Procurement professionals are tasked with finding the best suppliers for their organization. In order to do so, they must analyze the supplier market and develop sourcing tactics that will give their organization a competitive advantage. This usually done in stage 3 and 4 of the Sourcing process.

One tool that procurement professionals can use, together with Kraljic’s matrix, for this analysis is Porter Competitive Model. In this blog post, we will explore how procurement professionals can use Porter Competitive Model to analyze the supplier market and decide on the best sourcing tactics for their organization.

Learn more about the sourcing process in the course Sourcing Process part 1.

Porter Competitive Model

Porter Competitive Model is a framework that analyzes an industry’s competitiveness based on five factors: threat of new entrants, bargaining power of sub-suppliers, bargaining power of us as buyers, possibilities to find substitute products or services, and intensity of competitive rivalry. This model can be applied to the supplier market to analyze the competitiveness of suppliers and determine the best sourcing tactics.

Threat of New Entrants

The first factor to consider when analyzing the supplier market is the possibility of new entrants and creating new suppliers. Procurement professionals must ask themselves if it is easy or difficult for new suppliers to enter the market. If the market is saturated with suppliers, then it may be difficult for new entrants to gain a foothold. In this case, procurement professionals may want to focus on developing relationships with existing suppliers to ensure continuity of supply.

One way that professional buyers can enhance competition is by helping suppliers enter into a new market. This can be beneficial for both the supplier and the buyer’s organization. By helping a supplier enter into a new market, professional buyers can increase the number of suppliers in the market, which can result in lower prices, better quality, and more innovative products or services.

To help a supplier enter into a new market, professional buyers can provide guidance and support in areas such as market research, product development, and marketing or allocate a chunk of business to support the process. They can also provide introductions to potential customers and partners in the new market. By working closely with the supplier, professional buyers can help ensure that the supplier’s entry into the new market is successful.

In addition to increasing competition, helping a supplier enter into a new market can also benefit the buyer’s organization by providing access to new products or services, and potentially reducing reliance on existing suppliers. This can help mitigate supply chain risks and improve the overall resilience of the organization’s supply chain.

Bargaining Power of sub-suppliers

The bargaining power of sub-suppliers is another important factor to consider. Procurement professionals must analyze the power that sub-suppliers have over the industry. This includes factors such as the availability of substitute products or services and the concentration of sub-suppliers in the market. If there are few sub-suppliers in the market, then they may have more bargaining power.

Bargaining Power of us, as Buyers

The bargaining power of buyers is also important to consider. Procurement professionals must analyze the power that their organization has over the suppliers. This includes factors such as the size of the organization and the availability of alternative suppliers. If the organization has significant buying power, then they may be able to negotiate more favorable terms with their suppliers.

Possibilities coming with Substitute Products or Services

The possibility of substitute products or services is another important factor to consider. Procurement professionals must analyze the availability of alternative products or services in the market. If there are many substitute products or services available, then suppliers may have less bargaining power. In this case, procurement professionals may want to explore alternative sourcing options or use the possibility to negotiate more favorable terms with suppliers.

Professional buyers can work with internal stakeholders to identify possible substitutes for the products or services being sourced. This can involve conducting market research, exploring alternative suppliers, or looking for alternative products or services that can be used in place of the ones being sourced. 

In addition to identifying possible substitutes, professional buyers can also work with internal stakeholders to evaluate the suitability of these substitutes for the organization’s needs. This can involve conducting product or service trials, evaluating supplier capabilities, and assessing the potential impact on the organization’s supply chain. By working closely with internal stakeholders, professional buyers can ensure that the substitutes being considered are a good fit for the organization’s needs.

Intensity of Competitive Rivalry

The intensity of competitive rivalry is the final factor to consider. Procurement professionals must analyze the level of competition in the market. This includes factors such as the number of suppliers and the level of product differentiation. If there is intense competition in the market, then suppliers may be willing to negotiate more favorable terms with their customers.

Conclusion Porter Competitive Model

Procurement professionals can use Porter Competitive Model to analyze the supplier market and determine the best sourcing tactics for their organization. By considering factors such as the threat of new entrants, bargaining power of sub-suppliers, bargaining power of buyers, threat of substitute products or services, and intensity of competitive rivalry, procurement professionals can develop a sourcing strategy that gives their organization a competitive advantage. By using Porter Competitive Model, procurement professionals can make informed decisions that benefit their organization and ensure continuity of supply.

Note: Illustration to the blogpost “Porter Competitive Model in the sourcing process” was created by Chat-GPT on September 8, 2024.

At Utbildning Inköp you can find information in Swedish about LHTS’ courses.