Worldwide corporations today, seek to elevate their productivity by being competitive at the same time. Businesses look forward to meeting their objectives without disrupting their existing strategic function. However, in the meantime, business rivalry has grown exponentially. That’s why it is now important to identify your competitive forces. The Porter’s five forces model is an effective and powerful tool that is widely used to analyze market competition and evaluate strategies to maximize profitability.
Over the last 3 decades, the Porter’s five forces strategy has revolutionized the way business is perceived. This change has very well been endorsed by the procurement and supply chain communities. The application of Porter’s model in both areas has proven to be a fruitful experience. Very often, the truth is learned the hard way and this is very much observed in the business arena. Porter’s tool offers the opportunity to have a hard look at your current market status. Every now and then a reality check is very important in business so as to make a proper plan for the following:
- Financial budgeting
- Resources planning
- Product promotion
- Price optimization
- Brand Development
What is Porter’s Five Forces model?
Developed in 1980 by a Harvard Business School academic, Michael Porter, this tool has become quite significant in today’s business management. The five forces have helped both the procurement and supply chain organizations to outperform and shift from being just a ‘service’ to becoming a full-fledged ‘function’. By using the Porter’s model, it is now easier for procurement and supply chain professionals to describe their strengths in their respective industries and identify their competitive forces.
Evaluating the comparative positioning of buyers and sellers within specific industries has also helped many professionals to assess their negotiating power on the overall market. The powers of Porter’s five forces model can alleviate many business difficulties in any given corporate situation, provided they are efficiently implemented.
Porter’s five forces model in depth:
1. Intensity of competitive rivalry
Competitive rivalry allows professionals in procurement and supply chain industries to analyze the speed of industry growth. Apart from using metrics only, it is important to keep initiating strategies to grow along with other competitors and not be left behind. Additionally, it is also important to keep an eye on the product evolution in the market. Moreover, the tool constantly encourages companies for product optimization by knowing when to diversify and capitalizing on their resources.
2. Threat of new entrants
Monitor new entrants on the market. This may well refer to an organized group of skilled individuals who may offer same product service as your organization. However, they may also have better technologies to implement what you already have. Improving and bettering your product should be a never ending process. As a company, if you need to increase your sales, then go ahead. This is perceived as economies of scale, through which you save costs by identifying what your competitors are doing and decide whether you may need to expand productivity.
3. Threat of substitute products or services
Is your industry being threatened by substitute products or services? Diversification or optimizing your product may save your company from substitute products being introduced by rival companies. Many huge companies have assessed their rival products and enhance theirs, in order to stay in line with the competition or at least tried to achieve something more usable or creative. Furthermore, analyze the relative performance of the substitute product or service. If necessary, switch to lower costs but keep in mind to monitor which product buyers are more inclined to.
4. Bargaining power of buyers
The power of buyers consists of gathering data in the marketplace so as to develop specific industry standards. Concentration is leaned on which company’s product attracts most customers. The creation of your Brand identity is also vital to the existence of your organization as this will demarcate you from other competitors. Also, observe to which degree competitor’s product prices may affect consumer’s purchasing behaviors. Evaluate the risks posed with the manufacturing of your products and whether they will be sustainable and compliant to industry norms.
5. Bargaining power of suppliers
The power of suppliers is also not negligible. Consider a supply market starting to consolidate. Fewer suppliers on the market would mean that a greater extent of supplier power exists on the market. Suppliers need to focus their energy in gathering key technologies or resources for a faster but secure delivery of products. As an example, consider New Zealand which is one of the largest manufacturer and supplier of dairy products in the world. In order to have a fast and sustainable supply chain, they have relied on mega trains as means of transport in difficult weather conditions, rather than just depending on large trucks. Also, the mega trains are equipped with latest technologies to preserve the dairy products.
At the end of the Porter’s five forces model analysis, your goal should be to list relevant data acquired as a basis to launch a stimulating critical thinking and debate. Your organization should come up with strategies and action plan which will help you outperform your competitors. You will have an overview of the market, helping your business to grow.
Here’s why the Porter’s model is recommended:
In a 2017 SciQuest Global Survey published by Cision PR Newswire, an evaluation of the upcoming challenges in procurement has been done. The challenge mentioned below gives a glimpse of how important the Porter’s model is for many procurement professionals who see their roles changing to support their respective organizations in the near future. The scope of their missions is to expand in new areas, but without forgetting the existing competition within the market. Here is an interesting extract of the findings:
“A total of 262 procurement professionals, whose titles included Procurement Director, Vice President of Procurement, Financial Director, IT director and CIO responded to the survey.”
Source: Procurement Tech 2017
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2017 SciQuest Global Survey
The need for Porter’s five forces analysis in the procurement and supply chain driven industries is indisputable. Keeping your risks at bay starts from here and the greatest risk in business is perhaps, the hard competition. By being able to describe your organization’s competitive forces, you will be able to create a seamless customer experience, build solid strategies and prepare efficient pricing mechanism to uphold your product longevity. Procurement and supply chain professionals need to give the Porter’s five forces model a try, if they haven’t yet. Competition is hard but it will certainly bring the best out of your product or service.