What changes have enabled Michael Porter to see Procurement (Purchasing) in a more strategic light - Essay Example

?What changes have enabled Michael Porter to see Procurement (Purchasing) in a more strategic light? Introduction Michael Porter is known for his ideas concerning competitive strategy and competitive advantage. To be on top in the competition within an existing market with absolutely many key players and potential market entrants, Porter advises everyone to employ competitive strategy in order to reach optimum competitive advantage. Competitive advantage can either be cost advantage or differentiation advantage. Porter explains when a unique product is produced; a firm could have the advantage to set premium price for it, calling it as a differentiation advantage. In addition, he wants to point out there is competitive advantage earned when a firm could produce existing similar product offerings, but at lower cost. He calls this cost advantage. Today, most, if not all, firms require outsourcing almost everything just in order to provide or come up with service or product offerings. This can be clearly elaborated in the value chain, which at the bottom line, one would be able to realize the associated cost generated in production of certain product or service. In order to achieve cost advantage as Porter defines, it is therefore important to at least minimize or cut cost in order to produce offerings that would have competitive price. Procurement or purchasing is an important component in Michael Porter’s value chain model. In this model, he originally identifies procurement to be just a support activity. However, recently, he emphasises the potential strategic contribution of procurement to shared value, as published in the Harvard Business Review. Concerning Porter’s recent claim, this paper tries to present the existing trend to justify whether opportunities for purchasing to contribute more strategically have increased, and how it might have addressed relevant matters in the difficult economic conditions facing organisations today. Significant trending Purchasing together with its strategic importance has long been remarkably considered, but there was actually less appreciation of it when it comes to what it can actually do with business performance. Concerning this issue, a study with empirical analysis conducted on 141 industrial companies reveals interaction among purchasing efficacy (purchasing strategic objectives and capabilities) and strategic integration of purchasing (between business strategy and purchasing strategic objectives) (Benito, 2007, p.901). Today, one essential point of understanding the actual strategic importance of purchasing can be viewed within the context of its actual contribution to business performance. So this goes with finding interesting stuffs about the likelihood of its contribution to creation of profit, customer satisfaction, increase market share and more. After all, business performance might include different metrics that could help measure and as bases of actual business growth. Regarding this, it has become a considerable point to constantly investigate purchasing using various empirical researches just to be able to quantify its actual significance as a strategic function. A recent study conducted to investigate the empirical contribution of purchasing and supply management (PSM) to the company’s success generated a substantial result based on the information gathered from the international survey of 306 major companies from eight industry sectors (Hartmann et al., 2012, p.22). The study showcases empirical evidence leading to the point PSM has remarkable contribution to the company success. The contributed value was found to be mediated by three operational performances such as cost, quality and innovation (Hartmann et al., 2012, p.22). PSM, increasingly regarded by senior management to strategically influence operational performance and financial performance, however, was found to still require external survey methodology that complements the internal perceptional measures of PSM performance, and a comprehensive performance measurement framework (Saranga and Moser, 2010, p.197). Consequently, based on a literature survey conducted pertaining to the point that purchasing and supply activities may be allocated to the categories of strategic and non-strategic, which may involve the concept about higher inter-organisational status for the former and low level status for the latter, and could generate higher intra-organisational status by creating saturated effort on strategic activities by undertaking change from clerical to strategic focus, the strength of this idea was found to exist but with remarkable challenge as tested within the remarkable economic distribution of large and small companies (Ramsay and Croom, 2008, p.192). Concerning this, there is another study conducted in order to find out the degree to which purchasing is regarded as a strategic activity by small-to-medium-sized enterprises (SMEs) by taking a survey of UK SME managers, but findings suggest purchasing practices vary considerably with low level of formality and less considered strategically in its employment as there were also negative inclusion of formal supplier evaluations (Pressey et al., 2009, p.214). Generally, the term company success might have its solid focus on the financial and operational performance of an organisation. For this reason, considering that each organisation, small or big, has corresponding operational activities, financial performance may also vary at some point. Budgets may vary and other relevant cost-related and financial matters may also have different emphasis. This is perhaps the reason, based on the implied results of the stated empirical research as shown above, why purchasing can be regarded as either strategic or non-strategic in nature. However, this all boils down to the possibility that purchasing has a substantial place where it can be positioned as something having remarkable strategic importance. When it comes to significant importance of purchasing as a strategic function, one may also have to look at the perspective or possibility of looking at it from the point of view of organisational structure, function and even its size. Just in the case presented by Pressey and colleagues, from the point of view of SMEs, there is actual variation of looking at purchasing as a management component with strategic relevance. Although some other may consider it so, but it seems there are still many organisations out there which remain to stay at the basic understanding about purchasing as a mere management-supporting activity. At some point, purchasing may not be considered with remarkable strategic function based on a different level of economic scale, as stated above. However, from academic point of view, many are becoming convinced to consider it as a strategic function that has relevant influence on organizational performance and success (Monczka, 2010, p.18). The strategic importance of purchasing together with supplier management is an emerging key element of business strategy, as based on major findings from empirical researches conducted (Choi, 2011, p.158). Purchasing finds its way in strategic management processes as far as achievement of competitive advantage is concerned, which is said to be a major finding from integrating purchasing into strategic management processes and purchasing practices (Moser, 2007, p.12). For instance, outsourcing could possibly create the strategic importance of purchasing function (Mukherjee and Kachwala, 2009, p.374). The inclusion of the idea about competitive advantage seems would what make purchasing a strategic function. For instance, Apple may have high level of competitive advantage because of its highly differentiated offerings. However, those firms which rely on the strategic importance of purchasing may consider taking its cost advantage out from it. To cite an instance, Wal-Marts may have effectively created a cost advantage because of its capacity to downsize costing within its supply chain. China may have better opportunity to give low-cost products because of its potential advantage when it comes to labour cost. As a result, outsourcing products from this country may be a good opportunity, especially those which would take substantial amount of cost prior to their production. The bottom line is to achieve a shared value, which from a simple perspective may be much feasible especially from the very specific case of an organisation. However, one should also be able to take a look at everything from the general standpoint on how purchasing could potentially provide a significant advantage to the economy. It seems there must be substantial amount of literature telling us the importance of purchasing as a strategic function. If this could be so, then it must also be strongly in line with having a better potential to address difficult economic conditions facing organisations today. America is in debt, which some may attribute to dumb practices, but as suggested in an article this could be relieved through integrated procurement, teamwork between States, cities and towns (Shaughnessy, 2012). By this, the States would collaborate with the private sectors and this does not actually exclude private organizations especially firms owned by various businessmen as primary subjects. Good purchasing practice such as strategic approach of cost reduction, especially in economic downturns could help reduce the problems associated with large inventory build up, which actually results to undesirable impact on the supply chain (Purchasing Practice, 2012). So far, there has been substantial number of literature trying to agree with what Porter claims about purchasing as a strategic function. Although, some other do not actually agree to this, it is clear that the issue is substantially within the bound of economic scale and actual applications. From empirical results, the trend of considering purchasing as a strategic function could be in an upward spiral based on the stated information above. Analysis Cost reduction as a potential source of competitive advantage is one of the clear emphases why procurement management may be the right approach in economic downturns. In tough challenging economic times, the issue would not only how to increase productivity, but including what strategies are necessary in order to obtain it. For this reason, purchasing has become a powerful tool in organisations, as stated earlier, to help companies deliver the best value for their product and service offerings. This value is directly linked with implementation of appropriate strategy. So far, it is clear it is not only Porter who specifically observes the importance of purchasing as a strategic function, but the existence of various empirical researches could substantially prove this. The results of these studies as discussed above, which could prove that the strategic function associated with purchasing, could have substantial contribution to the success and performance of an organisation. The performance and success of an organisation based on Porter’s idea about competitive advantage are generated through formulation and implementation of a competitive strategy. At this point, based on the gathered reviews, purchasing can now become a potential competitive strategy, for as long as it could create a substantial impact especially on creating competitive advantage. As Porter would want to emphasise, the cost advantage for instance can be acquired through the right idea or strategy and it could possibly be employed when it comes to procurement. Porter wants to tell us that it is not hard to initiate cost advantage, by initiating cost reduction strategy that might be implemented through purchasing. So at this point, seeing purchasing as a strategic function cannot be simply overlooked for as long as it could become potential source of competitive advantage. The idea about competitive advantage could also be measured through financial and operational performance, as there would be associated measurable outputs such as profit and market share. Although these are actual results, but it seems they can be most likely influenced by purchasing, as already stated and discussed earlier, and based on the prevailing outcomes of empirical studies trying to associate it with organisational performance and success. Considering this point, there must be something more to say about purchasing as elemental component to the success of an organisation. Although the clear point in here that must be emphasised pertains to its actual strategic function, as claimed by Porter to be existent. Porter is not only one to point this out, today, from academic perspective and based on the literature, there has been increasing number of beliefs associated with the issue showcasing purchasing as a strategic function in both operation and financial concerns of an organisation. This also means that organisations today are also trying to generate competitive advantage right from the start of their financial and operation concerns. After all, competitive advantage according to Porter could be either in one of these categories: cost advantage and differentiation advantage. For as long as purchasing is associated with financial and economic concerns, one could always freely give the point like Porter that procurement will definitely be considered as elemental strategic function and not just a mere support of basic strategic activities. Conclusion As found, there have been many things that can be said about purchasing, but the bottom line is the thought that it could help organisation to achieve its competitive advantage. In tough economic times, purchasing is found to create desirable impact on the supply chain. In addition, it is also found to increase organisational performance, which at some point involves the idea about financial and operational concerns. These are broad activities in the organisations but purchasing could possibly help enhance or influence them. All these considerations point to the idea that purchasing could remarkably help create competitive advantage. This creates a special place for purchasing as elemental strategic function, rather than just a mere supporting actor in the actual organisational activity. Purchasing therefore is not just a significant tool to ensure success of organisational performance, but above anything else, it also creates the venue to consider it as a strategic function, both in the academe and in the actual business environment. For this reason, many organisations are trying to make sure of a special treatment for purchasing activity, not just for its supporting function, but on how a company could possibly create competitive advantage, such as cost advantage. In tough economic times, cost advantage may find an opportunity to be maximised, by which in optimising the capacity of purchasing could be remarkably addressed. References Benito, J. G., 2007. A theory of purchasing’s contribution to business performance. Journal of Operations Management, 25 (4), pp.901-917. Choi, T. M., 2011. Fashion Supply Chain Management: Industry and Business Analysis. Hershey. PA: Idea Group Inc (IGI). Hartmann, E., Kerkfeld, D. and Henke, M., 2012. Top and bottom line relevance of purchasing and supply management. Journal of Purchasing and Supply Management, 18 (1), pp.22-34. Monczka, R. M., Handfield, R. B., Guinipero, L. C. and Patterson, J. L., 2010. Purchasing and Supply Chain Management. 4th ed. Hampshire: Cengage Learning EMEA. Moser, R. (2007). Strategic Purchasing and Supply Management: A Strategy-Based Selection of Suppliers. Wiesbaden: Springer. Mukherjee, P. N. and Kachwala, T. T., 2009. Operations Management And Productivity Techniques. Delhi: PHI Learning Pvt. Ltd. Pressey, A. D., Winkhofer, H. M. and Tzokas, N. X., 2009. Purchasing practices in small-to medium-sized enterprises: An examination of strategic purchasing adoption, supplier evaluation and supplier capabilities. Journal of Purchasing and Supply Management, 15 (4), pp.214-226. Purchasing Practice., 2012. Managing procurement through a downturn. Available from: http://purchasingpractice.com/thought-zone/managing-procurement-through-a-downturn/ [Accessed 28 October 2012]. Ramsay, J. and Croom, S., 2008. The impact of evolutionary and developmental metaphors on Purchasing and Supply Management: A critique. Journal of Purchasing and Supply Management, 14 (3), pp.192-204. Saranga, H. and Moser, R., 2010. Performance evaluation of purchasing and supply management using value chain DEA approach. European Journal of Operational Research, 207 (1), pp.197-205. Shaughnessy, H., 2012. Dumb practices: Why American tax dollars are wasted and where to find the solution. Available form: http://www.forbes.com/sites/haydnshaughnessy/2012/10/08/dumb-practices-why-american-tax-dollars-are-wasted-and-where-to-find-the-solution/ [Accessed 28 October 2012]. Read More