new wp revisit porter’s five forces to unleash procurement innovationporter3

8/12/2019 New WP Revisit Porters Five Forces to Unleash Procurement InnovationPorter3

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Revisit Porters FiveForces to Unleash

Procurement Innovation


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Revisit Porters Five Forces to

Unleash Procurement Innovation

It is no coincidence that transformation of procurement from tactical processor of POs into

corporate strategic powerhouse can trace its roots to about the same time the Harvard Business

Review (HBR)first published Michael E. Porters seminalHow Competitive Forces Shape Strategy in

1979.

As HBR observed when introducing an updated version of Porters work in 2008, the original

paper started a revolution in the strategy field. Emphasizing such concepts as neutralizing

supplier power, supply-side economies of scale, reducing switching costs, obtaining preferential

access to best raw-materials sources, standardizing parts and so forth, Porter helped to unleash

a strategic reinvention of procurement. The transformation was led by some of the worlds most

disciplined and innovative companies GE, IBM, Intel, Motorola, Honda,to name just a few and

propagated worldwide by some of the biggest players in management consulting.

With technology developers stepping in just a few years later to automate tedious, complex

and expensive procurement processes and to solve large business-intelligence problems for

procurement and supply management, strategic elevation of the function has continued to grow

and proliferate worldwide. It has spread from developed into emerging economies, and from very

large, multinational corporations to mid- and smaller-sized companies and also to institutions of

government, education and healthcare.

Introduction

Revisit Porters Five Forces to Unleash Procurement Innovation www.zycus.com


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Many of todays best procurement and supply-chain management practices can be

recognized easily in the pages of Porters original work. But procurement leaders have also

continued to innovate their strategic roles, expanding the functions reach to influence both

the supply and demand sides of a companys strategic and competitive positioning.

In this whitepaper, we revisit Porters original work with the intent of inspiring procurement

executives and professionalsat all levels to explore how Porters Five Forces can and

should be considered as they undertake such strategic procurement activities as:

Analyzing supply markets.

Spotting, driving, evaluating and exploiting supplier innovation.

Discovering and developing new suppliers.

Improving supplier performance.

Negotiating and writing creative contracts.

Collaborating with suppliers to change or manipulate industry competitive structures

in mutually beneficial ways.

And so many other opportunities to influence global business competitivenessfrom within the procurement and supply management functions.



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Threat of New Entrants

Keeping end-market prices low by

maintaining competitive cost

Reinvesting cost savings into R&D

Moving increasingly into supply-chain

financing and investing as a means

for tearing down supply-side

barriers to entry

Bargaining Power of Buyers

Unique product design through supplier

involvement right from the engineering phases

Discovering unique service partnership

opportunities in the supply base to enhance

overall package

Driving customer loyalty by employing

strong governance and ongoing performance

management over strategic non-product

factors like after-sales support, return

goods policies, or grievances redressal

Rivalry Among Competitors

Communicating with suppliers

and coordinating on innovationroadmaps

Co-developing with critical

suppliers

Collaborating to drive substantial

improvements in supplier

performance

Bargaining Power of Suppliers

Increasing the percent of suppliers

business dependency on your company

Unbundling and commoditizing of complex

goods and services

Pushing suppliers for greater

cost-to-price transparency

Threat of Substitute Products

Spotting potential substitution threats

to a companys own product lines

Understanding the historic trends,

volatility patterns and future expectations

for costs, profit and other success factors

of substitute markets

Analyzing the risks in supply chain

of competitors selling substitute products

How Procurement Can Counter Porters Five Forces



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The nexus of contemporary strategic sourcing and procurement derives from just one of Porters

Five Forces: neutralizing supplier power.In addition to classic power-shifting strategies such as

demand aggregation to gain leverage vis--vis suppliers, procurement organizations have added:

Countering Bargaining Power of Suppliers1


Increasing dependency (percent of suppliers business deriving from customers).

Increasing supplier-switching costs (for example, encouraging suppliers to co-locate, assume

greater inventory risks and/or invest in proprietary equipment).

Unbundling and commoditization of complex goods and services.

Pushing suppliers for greater cost-to-price transparency.

Introducing price transparency into formerly opaque markets.

Standardizing parts to reduce switching costs and eliminate other barriers to entry in

supplier-side market.

Segmenting suppliers to isolate high-, medium and low-leverage suppliers for different

types of treatment.

Increasing market competition by alleviating costs and complexities of bidding more suppliers

competitively and across larger geographic scopes.


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Impacts of procurement technology tools such as Spend Analysis and eSourcing/eAuction

have been strongly felt in enabling procurement to evolve and refine these aforementioned

strategies. But, while they have been quite successful at neutralizing and reducing supplier

power over the past several decades, procurement teams must assume suppliers will continue

to seek their own innovative ways of regaining the market power they have ceded.

Porter cites, for example, a strategy in which component manufacturers market directly

to end consumers with a goal of creating strong end-market preferences for their parts.

TheIntel Inside campaign,first launched in 1991, is a brilliant example. PC manufacturers

gaining the most from Intels marketing strategy would have been the ones obtainingmost favorable terms, greatest dedicated production capacity, fastest deliveries and

so forth from the chipmaker at the time that the massive campaign was active.

Market scans and analyses are another area where procurement leaders can bring Porters Five

Forces to bear. For example, procurement pros should be asking:

How rigorously are we applying the Five Forces framework in assessing the competitivestructures of our critical supply industries?

Have we considered how the Five Forces might be exploited or manipulated in our supply

industries? Or how they are likely to change on their own in the future?

Are we defining supply markets correctly (neither too narrowly, nor too broadly) for both

present and future?

And how might the results of our analyses change when market scope is shifted in

various directions?

Deepening procurements insights along these lines could prove invaluable in deciphering

and predicting suppliersgo-to-market strategies,evaluating suppliers bids,conducting

various what-if analyses and shaping strategies for awarding business among arrays of

suppliers and across global regions in order to consistently maximize buying power.



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Countering Bargaining Power of Customers

To continue innovating procurements corporate role and influencing competiveness in positive

ways, a new breed of procurement leaders and practitioners must also be exploring how

they might address another of Porters Five Forces countering customer power. Buyersare powerful if they have negotiating leverage relative to industry participants, especially

if they are price sensitive, using their clout primarily to pressure price reductions.

Industries that fall frequently into price wars cable television, mobile telecom and

airlines all suffer to varying degrees from excessive customer power. One response,

according to Porter, is to expand services and find new ways of increasing customer-

switching costs. The airline, for example, might serve better food, offer more choices for

in-flight entertainment or superior experiences related to baggage handling and so forth.

Procurements role, in this sense, is to discover uniqueservice partnership opportunities

in the supply base,negotiate profitable deals and to employ strong governance and

ongoing performance management over strategic service-provider relationships.

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When the threat of entry is high, incumbents must hold down their prices or boost investment to

deter new competitors, Porter writes. The simple takeaway here for procurement is to focus on

cutting costs as a means for keeping end-market prices low. Procurement erects barriers to entry by

developing supply-side economies of scale: buying in higher volumes, commanding lower prices

and better terms from suppliers. Resulting cost savings can then be reinvested into R&D as yet

another means for keeping out new market entrants.

But procurement leaders are expanding their thinking in this area as well. Porter emphasizes, for

example, demand-side benefits of scale. Buyers may value being in a network with a large number

of fellow customers, he writes. A good example is the Apple iPhone,where users share special

abilities to message one another, trade documents and use social-sharing applications that are not

available to other smartphone operating systems.

Countering Threat of New Entrants3



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A substitute performs the same or a similar function as

an industrys product by a different means, Porter writes.

Strategists should be particularly alert to changes in other

industries that may make them attractive substitutes when

they were not before. Improvements in plastic materials,

for example, allowed them to substitute for steel in many

automobile components.

Strategic enterprise procurement, with its horizontal

perspective spanning the many verticals in which most

large companies operate, is also uniquely positioned

to discover and exploit substitution opportunities. Classically, procurement seeks substitutes

to reduce supplier power, but it can also focus on spotting potential substitution threats

to a companys own product lines.What may be needed in procurement are better ways of

documenting, structuring, evaluating, reportingand otherwise sharing this type of market

intelligence as it is captured through supplier due diligence, eRFx, onboarding and other processes.

Combining and using procurements internal and external business intelligence to understand and

predict cost structures, profit margins, supply risks and other trends in competing (substitute)

markets is another untapped area where procurement is positioned to exert real competitive

influence on the demand side of things.

Are your companys competitors (those selling substitute products) well placed to endure

for many years in the marketplace?

What risks lurk in their supply chains?

And what are the historic trends, volatility patterns and future expectations for costs,

profitability and other success factors?

Such intelligence coming from procurement can help to inform and direct a companys strategies

for pursuing leaner inventories, better manufacturing processes and so much more.

Countering Threat of Substitute Products4



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The degree to which rivalry drives down an industrys profit potential depends, first, on the

intensity with which companies compete and, second, on the basis on which they compete,

Porter writes.

While promoting rivalry among suppliers can diminish their market power, there are also ways

that procurement can help to minimize negative influences of rivalry especially price wars in a

companys own end markets.

Competition on dimensions other than price on product features, support services, delivery

time or brand image, for instance is less likely to erode profitability because it improves

customer value and can support higher prices. Also, rivalry focused on such dimensions can

improve value relative to substitutes or raise the barriers facing new entrants, Porter observes.

Once again, the strategic contribution from procurement comes from:

Communicating with suppliers and coordinating innovation roadmaps.

Co-developing with critical suppliers (which requires underpinnings of trust often built via

consistent and strong supplier performance).

Collaborating to drive substantial improvements in supplier performance for example,

massive lead-time or fixed-cost reductions throughout multiple supply-chain tiers which can

enable all operating in the industry to avoid indulging in price wars.

Countering Rivalry Among Competitors5



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In deploying the Five Competitive Forces framework, Porter emphasizes both the importance of

defining industries correctly(recognizing the full scope of potential competition) and also of

distinguishing between competitive forces which determine an industrys long-run profit potential

and how the value gets divided among players and nonstructural factors. It is especially important

to avoid the common pitfall of mistaking certain visible attributes of an industry for its underlying

structure. Examples of such factors would include industry growth rates, technology and innovation,

government and complementary products and services.

The most successful companies, Porter suggests, will find ways to successfully manipulate or change

industry forces and structure in their favor. While procurement clearly can play a huge role, it cannot

operate in a vacuum. A companys overriding competitive strategy must clearly articulate how it will

attempt to exploit industry structure in its favor in order to reap a larger share of available profits or

to change industry structure altogether (perhaps increasing the size of the total pie). The strategy,

in turn, needs to be quite clear in articulating the various ways in which procurement is expected to

behave and that needs to trickle down into all the daily activities of procurement practitioners.

Procurement technology tools, which by now have evolved to a highly advanced stage, can help

to make that trickle down happen. For example, by controlling the way in which a company:

Configures and weights its systems for measuring supplier and procurement performance.

Filters and mines Big Data for opportunity discovery.

Captures and structures market intelligence via RFx, contracting, supplier onboarding and

supplier information management processes.

And builds standard and innovative terms and conditions into contracts.

This whitepaper only scratches the surface of possibilities for procurement-led business performance

improvement captured in Porters Five Competitive Forces. We encourage procurement leaders and

professionals to revisit the original works (1979 and 2008) and also our series of related blog posts

as a point of departure for some deep thinking about where procurement can go next in terms of

strategic process innovation over the coming five to ten years.

Conclusion - Factors Not Forces

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