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New WP Revisit Porter's Five Forces To Unleash Procurement InnovationPorter3
New WP Revisit Porter's Five Forces To Unleash Procurement InnovationPorter3
New WP Revisit Porter's Five Forces To Unleash Procurement InnovationPorter3
Forces to Unleash
Procurement Innovation
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.
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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:
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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:
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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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.
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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.
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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.
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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.
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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.
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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.
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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.
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About Zycus
RCE-TO-PAY SOL
UTIO
S SOU
U
C
NS
ZY
Financial Savings
Management
Invoice
Management
Spend
Analysis
Purchase Order
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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