Understanding competitive rivalry for effective procurement strategy

Source: Understanding competitive rivalry for effective procurement strategy | Newsday (Business)

Additional to the review of indices of organisational size in relation to market share or the level of sales revenue to market value, tools for review of competition rivalry include concentration ratio also commonly known as CRx and Herfinahl-Hirschman index also commonly known as HHI.

By NYASHA CHIZU

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

The concentration ratio is then a measure of the extent of market control by the largest firms in an industry.

The concentration ratio ranges from 0% to 100% that is normally grouped into no, low, medium, high to total concentration.

Where there is no concentration, a 0% would exist, the number of largest firms in the category of four or five would not have any significant market share.

Where the concentration is 100%, it implies that the top four or five companies would account for the total market share.

Why is this analysis critical for the development of an organisational strategy and the procurement strategy?

In those markets where CRx is low, rivalry is high and no organisation on the supply side has dominance in the market.

In view of competition within the supply chain, it implies that there is no dominant character in the market.

Competition in such markets is very high and the reverse is true. Such information is useful in the determination of the bargaining power of buyers and suppliers in an industry.

On the other hand, the HHI measures the size of the organisation in relation to the industry and it also indicates the level of competition among such organisations.

The HHI has a ration of between zero and one, where one represents a monopoly market and zero representing a large number of small organisations in the market.

The assessment indicates the level of competition assisting in the review of the buyer and supplier strength in any given market since the larger the number of competitors in a given sector, the greater the level of rivalry.

This affects the buying strategies and sales strategies of such firms, since it will be difficult to win and maintain the level of customers.

Factors such as the rate of market growth also influence the level of rivalry in any market.

Where the market is growing at a snail’s pace, the competitors suffer in sales volumes with profound implications on the revenues and profitability of the organisations.

There is a high possibility of intense competition when firms try to defend their existing market share while at the same time, trying to gain a greater share of that market.

In such instances, the buyer has bargaining power and the procurement strategy should appropriately take advantage of such circumstances.

Another critical element is the assessment of costs associated with the market.

In markets where the fixed costs contribute the majority of costs, the only viable solution for the suppliers is the full capacity utilisation of production facilities in order to spread fixed costs in order to be profitable. When the organisation is in such a situation, the noble thing is to adopt a hardline to defend the market share against the rivalry.

The situation presents a bargaining position for buyers, where the supplier intends to capitalise on the excess to the market produced to spread overheads.

In markets where products have short life cycles, producers are under pressure to release stock before the product becomes redundant or obsolete.

The suppliers fight to be first to occupy the market and they also struggle to push the product in view of the shorter life cycle.

This poses another opportunity for a stronger bargaining position of the buyer in such an industry.

This factor is also related to the influence switching costs have on the market.

Where switching costs are low, it is easy to lose a market as a supplier and the opposite is true.

A buyer would need to understand the market in order to craft an appropriate procurement strategy.

There are other factors that introduce price wars in a market that buyers need to understand in order to manage through an appropriate procurement strategy in order to take advantage of their situations.

lNyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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