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Revisit Porters Five

Forces to Unleash
Procurement Innovation

Revisit Porters Five Forces to


Unleash Procurement Innovation
Introduction
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 seminal How 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.

Revisit Porters Five Forces to Unleash Procurement Innovation

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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 professionals at 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 competitiveness


from within the procurement and supply management functions.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

How Procurement Can Counter Porters Five Forces

Threat of New Entrants

Bargaining Power of Buyers

Keeping end-market prices low by


maintaining competitive cost

Unique product design through supplier


involvement right from the engineering phases

Reinvesting cost savings into R&D

Discovering unique service partnership


opportunities in the supply base to enhance
overall package

Moving increasingly into supply-chain


nancing and investing as a means
for tearing down supply-side
barriers to entry

Rivalry Among Competitors

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

Communicating with suppliers


and coordinating on innovation
roadmaps
Co-developing with critical
suppliers

Threat of Substitute Products

Collaborating to drive substantial


improvements in supplier
performance

Spotting potential substitution threats


to a companys own product lines
Understanding the historic trends,
volatility patterns and future expectations
for costs, prot and other success factors
of substitute markets
Analyzing the risks in supply chain
of competitors selling substitute products

Revisit Porters Five Forces to Unleash Procurement Innovation

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

www.zycus.com

Countering Bargaining Power of Suppliers

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:

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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

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.
The Intel Inside campaign, first launched in 1991, is a brilliant example. PC manufacturers
gaining the most from Intels marketing strategy would have been the ones obtaining
most 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 competitive
structures 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 suppliers go-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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

2 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. Buyers
are 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 customerswitching 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 unique service partnership opportunities
in the supply base, negotiate profitable deals and to employ strong governance and
ongoing performance management over strategic service-provider relationships.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

3 Countering Threat of New Entrants


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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

Through creative uses of eRFx, supplier information management and onboarding processes,
procurement is uniquely positioned to uncover not only existing supplier capabilities but to gain
deep insights into what suppliers worldwide (even those in unfamiliar markets and economies)
may be developing for several years out into the future. Procurement teams most capable of
discovering and capturing supplier innovations may be able to generate consumer network and
other demand-side effects that prove to be important competitive differentiators going forward
in time.

Barriers to market entry work against procurement when they limit supply-market competition
and engender greater supplier power. While Porter cites high capital requirements as one
barrier to entry, savvy procurement organizations are also moving increasingly into supply-chain
financing and investment as means for tearing down supply-side barriers to entry in certain
cases. Other ways procurement can remove barriers to entry in supply markets is to create easy
ways for new suppliers to introduce themselves and showcase products and innovations that
can engender demand-side economies of scale, brand currency and long-term customer loyalty.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

4 Countering Threat of Substitute Products


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, reporting and 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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

5 Countering Rivalry Among Competitors


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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

Conclusion - Factors Not Forces


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.

Revisit Porters Five Forces to Unleash Procurement Innovation

www.zycus.com

About Zycus
RCE-TO-PAY SOL
UTIO
S SOU
U
C
NS
ZY
Financial Savings
Management
Invoice
Management

Spend
Analysis

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Management

Strategic
Sourcing

Catalog
Management

Contract
Management

Requisition
Processing

Supplier
Management

Zycus is committed to positioning procurement at the heart of business performance. With our spirit
of innovation and a passion to help procurement create even greater business impact, we have evolved
our portfolio to a complete Source-to-Pay suite of procurement performance solutions - Spend Analysis,
eSourcing, Contract Management, Supplier Management, eProcurement, eInvoicing and Financial
Savings Management. We are proud to have more than 200 solution deployments among Global 1000
clients across verticals like Manufacturing, Automotives, Banking and Finance, Oil and Gas, Food
Processing, Electronics, Telecommunications, Chemicals, Health and Pharma, Education and more.
To learn more about the Zycus, address e-mail to information@zycus.com or visit http://www.zycus.com

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