The blog post “How can a buyer act in monopolistic markets” is inspired by insights from Per-Arne Jonsson, a senior consultant at EFFSO AB. You can find a link to the original blog post (in Swedish) at the end of this article.

As a buyer we often encounter situations where there appears to be a lack of competition — either actual or self-created. What do these situations look like, and what causes them? How can a buyer act in monopolistic markets to make the best of the situation? How can we influence and how can we change our own behavior?

A monopoly can simply be defined as the absence of competition. Let’s first discuss competition.

Competition in the supplier market is crucial as it can lead to lower costs, higher quality, increased innovation, reduced dependency, and increased flexibility, i.e., factors that can enhance an organization’s capability, competitiveness, and profitability.

Price Pressure

When there are multiple suppliers in the market, they are likely forced to compete for business by offering competitive prices. This assists the customer in negotiating more favorable prices and terms for purchases, which in turn can reduce costs and increase profitability.

Quality Improvements

Competition can also lead to improvements in product quality and service from suppliers. To win business, suppliers strive to offer higher quality in their products or services, which benefits the organization purchasing them.

Innovation

When there are multiple players in the market, innovation and the development of new products and services are encouraged. Suppliers invest in research and development to differentiate themselves from their competitors and meet customers’ needs.

Increased Supply Stability

Having multiple potential suppliers to choose from reduces an organization’s dependence on a single supplier. This decreases the risk of disruptions in the supply chain if one supplier encounters problems or fails to deliver.

Flexibility

Competition in the supplier market gives the organization the flexibility to adapt to changing needs and requirements. If a supplier does not meet the organization’s expectations, the company can switch to another supplier without suffering serious consequences.

Monopolistic markets

With this background, we can probably agree that competition is generally beneficial. Most countries therefore try to counteract the emergence of monopolies with regulations, legislation, and by encouraging competition by making it easier for new players to establish themselves in the market.

(Some monopolies, however, can be beneficial to the economy if they lead to security, efficiency, and/or innovation due to the concentration of resources and expertise.)

Simplified, one can say that there are two types of monopoly situations:

Real Monopolistic markets

A monopoly is a market situation where there is only one seller or provider of a good or service. This means that there are no significant competitors in the market, and the single company has control over the price and availability of the good or service. Monopolies can arise for various reasons, including regulations, patents, technological advantages, or because one player simply becomes so dominant in the market that it becomes difficult for competitors to establish themselves.

Self-Created Monopolistic markets

As a procurement manager, it’s crucial to recognize situations where our organization believes that it cannot or does not want to take advantage of the competition available in the supplier market. Several factors can contribute to this situation, often leading to a self-imposed limitation that prevents us from leveraging the full potential of market competition. Here’s an elaboration on the primary reasons why this happens:

Technical Lock-In

• Definition: Technical lock-in occurs when we’ve chosen a specific technical solution for our production, infrastructure, or IT environment that confines us to one or a limited number of suppliers. This lock-in often results from proprietary technologies that are tightly integrated with our products or services.
• Example: If we’ve implemented a specialized software platform for production management that only works with certain equipment, switching suppliers could mean changing the entire production system, which is costly and complex.
• Impact: This dependency creates a barrier to exploring other supplier options, making it challenging to negotiate favorable terms due to a lack of alternative suppliers.

Internal Structures and Work Methods

• Definition: Our internal processes can limit our supplier options if we’ve developed them around a specific way of working. This includes case management, handling procedures, and workflow systems that may rely on one supplier’s product or service.
• Example: An organization may have integrated its ticketing and customer service system with a single supplier’s CRM platform. Switching to a new supplier might mean overhauling the customer service workflow and retraining the staff, resulting in high switching costs.
• Impact: Such structural preferences can inadvertently create a self-imposed monopoly, limiting our ability to negotiate competitive rates and access innovative solutions.

Internal Preferences

• Definition: Internal preferences arise from long-standing relationships that create habits or trust, making it challenging to consider alternatives to existing suppliers.
• Example: If we’ve worked with a particular supplier for over a decade, our familiarity and trust in their reliability can overshadow any competitive offerings from other vendors.
• Impact: While these relationships can have advantages like smoother communication, they might blind us to opportunities for cost savings or technical advancements offered by new suppliers.

Design of Tenders

• Definition: In the tendering process, we may set requirements or define the scope of the tender so broadly that only a few suppliers can submit bids. This may sometimes be due to the procurement unit’s desire to reduce the number of suppliers for easier management.
• Example: If a tender requires suppliers to provide a complete suite of products and services, only large suppliers with broad capabilities may be able to meet the requirements, excluding smaller, more specialized vendors.
• Impact: This approach could restrict competition, potentially leading to higher costs and reducing the procurement unit’s ability to source from niche suppliers that may offer innovative or more suitable solutions.

As procurement managers, it’s essential to address these challenges and recognize when internal structures, preferences, or technical constraints are limiting our ability to fully leverage market competition. By identifying and mitigating these barriers, we can optimize our sourcing strategies, find innovative suppliers, and ultimately achieve better value and quality for the organization.

How can a Buyer Act in Monopolistic Markets

As a professional buyer, navigating a monopolistic market requires a strategic approach to minimize risks and ensure the best value for the organization. Here’s how you can act proactively using the following strategies:

1. Do It Ourselves:
   • Definition: When facing a monopolistic supplier, we can consider bringing certain aspects of production or services in-house, essentially creating a new source of supply.
   • Application: For instance, if a particular component is crucial and only available from one supplier, setting up our own manufacturing capacity or developing in-house expertise for services allows us to create direct competition.
   • Benefits: This approach provides a significant advantage by reducing dependency on external suppliers and potentially lowering costs through more efficient operations.
2. Transparency Around Costs:
   • Definition: Building a transparent relationship with a monopolistic supplier involves analyzing the cost components of the supplied goods or services collaboratively to agree on a reasonable price.
   • Application: This requires engaging the supplier in open discussions, reviewing their production or operational costs, and establishing a fact-based analysis to reach a fair pricing agreement.
   • Benefits: This approach can reduce the risk of price exploitation, build trust, and ensure both parties understand the pricing structure, ultimately leading to a more balanced relationship.
3. Find Mutual Value:
   • Definition: Creating a relationship that balances mutual value is crucial, particularly in monopolistic situations. This involves finding ways to make the relationship beneficial for both parties.
   • Application: For example, a supplier might be incentivized to offer better pricing if we commit to long-term contracts or share production forecasts to aid their planning.
   • Benefits: Mutual value encourages suppliers to maintain a good relationship with the customer, fostering stability and potentially leading to innovation and better terms in the long run.
4. Facilitate Establishment in Geographic Monopolies:
   • Definition: In regions where a single supplier dominates due to geographic constraints, facilitating the entry of new players can help create competition.
   • Application: This might involve guaranteeing new entrants a minimum volume, providing access to our facilities at favorable rates, or temporarily paying a premium to enable them to establish and invest in new capacity.
   • Benefits: While initially challenging, this approach can diversify the supply base, increase competition, and ensure a more stable and reliable sourcing network over time.

Additional Strategies to Consider

5. Risk Management:
   • Develop a contingency plan, including inventory buffers or backup suppliers from adjacent markets to ensure uninterrupted supply in case the monopolistic supplier cannot deliver.
6. Collaborative Innovation:
   • Engage with the monopolistic supplier in joint research and development projects to innovate together, reducing production costs or improving the final product, benefiting both parties.
7. Industry Alliances:
   • Partner with other organizations facing similar monopolistic conditions to negotiate collectively, leveraging combined purchasing power to secure better terms.

Breaking Self-Inflicted Monopolistic markets

How can a buyer act in monopolistic markets when it is a a self-created monopoly. When internal organizational decisions, structures, or habits prevent us from taking advantage of the competition available in the supplier market. This can lead to over-reliance on a single supplier or a small set of suppliers, making the organization vulnerable to supply disruptions, higher costs, and a lack of innovation. Here’s how we can address and break these monopolies by making changes internally:

1. Challenge the Given:
   • Explanation: It’s crucial to challenge ingrained tracks, questioning long-standing practices and supplier relationships. This requires a willingness to step out of the comfort zone and critically evaluate the current procurement strategies.
   • Implementation: Begin by assessing existing supplier relationships and their impact on the supply chain. Present alternatives and highlight potential consequences of sticking with the status quo versus making a change.
   • Benefits: This approach can reveal hidden risks and costs associated with long-standing relationships while uncovering potential opportunities in the market.
2. Fact-Based Analyses:
   • Explanation: In situations where old habits and opinions dominate decision-making, fact-based analyses are essential for establishing credibility and driving change.
   • Implementation: Procurement must gather comprehensive data on supplier performance, market trends, and cost structures. Conduct comparative analyses between current suppliers and potential alternatives.
   • Benefits: Presenting clear, data-backed arguments simplifies decision-making and helps overcome resistance, leading to more informed procurement decisions.
3. Anchoring/Decision at a Higher Level:
   • Explanation: Often, organizational lock-ins exist at lower levels, making it difficult to effect change. Securing higher-level buy-in is crucial for breaking internal monopolies.
   • Implementation: Develop pathways to decision-makers at senior levels, presenting proposals that align with broader strategic goals and incentives. Highlight the strategic and financial benefits of diversifying the supplier base.
   • Benefits: Engaging top management can introduce new goals and drivers that can facilitate structural changes within procurement practices.
4. Pilot Project for a Smaller Part:
   • Explanation: Pilot projects help test new procurement strategies on a small scale, reducing the risk of disrupting the entire supply chain.
   • Implementation: Identify a willing unit or facility to run a pilot project and implement new procurement methods or supplier partnerships. Evaluate the results and use them to build a case for broader adoption.
   • Benefits: A successful pilot demonstrates the feasibility of change while providing tangible results that can encourage broader transformation.
5. Long-Term Change Projects to Open Up for More Suppliers:
   • Explanation: Long-term transformation work may be required in monopoly situations tied to specific technologies or infrastructure. Breaking these lock-ins involves strategic planning and comprehensive analyses.
   • Implementation: Work on developing new procurement strategies that maintain value while reducing dependence on monopolistic suppliers. Get high-level buy-in to ensure organizational support.
   • Benefits: A carefully planned transformation can reduce costs, improve innovation, and lead to a more diversified supplier base.
6. Break Apart Services to Make Room for Niche Suppliers:
   • Explanation: Sometimes, grouping various services or products into one procurement process limits competition, favoring large suppliers capable of handling the entire scope.
   • Implementation: Conduct a supplier market analysis to identify areas where breaking services into separate lots can allow niche suppliers to participate. Tailor strategies to enhance competition in these segments.
   • Benefits: This approach can bring specialized suppliers into the fold, increasing competition and potentially improving service quality.
7. Procurement Must Learn to Handle Multiple Suppliers:
   • Explanation: Relying on a single supplier is often easier for contract management, follow-up, and communication, but can also lead to over-dependence.
   • Implementation: Assess internal processes and adapt them to efficiently manage multiple suppliers. Balance internal efficiency with the organization’s broader best interests.
   • Benefits: This ensures that procurement can effectively manage diverse suppliers while gaining the flexibility to source from multiple vendors.

Observations on the Role of Procurement

• Fact-Based Analyses: Procurement must be able to present well-substantiated analyses simply and clearly to decision-makers.
• Knowledge of the Supplier Market: A deep understanding of the supplier market’s structure, opportunities, limitations, and development is essential.
• Relationship to the Business: Building mutual respect and understanding between procurement and other business units fosters effective collaboration.
• Role in the Organization: Procurement should establish pathways to decision-makers to be viewed as a value-creating part of the organization, not just a support function.

How can buyer act in monopolistic markets using Kraljic’s Matrix

The Kraljic Matrix is a strategic tool used in procurement to categorize suppliers based on the risk associated with their supply and the impact of their supply on the company’s profit. This helps companies decide how to allocate resources and develop strategies for different types of suppliers. The matrix divides suppliers (or product sourced) into four quadrants: strategic, leverage, bottleneck, and non-critical.

Strategic and Bottleneck Quadrants

Strategic Quadrants: Suppliers in this quadrant have a high impact on the company’s profits with a high supply risk. These are often suppliers of critical components with few or no alternatives, potentially leading to a monopolistic market situation. The strategies typically involve building strong partnerships, joint development, securing long-term contracts, and investing in supplier capabilities.

Bottleneck Quadrants: Suppliers in the bottleneck quadrant also pose a high supply risk but have a low impact on a company’s profit. These supplies are often from monopoly or oligopoly markets where substitution might be difficult, but they don’t have as critical a financial impact as strategic items. The strategies here focus on securing supply, finding alternative suppliers, and increasing inventory levels to manage the risk.

Connection with Monopolistic Markets Strategies

The insights provided by Per-Arne Jonsson resonate particularly with the strategic and bottleneck approaches in the Kraljic Matrix:

• Monopoly Situations: Both the strategic and bottleneck quadrants may deal with monopoly situations where competition is low. This is particularly challenging for procurement because the company relies heavily on single sources for key materials or services.
• Dealing with Monopolies: The strategies recommended for dealing with monopolies, such as creating transparency around costs, enhancing relationships, or facilitating the entry of new market players, align closely with approaches for managing strategic and bottleneck suppliers in the Kraljic Matrix.
• Transparency and Collaboration: For strategic suppliers, fostering a transparent and collaborative relationship can help in negotiating better terms and ensuring a stable supply chain, which is crucial in a monopolistic scenario.
• Encouraging New Entrants: For bottleneck suppliers, encouraging new entrants into the market can help reduce dependency on a single supplier, thereby mitigating risk and potentially shifting the supplier’s position in the matrix over time.
• Self-Created Monopolies: The discussion about self-created monopolies, where internal choices limit competition, can apply to strategic decisions in procurement where reliance on specialized technologies or processes ties a company to specific suppliers. Recognizing and addressing these self-created constraints can open up new supplier avenues and potentially reposition items within the matrix.

Summary: How can a buyer act in monopolistic markets

Addressing these internal challenges helps organizations unlock the potential of competitive markets, leading to better value, reduced risks, and increased innovation.

Understanding the dynamics of monopolistic markets through the lens of the Kraljic Matrix allows procurement managers to strategize effectively, minimizing risks associated with supplier dependencies while maximizing the value derived from each supplier relationship. The strategies outlined, based on deep market knowledge and proactive supplier management, are essential for navigating both strategic and bottleneck quadrants effectively

Learn more about sourcing activities in the bundle The sourcing engine room – a modern sourcing process. The Sourcing Engine room is build around three courses presenting the basics of a modern sourcing process. Learn about the key activities when preparing, negotiating and implementing a new improved supply chain.

Learn more about Kraljic and his matrix in Get to know Kraljic and his matrix. After completing the course you will have an understanding of who Peter Kraljic is and the history of his Matrix, how to use Kraljic’s Matrix and in which procurement processes you apply Kraljic’s Matrix.

In the course Kraljic and Portfolio analyses by Paul Rogers, Kraljic Portfolio management connect the four quadrants (Leverage, Non critical, Strategic and Bottleneck) in Kraljic´s matrix to 8 relevant sourcing strategies.

Link to the original text by Per-Arne Jonsson, a senior consultant at EFFSO AB (in Swedish).

Illustration to the blogpost “How can a buyer act in monopolistic markets” is created by Chat GPT on April 3, 2024.