Supply markets and competition [Porter’s 5 Forces & Market Knowledge]

Supply markets and competition

[Porter’s 5 Forces & Market Knowledge]

When you are buying products and services on behalf of your organisation, it is important to understand the markets in which they operate, particularly the level of competition for your orders.

Competition is good for you because it creates rivalry between suppliers. This leads to product innovation and better value for money, which enables your budget to go further and ultimately benefit more patients. This will put you in a stronger position when you negotiate terms with them and help you to achieve better value for money for your organisation.

An effective way to gather the information you need to understand the level of competition that exists is with a model known as Porter’s Five Forces.  It is based on a method created by Prof. Michael Porter at Harvard University.

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1. Degree of rivalry: more competition gives buyers more choices.
2. Threat of new entrants: new, lower cost providers, have the effect of driving down prices.
3. Threat of substitute products and services: the substitute of non branded goods for healthcare standard products.
4. Power of buyers: sometimes buyers can achieve better prices by ordering larger quantities. They have greater purchasing power.
5. Power of suppliers: fewer suppliers means less competition.

Here are some useful questions to help you obtain information you need:

• How much competition is there? If you have a choice of suppliers you may be in a stronger position to obtain a more favourable price. If the choice is limited, you could end up paying more.
• How easy is it for new suppliers to enter the market? This is important, particularly if there is currently only limited competition. Can you find alternative suppliers in other countries? Or maybe suppliers in related sectors can be persuaded to diversify.
• Can alternative products or materials be used? Newly developed materials and innovative methods can open the way for greater competition, reducing the power of existing suppliers.
• Can you work with organisations who need the same products? Larger orders generally mean lower unit prices. See if you can unite with other buyers to negotiate better terms. These is known as consortium purchasing.

In practice, access to a choice of products and services in healthcare can be limited for many buyers. In particular, medical equipment often has to be sourced from other countries. Bearing this in mind, it is still important to identify where savings can be made through better buying practices.