Porter's 5 Forces adapted to procurement
Objective: Understand Porter's model (1979) and know how to adapt it to a procurement context to assess the balance of power on a supplier market.
Michael Porter developed this model in 1979 to analyse the competitive intensity of an industry. Adapted to procurement, it lets the Category Manager assess their position of strength against suppliers on each market and adjust their strategy accordingly.
Force 1 - Rivalry between suppliers
The more suppliers compete with each other, the stronger the buyer's power.
- Favourable indicators: Many suppliers of comparable size, market overcapacity, little product differentiation, low switching costs
- Unfavourable indicators: Oligopoly or monopoly, market in shortage, strong product differentiation, high switching costs
- Procurement impact: Strong rivalry = price negotiation leverage, multi-sourcing possible, effective reverse auctions
Force 2 - Suppliers' bargaining power
The supplier's power depends on their ability to impose their conditions (price, lead times, quality).
- Indicators of strong power: Few alternatives, proprietary technology, strong brand, high transfer costs, possible downstream integration
- Indicators of weak power: Many alternatives, commoditised product, low brand recognition, the customer represents a large share of the supplier's revenue
- Procurement impact: Strong supplier power = difficult negotiation, need for partnerships, medium-term diversification
Force 3 - Buyers' bargaining power
The buyer's power depends on their ability to influence purchasing conditions.
- Indicators of strong power: Purchase volume significant for the supplier, standardised product, low switching costs, transparent price information
- Indicators of weak power: Small volume, technical dependency, high transfer costs, urgency of need
- Procurement impact: Strong buyer power = aggressive negotiation possible, e-auctions, favourable payment terms
Force 4 - Threat of substitute products/services
The existence of alternatives (even of another kind) strengthens the buyer's position.
- Favourable indicators: Several alternative technologies, low substitution cost, comparable performance, favourable market trend
- Unfavourable indicators: No technical alternative, costly or risky substitution, long qualification
- Procurement impact: Substitutes available = additional negotiation leverage, ability to switch technology
Force 5 - Threat of new entrants
The possibility of new suppliers entering the market influences the balance of power.
- Favourable indicators: Low entry barriers, attractive market, accessible technology, light regulation
- Unfavourable indicators: Heavy initial investment, patents, long certifications, incumbents' economies of scale
- Procurement impact: Threat of new entrants = future competitive pressure, opportunity to develop new sources