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Understand the competitive rivalry in your supply market

Business
Porter’s five forces analysis reviews the horizontal and vertical completion that exists within an industry.

Porter’s five forces analysis reviews the horizontal and vertical completion that exists within an industry.

By NYASHA CHIZU

The horizontal analysis is done by the review of threat of new entrants as well as threats associated with substitutes in relation to the rivalry between industry competitors.

A vertical analysis of forces operating within a supply chain also associate with the rivalry between industry competitors.

In a vertical analysis, the extent of industry competition is assessed together with the bargaining power of suppliers and buyers within a supply chain.

Understanding the elements and variables of both the vertical and horizontal competition is, therefore, critical if one is to come up with a meaningful strategy on procurement as well as the business in general.

The degree of rivalry among competitors varies between different industries and markets.

What separates boys from men in management is the capacity of the leaders to understand the markets and their associated industry focusing on the actions of competitors as well as their strategies.

The assessment is complicated by the extent of competition within a market. Every market will have different endurance factors ,as well as the different types of rivalry.

Common measures of understanding marketing rivalry is through the use of indices comparing the size of the organisation and the market share and the comparison of sales revenue with market value. The two indices though commonly used have proven to be limited.

Two additional indices are encouraged if the assessment of the competitive rivalry is to be meaningful.

The concentration ratio and the Herfindahl-Hirschman index are necessary to get a clearer picture of the rivalry between competitors.

The concentration ratio measures the total output produced in an industry by a given number of corporations.

The Herfindahl-Hirschman index then measures the size of the industry exposing the extent of the competition among these organisations.

Such assessment is necessary when developing a procurement strategy since it provides a clear picture of the level with which your suppliers have bargaining power over you and the extent to which your organisation commands the market.

There are several factors that increases the intensity of rivalry that exist in a market.

The number of firms in an industry determine the extent of rivalry.

Using the example of the mobile telecommunications industry, we observe that there is an oligopoly market both horizontally and vertically.

The suppliers of core systems are limited internationally to the extent that they can be counted using one hand.

The same applies with the number of mobile service providers in every country.

The oligopolistic nature of the horizontal and vertical competition then calls for closer cooperation within the supply chain in view of the nature of the investment required in relation to the level of rivalry in such market.

Other characteristics of the market that require review include the rate of market growth and the level of fixed costs.

The rate of perishability of the products is very critical. Perishability in this instance does not relate to farm produce or medical products that have limited shelf life only.

It also relates to the life cycle of technical product. Telecommunication products’ life cycle is becoming shorter and shorter.

A good example is the rate at which new cell-phone models are being introduced and eliminated every year. The same applies to motor industry and the rest of the technology market.

In assessing the extent of rivalry in a market, it is important to review the cost associated with switching, the level of product differentiation as well as the availability or non-availability of any exit barriers.

The first step when developing a procurement strategy is understanding these elements so as to fully understand if the availability or non-availability of new entrants or substitute increases or decreases the bargaining power of the suppliers.

Where factors are in favour of the bargaining power of suppliers, it weakens the bargaining power of the buyers. Both scenarios require appropriate strategies from the procuring entity.

lNyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: [email protected] Skype: nyasha.chizu