A market study (also known as market analysis, market assessment, market sounding, market research, etc.) is useful when defining requirements; preparing budgets; choosing procurement method; planning and scheduling the procurement of goods, services and works; evaluation of bids/proposal, and sometimes to justify contract amendments.
Analyzing supply markets for purchasing is a technique used to identify market characteristics for specific goods and services and provides information that assists in planning the purchase. It enables the department to understand:
- How the market works;
- The direction in which a market is heading;
- The competitiveness of a market;
- Potential suppliers;
- Existing goods or services that may satisfy the requirement;
- Anticipated costs and timeframes; and
- Lessons learnt from other users of similar goods or services.
Research and analysis
To develop an understanding of a supply market, research and analysis is undertaken to determine:
- the number of suppliers and their respective market shares (market structure)
- the degree and type of competition between suppliers
- the nature and quality of the supply chain
- the potential for substitute or alternative goods or services
- the agency‘s value as a customer (supplier referencing)
- Sustainability and other broad market ‗context‘ factors (e.g. political, economic, social/cultural, and technological) affecting the supply market.
WHY UNDERTAKE MARKET RESEARCH?
Thorough analysis of the market may assist to:
1. Help define requirements and strategies
Undertaking planning and analysis prior to preparing tender documentation is the foundation of a good specification, selection and contracting process. Planning and analysis is particularly important when developing complex requirements. The accuracy and detail of the definition is likely to improve as you collect and analyze information. A poor description of requirements may mean that the product or service is not delivered as required.
There are a number of reasons for analyzing supplier markets:
- Better knowledge of supplier strategy
- Manage risk to the contracting authority
- More informed contracting authority
- Allows for the identification of opportunities to advance
- Government priorities
1. Better knowledge of supplier strategy
Understanding how individual suppliers operate, their market position, why they want to deal with the contracting authority and understanding their longer term goals helps obtain value for money. Analyzing supply markets may:
- Provide valuable information about suppliers‘ strengths and weaknesses. For example, the contracting authority may discover that a particular supplier is keen to win a Government contract or a supplier may have difficulty fulfilling orders.
- Identify comparable substitute goods and services that may be available from more competitive and less risky supply markets and could offer better value for money
- Understand which suppliers are more technologically advanced in particular sectors
- Identify opportunities to better manage the supply chain1 that will reduce the cost of purchasing goods or services
- Allow the contracting authority to become aware of all potential suppliers (in a market with a limited number of suppliers, it is advantageous for the contracting authority to encourage all suppliers to tender).
- Provide a sound understanding of the contracting authority‘s attractiveness as a customer for the supplier. The more important the contracting authority is to the supplier in terms of the business generated the more likely better service and price becomes available from that supplier.
Tip -Browse the Current Tenders and Contracts Awarded sections for similar tenders on the Tenders website. Speak to other departments and review your own department’s tender history.
2. Achieve value for money
Undertaking market research will assist in achieving value for money through:
- the identification of comparable substitute goods and services;
- the identification of alternative processes, such as leasing rather than purchasing;
- developing an understanding of how suppliers determine their pricing strategies; and
- Identifying how competitive the market is.
Tip -Try talking directly to potential suppliers.
3. Manage risk for the contracting authority
Analyzing supply markets assists in determining the risks involved in purchasing particular goods or services. It can also identify ways to manage these risks. Analyzing supply markets may:
- Assist in the development of specifications to encourage competitive offers and reduce the possibility of purchasing goods or services which are not fit for purpose. Specifications are often set which are too restrictive and reduce the number of potential
suppliers. This is often the result of a limited knowledge of alternatives.
- Identify opportunities to increase the base of suppliers to meet the needs of contracting authorities.
More informed contracting authority
- One of the aims of the procurement management reform process is to help create a more informed contracting authority. With market analysis, the contracting authority understands how technology and other factors are driving changes in the market for the particular goods or services it requires. The contracting authority understands how goods and services are priced and how service quality and standards are set by suppliers.
- Contracting authorities who understand markets and suppliers are better able to develop tenders which reflect conditions in that market. Indeed they are able to help develop the market or suppliers so it can provide the goods or services necessary to the functioning of the contracting authority. They are also able to deal with suppliers on a more equal basis when contracts are in place.
- An informed knowledge of the market and the capabilities of suppliers can help bring a better approach to achieving whole of government objectives when contracting authorities are tendering. Thus, an informed knowledge of the ICT sector may allow for a tender which seeks an innovative response from the small business software sector. A better understanding of changes in environmentally friendly technology could help improve environmental outcomes from procurement.
4. Allow for the identification of opportunities to advance government priorities
- Government policy requires value for money outcomes from procurement and this can include achieving whole of Government objectives. Procurement can assist in the development of environmental or social initiatives or it can become a force for
innovation and help support small and medium enterprises to develop their potential. Understanding the market can assist in minimizing risks by:
- constructing specifications that promote competitive offers;
- ensuring contractual clauses are sufficient in the current environment;
- identifying any legislation or standards to which the goods or services must conform;
- identifying how to encourage innovative solutions; and
- Developing an understanding of similar goods or services that may be able to be purchased through more competitive or less risky markets.
Tip -Search the Tenders website for similar tenders and use previous experiences to identify possible risks.
5. Progress Government priorities
It may be possible to progress Government purchasing priorities or policies by undertaking market research to identify opportunities for:
- The local supply of goods and services;
- Local supplier development;
- Replacing imported goods with local goods;
- Establishing a local consortia of firms;
- Industry development; and
- Encouraging small to medium enterprises.
Market analysis enables procurement to understand how the supply market works, the direction in which the market is going, the competitiveness and the key suppliers within the market. The results of this analysis can help the buyer to improve and shape the strategy and tendering process and align their behaviour in order achieve better value for money, reduced prices or an
improved service. The extent of a market study is dependent on, and determined by, the degree of complexity and
monetary value of the requirement.
A market study can be done using the internet and/or by soliciting information potential suppliers, consultants or service providers. It can be done in-house, or by hiring a specialized firm to carry-out the study. The minimum expected results of a market study are: the identification, interest and availability of suppliers, contractor or services providers, their technical capability and financial capacity,
and price trends. It is very useful to develop a template for recording and filing the results of a market study, and for future use when procuring similar goods, services or works from similar market.
Information must be gathered about the supply market from which the good or service will be purchased As with demand analysis, the results of supply market analysis need to be evaluated to identify the key insights for the development of the procurement objectives and the procurement strategy options.