18 Must-Have Negotiation Skills For Procurement Professionals
Porters 5 Forces – Everything a Procurement Manager Must Know
Are you familiar with Porters 5 Forces model? Are you also aware that it can be used as a powerful procurement technique that can definitely help any organization with its procurement needs?
If your answer is a NO, then it’s time to turn your eyes towards this article. We are going to discuss what Porters 5 Forces model are about and how they can help procurement managers with their procurement process development.
Once you’re done reading this article, you should be a master of Porter’s 5 Forces and you already have an idea of how to use them for your procurement processes.
Porters 5 Forces Model– What Exactly is It?
Porter’s 5 Forces is actually Michael E. Porter’s Five Forces of Competitive Position Analysis. Developed in 1979, its simple framework is used for assessing and evaluating the competitive strength and position of a business organization.
The concept promotes five forces that determine the competitive intensity and attractiveness of a market. So if we were to create a simple statement, Porter’s 5 forces help procurement managers in identifying where power lies during a business situation. With Porter’s 5 Forces, the following can be determined within the organization:
- Understanding how strong an organization’s competitive position is currently
- how the company can achieve a competitive advantage over its rivals
Today, Porter’s 5 Forces are now used by numerous procurement managements to gain an edge over their competition. When they need to create new procurement processes that will help them get the highest quality supplies, they often rely on these five points of power
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Porters 5 Forces Model– The 5 Points of Power
And now we come to the part where every procurement manager is often interested in learning about like procurement analytics.. We have Porter’s 5 Forces, each point of power explained as closely as explained by Michael E. Porter himself.
1. Supplier Power
An assessment of how easy it is for suppliers to drive up prices. This is determined by the number of suppliers for each essential element; the uniqueness of their product or service; the relative size and strength of the supplier; and the cost of switching from one supplier to another.
2. Buyer Power
An assessment of how easy it is for buyers to drive prices down. This is determined by: the number of buyers in the market; the importance of each individual buyer to the business; and the cost to the buyer of switching from one supplier to another. If a business has just a few powerful buyers, they are often able to dictate terms.
3. Competitive rivalry
The main driver is the number and capability of competitors in the market. If there are many competitors offering undifferentiated products and services, this will reduce market attractiveness.
4. Threats of substitution
Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.
5. Threats of new entrants
Profitable markets attract new entrants, which in turn reduces profitability. Unless incumbents have strong and durable barriers to entry – for example, patents, economies of scale, capital requirements, or government policies – then profitability will decline to a competitive rate.
How to Use Porters 5 Forces Modelfor the Procurement Process?
For the procurement manager, having the ability to determine and define the threats and the source of power coming from assessing the competitive advantage of a company is a valuable source of information and an asset that can be taken advantage of when developing an impeccable procurement plan.
By using Porter’s 5 Forces, the procurement manager can do the following:
- Help organizations in understanding the factors affecting profitability in a specific industry.
- Can help inform decisions about whether to enter a specific industry or increase capacity in the industry.
- Assist in developing competitive strategies for the organization.
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