analysed in a systematic way by considering the following factors;
- Market structure
- Competition
- Supply chains
- Substitute goods and services
- Buyer’s value as a customer
1. Market Structure:
Market structure looks at the relevant market or market segments, total size of the market, key suppliers in the market and their respective market shares, existing ownership structures in the market and profitability of the different suppliers.
The following steps are involved;
I. Defining the market – this entails determining the key characteristics of the market under consideration and helps to focus the supply market analysis in order to target the relevant suppliers.
II. Market Size and Market Shares – the size of the total market is determined both in terms of sales and volume. Depending on the complexity of the market, the total size of the market can then be categorized at international, national or regional levels. The key suppliers and their respective market shares are then determined, and this affects the negotiating power of the buyer.
III. Market Concentration – the concentration of suppliers in the market and the products they are selling is determined. Depending on the outcome, the market will be categorized as perfect competition, monopolistic competition, oligopoly or monopoly.
IV. Ownership – identifying the ownership of firms can explain their behaviour and influence how the market competition will be. Factors to consider include if a supplier is a subsidiary of another, if there are any ownership transfers, if there are firm takeovers, if the firm is local or part of an international firm, etc.
V. Profitability – this determines the viability and survival of a supplier i.e. whether a supplier will continue operating in a competitive market due to high returns, or whether a supplier will exit and withdraw from the market due to low returns. Factors that will be investigated are cost structures of the firms for identical products and product differentiation.
2. Competition
Competition involves understanding and examining how suppliers compete in the market. This provides the necessary information about supply market dynamics e.g. the availability and pricing of products and services. Areas to consider in analyzing competition include;
I. The basis of competition – suppliers will compete on features such as, price, quality of service, distribution, types of products, brand image, etc.
II. Barriers to entry and exit – the level of competition is greatly affected by the type and level of barriers to entry and exit in a market. High barriers to entry result in fewer competitors while low barriers to entry result in greater number of competitors.
III. Changes to competition – by determining the future competitive environment a buyer can plan ahead and wait for circumstances to change in order to get better prices from suppliers.
IV. Product life cycle – by identifying the stage the good or service is in the product life cycle will help the buyer consider the suppliers’ possible marketing strategies and how the suppliers will compete within the market. The product life cycle model consists of four stages, i.e. introduction, growth, maturity and decline, with each stage having different marketing strategies.
3. Supply Chains
The supply chain, i.e. the process of creating a good or service, is analyzed in order to clearly understand the value addition of each party in the supply chain, the unnecessary costs within the supply chain, dependencies in the supply chain and their potential risks within the supply chain. This information assists the buyer to develop an appropriate procurement strategy to manage the supply chain value, risks and costs. Key areas in analyzing the supply chain include;
I. Identify the level of value addition – each party in the supply chain is examined to identify if they are adding value and if that value addition is worth the costs and risks incurred.
II. Supply chain dependencies – this is analyzed by determining if the buyer is fully dependent on a single supplier since this carries along risks in case there are other suppliers further up the supply chain, whom the buyer has no supply agreements with.
III. Sustainable procurement – the complete supply chain of the products and services is examined to identify and develop an understanding of sustainability areas, the risks involved and how to manage them.
IV. Where to buy in the supply chain – the whole supply chain is analyzed to make the appropriate decision on where to purchase, for the buyer to realize better value for money. The purchase can be from a retailer, wholesale market of directly from the manufacturer.
4. Substitute Goods and Services
Substitute goods and services are analyzed to provide an awareness of the alternative means of meeting the buyer’s demand requirements. The analysis focuses on the following;
I. Identifying substitutes – with clear and unbiased specifications of a firm’s needs, there will be a possibility of opening up the market to a wider range of products, services and suppliers. The substitutes should be identified in consultation with the end users of the product or services.
5. Buyer’s Value as a Customer
The value of the buyers as customers to the supply market is analyzed to identify any changes they would need to make in order to become more attractive for the suppliers to meet their demand requirements. The analysis includes factors like;
I. Supplier preferencing – buyers need to realize that their suppliers will assess the costs of doing business with them and determine if it is profitable or not. The buyer will use supplier preferencing to examine how the suppliers view the buyer’s business. The supplier may view the buyer as a nuisance, exploitable, development or core customer.
II. Supplier account strategies –buyers will gauge their value to the suppliers with the aim of being regarded as a core business account rather than a nuisance business account.
III. Matching supply positioning to supplier preferencing – once the buyer has determined how the supplier perceives them as a customer, there will be need to match up the buyer’s requirements and the value the supplier has placed on meeting those requirements.
IV. Supplier dependence – the buyer will analyze if a supplier is highly dependent on them because this can result in risks for the supplier if the buyer decides to use other suppliers, or it may indicate that the buyer is not getting the value for the products or services.