Not All Competition Is Equal

“Competition is good for business” – this principle holds in procurement as well: the more competitors a buyer has in a negotiation, the better. In practice, however, existing competition is often not used consistently.

A central problem lies in the incentive structures of many procurement organizations. Policy usually requires obtaining several quotes in order to create benchmarks – and the existing supplier automatically becomes the reference point. But if the additional quotes offer worse terms, the buyer faces a dilemma: switching would create uncertainty while also being more expensive. Pure “benchmarking to satisfy the process” must therefore not be the goal.

Game theory in procurement shows that a supplier’s value depends not only on price, but decisively on its role in the competitive dynamic. Incumbent suppliers in particular, who are “firmly in the saddle,” respond only to a limited degree to formal comparison quotes. An additional competitor does strengthen the negotiating position – but the decisive factor is to signal a credible willingness to switch.

Mechanism Design: The 3C Logic

Effective mechanism design translates these insights into concrete processes. Three Cs are central:

  • Competition: Suppliers are informed in advance about the competitive framework, trained where appropriate, and know that at least two serious bidders are in the field.
  • Comparability: A bonus-malus system ensures that qualitative and quantitative differences are taken into account objectively.
  • Commitment: Procurement commits in writing to honoring every outcome of the process.

This makes competition maximally visible to incumbent suppliers – without their being run over by a “surprise scenario” at the end. The real effect is to activate suppliers ahead of time and get them to engage more intensively with their own pricing.

Because whether procurement actually has competition is irrelevant if suppliers do not perceive it as credible. Competition and the information about it produce four combinations: if competition exists but is not made credible during the negotiation process, it is as good as neutralized – this is especially true for strong, established incumbent suppliers. Only a good process makes competition tangible.

Information in Monopoly Negotiations

The approach so far assumed that competition actually exists in the form of another supplier. That is not always the case: monopoly situations are the rule more often than most procurement organizations would like. What role does information play here?

That depends largely on whether you are dealing with a genuine monopoly at all. This analysis must be carried out in a differentiated way and is determined by a series of core questions:

  • Are there substitutes or potential new suppliers?
  • Can specifications be adjusted to enable alternatives?
  • Do make-or-buy scenarios exist?
  • Does the buyer hold relevant demand power?
  • What interests does the sales manager pursue compared with the company’s strategy?
  • And above all: which of this information does the supplier have?

A common mistake is to overestimate the other side’s level of knowledge. Suppliers often know less about the actual dependencies than one assumes. The assumption that the supplier is “well aware anyway” of your situation gets you nowhere.

If it is a known, genuine monopoly, the supplier’s bargaining power dominates – then all that remains is a partnership-based negotiation approach and the attempt to jointly realize as much potential as possible. But if the questions above reveal room for maneuver, the goal is: make alternatives credible.

Making Alternatives Credible

The decisive point is not to reflect the supplier’s strength back at it, but to signal the possibility of alternatives. Possible signals include:

  • Cross-functional stakeholders emphasize that switching barriers are being actively dismantled.
  • Informal channels are used deliberately to spread uncertainty.
  • Management points to make-or-buy options or links the negotiation to attractive additional business.

This creates a negotiation situation “as if” competition existed – a superior strategy, especially when the dependencies are mutual.

Negotiation Conduct vs. Negotiation Management

Negotiation conduct means optimizing a specific, upcoming negotiation. Negotiation management, by contrast, describes the behind-the-scenes work on structurally improving the negotiating position – ideally tracked within well-structured category management. This includes, for example, changing specifications or quality standards in order to make competition possible in the first place.

Negotiation management follows a U-shape that is not always run through in full:

  • A: Monopoly situations are deliberately “loosened up” through tactical elements.
  • B: Real competition is built up in the background …
  • C: … and then used explicitly.

This structural work is precisely the core of our procurement consulting: it shifts the negotiating position before the actual negotiation even begins.

Summary and Next Step

Information plays a major role in negotiations – particularly the question of how it is distributed. Two combinations of actual competition and supplier knowledge are maximally unfavorable for procurement: genuine monopolists who are aware of their position, and genuine competitors or incumbent suppliers who nevertheless consider themselves monopolists.

A serious mistake is to believe that the information held by all players reflects reality at all times. The task of procurement is therefore to influence this state of information in specific negotiations – or at least through longer-term negotiation management – and ideally to work toward clean mechanism design.

This rigor lies behind more than €35 billion in negotiated volume across 16 industries – academically anchored by Prof. Dr. Christian Rieck as advisory board member. Want to know how visible your competition really is? Arrange an initial consultation.