Market analysis

What is market analysis?

Market analysis is an essential part of the CIPS Procurement and Supply Cycle. It is conducted at stage two of the cycle: market analysis and make or buy decision. This involves analysing the market to assess market conditions, evaluating product lifecycles and seasonal trends, and identifying any risks or other factors that need to be considered to ascertain whether it is the right time to enter the marketplace.

Why is market analysis important in procurement?

Market analysis can help procurement professionals to develop effective procurement strategies to best fulfil their business needs. By analysing factors such as how many buyers or suppliers are in the marketplace, organisations can develop appropriate negotiation strategies to manage the distribution of bargaining power. Evaluating macroenvironmental factors for potential risks can help you determine whether it is the right time to enter the marketplace and create risk mitigation plans to manage any potential issues. This includes considerations such as the availability of suppliers, supply shortages, currency fluctuations, and likely advancements or obsolescence of technologies.

What would procurement evaluate as part of a market analysis?

A typical market analysis would involve an analysis of the following.

• Product or service life cycles.
• Seasonal trends and consumer preferences.
• Currency and commodity trends.
• STEEPLED factors such as economic, social, technological or political considerations that may affect the supply chain and their associated risks.
• Market structure – the levels of supplier competition and how many potential buyers and suppliers are within the market.
• Potential alternative or substitute products and services.
• Supply and demand factors such as material delays.
• Potential sourcing strategies and the advantages and challenges of each, such as global sourcing, outsourcing, offshoring, low-cost country sourcing, or local sourcing.

What tools can assist procurement in conducting market analysis?

Market research

This involves industry-relevant research, such as market and media publications, professional bodies, websites, commodity and price indexes, trade fairs and webinars. This can provide insights into general market conditions, such as political affairs and economic trends. Industry-specific research can help assess factors relevant to your marketplace, such as supply and demand, commodity prices, supplier availability or specific risks, such as conflict minerals in electronics or human rights issues in textiles.

STEEPLED

A STEEPLED analysis enables organisations to assess risks across their macroenvironment in eight key areas: social, technological, economic, environmental, political, legal, ethical and demographical. This can help businesses analyse potential risks, opportunities and trends in the marketplace and develop appropriate strategies to manage them.

Carter’s 10 Cs

This framework is a useful tool for analysing suppliers within the marketplace, to assess whether they are capable of fulfilling your needs. It involves evaluating suppliers against 10 considerations: competency, capacity, commitment, control, cash, cost, consistency, culture, clean and communication.

Porter’s Five Forces

Porter’s Five Forces framework can help organisations analyse the level of competition within the market. It assesses five key factors.

• Competitive rivalry: How many organisations are in the marketplace, providing the same goods or services?
• Threat of new entrants: How likely is it that another organisation can enter the marketplace, and how would this potentially affect the business?
• Threat of substitution: How likely are customers to find another product or service?
• Bargaining power of buyers: How many buyers are in the marketplace, and how does this affect their ability to negotiate?
• Bargaining power of suppliers: How many suppliers are in the marketplace, and how does this affect their ability to negotiate?

This information can help provide an indication of factors such as supply and demand by enabling visibility of how many suppliers or customers there are in the market, and how easy it is to switch suppliers and/or move to an alternative product or service. This can help guide strategies for things like negotiation, supplier relationship management, commodity management, and whether it is the right time to enter the marketplace.

Typical market structures

Monopoly. In a monopoly situation, there is only one producer of a particular good or service in the marketplace. This may be because the producer has the legal right to be the only supplier, for example, if there is a patent, copyright or registered design. This is a difficult situation to navigate as a procurement professional, as the supplier can essentially set their own prices, and there are no other alternative or substitute options, such as other products/services or suppliers, that can be accessed. With regard to Porter’s Five Forces framework, the supplier holds the highest bargaining power.

Duopoly. In a duopoly situation, two suppliers dominate the market for a product or service. This environment poses similar challenges to a monopoly, except that there is at least one other supplier in the marketplace, making it harder for one supplier to control or set prices.

Oligopoly. An oligopoly exists when more than two suppliers significantly influence a given market. Although there are more than two, an oligopoly is still considered to be a small number of producers, meaning that supplier bargaining power is still high and buyers are still limited in their choice of suppliers.

Monopsony. In contrast to a monopoly, a monopsony is a market where there is only one buyer for a particular product or service. This may be because the company has acquired or merged with other competitors, or other buyers have had to exit the market due to funding, demand for their own products/services, or due to changes in STEEPLED factors such as technology. In this scenario, the buyer has higher bargaining power, because the supplier has nobody else to sell to.

Oligopsony. In an oligopsony, there are a small number of buyers in a market. Although there is more than one buyer, there is still a limited number of customers for producers to sell to.

Perfect competition. A perfectly competitive market is one with numerous sellers and buyers of a product or service. This means that buyers have a variety of producers to purchase from, and sellers have a variety of customers they can sell to. Prices cannot be set by a sole purchaser or producer, and there is freedom to choose providers and negotiate fair prices. There may also be substitute or alternative products and services in the market. There are no barriers to entering or exiting the marketplace, and all players within it have perfect knowledge of prices, production costs, and other influences on supply and demand.

From a procurement and supply perspective, perfect competition is the desirable marketplace scenario. In this environment, it is easy to exit or enter the market; there are multiple buyers and suppliers and alternative or substitute products/services, leading to a healthy amount of competition. However, this may not always be possible. If you are in a monopolistic or oligopolistic marketplace, it is important to identify this during market analysis, so that you can develop appropriate strategies to manage the implications. For example, in a monopolistic scenario, where there is only one supplier of the required product or service, you may seek to develop the negotiation skills of your team or build stronger strategic supplier relationships to try to offset the bargaining power of the supplier.