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CIPS Exam Report for Learner Community: Qualification: Diploma in procurement and supply Unit: D5 - Managing contracts and relationships in P&S Exam series: July2013 Question 1 – Learning Outcome 1 Explain, using examples, the following competitive forces in supply chains: (i) Threat of new entrants to a market (ii) Power of suppliers (iii) Power of buyers (iv) Potential product or service substitutes (v) Competitive rivalry (25marks) Learning Outcome: 5 marks each is awarded for this question up to a total of 25 marks. Each detailed discussion of the five forces model will attract a total of 4marks with a full 5 marks for providing good or relevant examples from case materials or industry best practice. Pass grade answers are likely to include the following content Threat of New Entry: This force affects the power between companies that operate in a market through the ability of other organisations to enter the market. If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if there is little protection for key technologies, then new competitors can quickly enter the market and weaken the position of the companies that are operating in the market. Candidates are required to define “Threats of New Entry” and be able to identify the “Barriers to entry”. For instance, if there are strong and durable barriers to entry, then it can be possible for companies to preserve a favourable position and take fair advantage of it. Barriers to entry into a market include; economies of scale, need for large scale finance for high capital investment, product differentiation and high brand loyalty, high advertising spend by competitors, access to established distribution channels or natural resources, Government or legislative barriers. Power of suppliers: Power of suppliers could depend upon the uniqueness of suppliers’ product or service, their strength and control over their customers as well as the cost of switching from one to another. The fewer the supplier choices organisations that operate in the market have, the more powerful suppliers will generally be. So the power of suppliers tends to be high where; there are a limited number of suppliers (especially with an oligopoly) few substitutes, volume is unimportant to the supplier’s business, the product or service is JULY2013_ (D5) 1/5 Leading global excellence in procurement and supply important to the buyer, switching costs to the buyer is high. Buyer power: this refers to the pressure that customers exert on firms that operate in a market to obtain high quality products or services at lower prices. Buyer power increases when there are few buyers and many sellers in the field, or when products or services are not significantly differentiated and can be easily substituted. For suppliers, buyers’ demands represent costs. This means that the stronger the buyer is, the less profit will generally be made by suppliers, which is why many companies try to develop strategies that reduce the power of buyers. So buyer power is high where; there are a limited number or large in size relative to buying organisations, spend is important to supplier’s revenue, products are undifferentiated, and there is a potential for backward integration. A good answer for this aspect of the question can be found on page 45 of the official CIPS course book. Substitutes: substitute products are alternative products that serve the same purpose (e.g. postal services, courier services, fax machines and emails in the field of communication) making it easy for buyers to switch to alternative suppliers, and therefore limiting the price that suppliers can charge for their products; see page 45 3.7 of the official CIPS course book. Having an idea about the topic can be good for marks to be awarded and not necessarily copying verbatim from text books. Substitutes may refer to viable, alternative choices of products or services that customers can make which meet the same needs as the original product or service that is supplied. An example would be MP3 downloads which meet the same need as CDs, or mobile phones with cameras which satisfy the same need as digital cameras. As with reducing the threat from new competitors, companies can use different strategies to protect their products using trademarks, patents or strong branding to differentiate them from substitute products. Alternative products which serve the same purpose make it easier for buyers to switch to alternative suppliers, for example, postal and courier services or “Gari and Couscous”. Competitive rivalry: Competitive rivalry exists; companies, organisations or institutions differ from one another in terms of their

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