Back to Basics – Explaining Competitive Advantage to An Alien CEO

We’re back with our CPO hero, explaining procurement to their very clever, sexually fluid and alien CEO TraceyJim (TJ for short).

TJ has a huge intellect but is not familiar with business practices on earth, so our CPO hero is having to explain everything starting from first principles. (See part 1 here).

TJ - So we must buy many goods and services from external entities, who specialise and become successful by developing expertise in those areas. We find those organisations and then buy from them. We have to make sure they are competent or they can affect our business. Then you mentioned this “competitive advantage” and how suppliers can contribute to it. So tell me, what does that mean?

CPO – We have competitors, other firms, who produce similar goods and services to those we sell. For us to succeed, we have to be better than those competitors in some way. Perhaps our products are cheaper, so people will buy them rather than the other firms’ products because of that. Or our products might be better quality than those of our competitors. Or they might be different or even unique, and sell because of that. Those are the sort of factors that give us an advantage.

TJ – It must be possible to have more than one factor that gives us this competitive advantage?

CPO – Yes, although most firms concentrate mainly on one aspect as a core strategy. So if you have high quality, unique products, you probably do not need to sell them cheaply.

TJ – I see that. So now tell me what this means for your “procurement” activity?

CPO – I explained previously that we spend 70% of our revenues with suppliers. So whatever our competitive advantage might be, many suppliers must contribute towards it.

TJ – So if our main strategy is to be a low-cost provider, then I can see that we must buy goods and services from suppliers in a manner that enables us to be a low-cost provider.

CPO – Exactly. Or if we are innovators in our markets, you would expect that some of that innovation at least would come from suppliers and what we buy from them.

TJ – Yes, but surely even if we are innovators, there is also a logic that says we do not want to pay more than is necessary for anything we buy?

CPO – You’re right again. So if a firm makes a very high-quality product and buys high-quality materials – perhaps the very best cotton material to make clothing or fine ingredients to make high-quality food products, then it should still seek to pay a fair price for those supplies.

TJ – What do you mean by a “fair price”?

CPO – Ah, we will need to come back to that later! But basically, even if we buy “expensive” items, we don’t want to pay more than our competitors for them – if we do, we will suffer competitively or we will not make as much profit as we should and could.

TJ –But surely not everything we buy can contribute to competitive advantage?

CPO – Not directly. But if we pay more than we should for anything, we are losing some advantage. However, we should pay more attention to those purchases that contribute directly.

TJ - So we must understand what really contributes to our competitive advantage in terms of what we buy, and base our approach on that?

CPO – Yes.

TJ – And that is how all procurement functions and professionals think and work?

CPO – Well … perhaps not! But now I need to talk about risk. That is the other key concept you need to understand.

TJ – Next time, I think. Even with my IQ of 248 I need time to process – this “procurement” is much more complex than I imagined! And tonight I promised my reproductive partner that we would finish the 4-hour atonal symphony for 300 instruments that we started writing last night. Just our little hobby, you know …

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