Supply Market Analysis: A Case Study Example

Introduction

When analysing supply markets, it is common practice to use recognised tools such as STEEPLE, Porter’s Five Forces and SWOT. STEEPLE analysis identifies the broad external factors (social, technological, environmental, economic, political, legal, and ethical) which impact on the supply market, while Porter’s Five Forces analysis considers the competitive forces within the supply market itself. The output from these two analyses constitutes the external opportunities and threats of the supply market, which can be combined with the internal strengths and weaknesses of the buying organisation within a summary SWOT analysis. The buying organisation must then plan to take advantage of the opportunities and build on its strengths, whilst mitigating the threats and overcoming its weaknesses.

The relationship between the three tools within a supply market analysis exercise is shown below:

World Bank has produced a guidance document for procuring medical diagnostic imaging (MDI) equipment.[1] This has been used and adapted to produce a worked example of a typical supply market analysis using the previously mentioned tools. It should be noted that this analysis assumes that World Bank, rather than individual governments from developing countries, is procuring the equipment. This will have an impact on the dynamics of the analysis, as World Bank will have more leverage in the supply market than individual governments.

STEEPLE Analysis

Five Forces Analysis

BARGAINING POWER OF SUPPLIERS (SUPPLIER POWER): The MDI market is a concentrated market, with four major players (GE, Siemens, Philips and Toshiba), that have large market shares in all the equipment lines. Suppliers to this market are mainly comprised of component and sub-component manufacturers. Availability of substitutes is limited, as these components and sub-components are technologically advanced, and often protected by patents and intellectual property rights (IPR).

However, there is a growing risk for manufacturers in countries that have more limited intellectual property protection laws where reverse engineering is creating a threat of technology copying. Competition in this area is due mainly to the ‘make or buy’ decision of each manufacturer. Market leaders, such as GE, Philips, Siemens and Toshiba, have large R&D budgets and are fully capable of producing each component in-house, therefore the bargaining power of their suppliers is low.

BARGAINING POWER OF BUYERS (BUYER POWER):  The size of the MDI equipment market is considerable (US$33.4 billion in 2020) and growing (6.2% per annum). Annual spend on this type of equipment financed by World Bank is in the region of US$100 million to US$200 million, therefore the Bank’s portfolio in relation to overall market size is small. Bearing in mind the market capitalisation of any of the four largest suppliers in this market is more than US$3 billion, the Bank is unlikely to exert any kind of influence over suppliers from a strictly financial point of view. However, the Bank has a unique brand and international standard-setter role, and kudos associated with its name, which puts it in a position of its own from a buyer’s perspective. It also has unique relationships with governments worldwide, which may be of interest to any supplier looking to build long-term strategic partnerships, or indeed seeks the Bank to influence global procurement practice. Therefore, the bargaining power of the buyer is medium.

RIVALRY AMONG CURRENT COMPETITORS (COMPETITIVE RIVALRY): The MDI equipment market is oligopolistic in nature. Only four firms have a large share of and dominate the market. The degree of competition varies slightly for each market segment, but in these segments the four largest players have a combined market share of over 65%-90%. Barriers to entry such as high fixed costs, patents, multiple regulatory regimes and brand loyalty bring down the competitive rivalry and make it difficult for new suppliers to emerge. Therefore, competitive rivalry is low.

THREAT OF SUBSTITUTE PRODUCT/SERVICES (PRODUCT AND TECHNOLOGY DEVELOPMENT): MDI equipment manufacturers have been launching new products at varied price points and across all modalities to strengthen their presence in the MDI equipment market owing to significant opportunities in emerging markets. MDI equipment manufacturers have also been focusing on nations such as India, China, and Brazil, through geographic expansions and development of low-cost equipment specifically for developing nations. The threat of substitute products is low, and innovations are generally due to size and functionality of the product, rather than its performance.

THREAT OF NEW POTENTIAL ENTRANTS (NEW MARKET ENTRANTS): The threat of new entrants is medium to low. There are numerous barriers to entry into this market which makes entry to the market a challenge:

1. Brand Loyalty: Established brands hold an advantage in this market, as recognition is linked to quality, which directly affects clinical outcomes, therefore buyers are less likely to take a gamble on a new unknown brand;
   
   
2. Customer switching costs: In many cases in this market, purchases are linked to service contracts or IT equipment, which has the potential of making a switch to another brand costly;
   
   
3. Capital Investment: This is a very high-tech industry, with a large amount of capital required for R&D costs;
   
   
4. Government Regulations: This market is very tightly regulated, varying in degree from country to country. Suppliers must comply with the latest international standards to remain competitive;
   
   
5. Patents: Suppliers in the market strive for continual innovation and protect their investment and market position through aggressive patent registration and enforcement. However, there is a growing risk for manufacturers in countries that have more limited intellectual property protection laws where reverse engineering is creating a threat of technology copying.

Summary SWOT Analysis

[1] http://pubdocs.worldbank.org/en/258511553620191211/Procurement-Guidance-MDI-Equipment-Buyers.pdf