Continuing our discussion/development of a Category Sourcing Scorecard, today we will focus on Market Factors. Last time, we evaluated Internal Factors which look at the organization, the sourcing team, and the general internal landscape for sourcing a specific category.
As a reminder, the primary goal of this series will be to focus on the analytical aspect of developing a sourcing wave strategy which we will do by discussing the key factors that should be weighed in making those decisions. We believe that this will culminate in the development of a “Category Sourcing Scorecard” (We introduced the idea in this article).
Are there any Michael Porter fans in the house? I hope so, because this section borrows heavily from Porter’s Five Forces Model, which is a framework that can be used to better understand an industry by defining the level of competition within it. For our purposes, the market factors we use will help the sourcing team define the level of competition that exists in a given category market.
Factor #1 – Level of Competition (as defined by the number of potential suppliers)
Discussion: This factor parallels Porter’s “Competitive Rivalry” force and evaluates how many qualified suppliers exist or more accurately (since we are at the beginning of the sourcing process and may not have deep knowledge of the category), how many potentially qualified suppliers are likely to participate in a sourcing event. It stands to reason that the more qualified suppliers there are for a given category, the higher level of competition will exist – all to the sourcing team’s benefit. You can certainly have a highly competitive category with a small number of suppliers or with as few as two, but the Scorecard is intended on taking a “scientific” or quantifiable approach to the development of your sourcing waves. As such, we will use the number of suppliers as a proxy to define the level of competition.
Scorecard Question: How many potential suppliers could bid on this category?
Multiple Choice Answers: (A) Few, less than five (B) Some, between five and ten (C) Many, more than ten
Factor #2 – Market Entry Barriers
Discussion: As you would expect, this factor parallels Porter’s “Threat of New Entrants” force and evaluates how easy or difficult it is to become a supplier of this category. For example, if all a new company needs to become a supplier of this category is a phone and a website, the barriers to entry are low. That would indicate that there is more potential competition in that category than in a category that requires new suppliers to make an investment of millions of dollars and take several years to build a factory and develop a distribution channel.
Scorecard Question: The market barriers to enter this market can be described as…
Multiple Choice Answers: (A) High (B) Medium (C) Low
Factor #3 – Substitute Availability
Discussion: This factor parallels Porter’s “Threat of Substitutes” force which looks at the availability of alternative products or services that can be used in place of the category and the buying organization’s ability to use those alternatives. In this context, a substitute does not mean a rival supplier’s similar product (not substitutes: HP Pavilion vs Lenovo ThinkPad), but rather a different or slightly different item or service that can be successfully used in a similar capacity. One example of a substitute could be the consideration to buy the sales team new tablets instead of new laptops (substitutes: HP Pavilion vs Apple iPad).
Scorecard Question: Are substitutes for this category available?
Multiple Choice Answers: (A) None (B) Few (C) Some
Factor #4 – Buyer’s Relative Bargaining Power
Discussion: This factor combines two of Porter’s forces – “Supplier Bargaining Power” with “Buyer Bargaining Power” to determine which side of the negotiating table has the upper hand, if one exists. For example, there are some heavily-regulated industries where prices are fixed; and then, there are industries where the buying organization or the spend is so small that the ability to drive pricing or negotiate from the buyer side is limited. This factor is the one that at a high level really tries to boil down the opportunity by asking, in effect, “how sourceable is this category?” If we go through the sourcing process, do we have an ability to impact final pricing and terms?
Scorecard Question: What leverage does the buying organization have over final terms and pricing?
Multiple Choice Answers: (A) Little to none (B) Some leverage (C) Considerable leverage
And there you have the Market Factors…
Postscript (I): I imagine that the last factor – Buyer’s Relative Bargaining Power – will raise a few questions regarding how it should be used and what should happen if the answer to the question is that “little to no buyer leverage is available” with this category? In that scenario, why go any further in considering this category for sourcing? The short answer is that many teams may not know the real answer to the question and we do not want to provide a back-door exit to any stakeholder looking to avoid sourcing at any cost. The Scorecard is quick tool that evaluates a whole host of factors and compares them to other categories. Since many answers will be given without full knowledge, we’re really focusing on the composite score to help prioritize the categories. A more detailed review of the category will occur when the sourcing process kicks off.
Postscript (II): Also, in the Scorecard, we’ll need to provide a discussion or context around the somewhat subjective answers provided to the Market Barriers question. We will also need to place more context around the buying leverage question.