Porter’s five forces reviews the bargaining power of both the suppliers and buyers in preparation for a strategy and this is also applicable to the development of a procurement strategy.
By NYASHA CHIZU
The extent of the power of customers in any given market can influence the dynamics in that sector.
The degree with which customers can bring considerable pressure to the market reflects on the level of innovation invested in that market in order to improve quality and lower the prices.
The bargaining power can be influenced by a single organisation or similar institutions in a single market. Where a customer is the major consumer of the product from the market, that firm can drive that market singlehandedly.
Where there are a group of firms consuming the bulk of the produce from a certain sector, that sector then becomes the driver of that market.
The extent with which customers can influence the market depends on the level of concentration in that market and how organised the customers are.
Organisation of customers is reflected by the strength of their associations, if any exist. Such associations can be formal or informal.
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The level of concentration relates to the percentage of the market share which that customer or such customers occupy.
Farmers follow quality conditions imposed on them by supermarkets. Smallholder farmers are contracted to sell to their customers, who are mainly retailers in the private sector, and hospitals, schools and the uniformed forces in the public sector.
In this case, the buyer determines or imposes strict quality controls on the suppliers, which the suppliers in their multitude, are forced to comply with for fear of risking losing the contract.
The bargaining power of the customer in such instances relates to how significant their purchases are to the revenue of the supplier.
Switching costs have a significance to the bargaining power of buyers.
In markets where it is costly to switch to alternative markets, suppliers tend to have more muscle. Buyers have significant bargaining power in markets where it is easy for them to transfer between different products.
The availability of alternatives in the form of substitutes from close products reduces switching costs.
The soap manufacturing business is one example where in all the categories from bathing to washing soaps and powders, there are numerous alternatives, the issue of brand loyalty diminishes and would not have an impact on the quality and costs associated with the buyer’s purchases.
With the recognition that procurement is a strategic level of business, many organisations have invested in research and development in the function leading to well-informed customers, who know much about the products they intend to procure.
Issues of total cost management have led to many businesses being price sensitive.
Buyers are now able to separate wood from trees, and trees from forests, by identifying the portion of their purchases that represents a substantial portion and, thereby, protracting the buying process resulting in greater buyer’s bargaining power.
The seller will have to invest a lot in persuading the buyer during the process.
Related to market knowledge is the issue of the level of concentration of buyers that provides bargaining power in their favor.
In such instances, market research will lead to buyers arriving at an informed position in relation to alternative products on the market.
Such knowledge even extends to issues around costing structure that are used against sellers during negotiations.
Such knowledge provides buyers with the power to detect prices and margins of producers.
All these factors are important in the formulation of the procurement strategy.
Having bargaining power is one thing, and the important element is how that bargaining power is used in favour of the buying organisation. This is what differentiates a mere buyer from a procurement professional in the 21st century.