FIVE COMPETITIVE FORCES OF INDUSTRY INDUSTRY Michael Porter has postulated that the intensity of competition in an industry is determined by its underlying economic structure1. And he further contends as we saw above, that the industry structure structure is shaped by five basic competitive competitive forces: the threat of new entrances into the industry industry,, the bargain bargaining ing power power of supplier supplierss to the industry industry,, the threat of substitu substitute te products or services, the bargaining power of customers or buyers, and the Rivalry among Existing Firms. The figure shows these competitive forces.
The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand). demand).
buyer propensity to substitute relative price performance of substitutes
buyer switching costs
perceived level of product differentiation
The threat of the entry of new competitors
Profitable Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level perfect (perfect competition). competition).
the existence of barriers barriers to entry ( patents, patents, rights, etc.)
economies of product differences
brand equity
switching costs or sunk or sunk costs
capital requirements
access to distribution
absolute cost advantages
learning curve advantages
expected retaliation by incumbents
government policies
The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Somet Sometim imes es rivals rivals compe compete te aggres aggressiv sively ely and somet sometime imess rival rivalss compet competee in non non-pr -price ice dimensions such as innovation, marketing, etc.
number of competitors
rate of industry growth
intermittent industry overcapacity
exit barriers
diversity of competitors
informational complexity and asymmetry
fixed cost allocation per value added
level of advertising expense
Economies of scale
Sustainable competitive advantage through improvisation
The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.
buyer concentration to firm concentration ratio
bargaining leverage, particularly in industries with high fixed costs
buyer volume
buyer switching buyer switching costs relative to firm switching costs
buyer information availability
ability to backward to backward integrate
availability of existing substitute products
buyer price sensitivity
differential advantage (uniqueness) of industry products
RFM Analysis
The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.
supplier switching costs relative to firm switching costs
degree of differentiation of inputs
presence of substitute inputs
supplier concentration to firm concentration ratio
threat of forward integration by suppliers relative to the threat of backward integration by firms
cost of inputs relative to selling price of the product
This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies. strategies.
E-Commerce Industry E-Commer E-Commerce ce or Electr Electronic onic commer commerce ce, refers to use of the Internet to conduct business
transactions. But it is important here to distinguish the difference between e-business and ecommerce. E-commerce focuses on efficiency in selling, marketing, and purchasing, while e-business focuses on effectiveness through improved customer, service, reduced costs and
streamlined streamlined business process E-business improves business performance by using electronic information technologies and open standards to connect suppliers and customers at all steps along the value chain. The analysis will be concentrated only in the buying and selling of products in the internet. In this industry are present the following firms: Amazon.com, Yahoo.com, MSN, eBay, FNAC, and others. In this industry is being sold products such as DVD’ DVD’s, CD’s, CD’s, PC’s, PC’s, books, books, phones, phones, mobiles mobiles,, perfumes perfumes,, bicycles bicycles,, furnitur furniture, e, househol households ds articles, watch’s, academic articles, clothes (for men, woman, and children), etc. The amount of trade conducted electronically has grown extraordinarily since the spread of the Internet. A wide variety of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer , supply chain management, management, Internet marketing, online transaction transaction processing processing,, electron electronic ic data intercha interchange nge (EDI), inventory management management systems, and automated data collection systems. Modern electronic commerce typically uses the World Wide Web at least at some point in the transaction's lifecycle, although it can encompass a wider range of technologies such as e-mail as well. A larg largee perc percen enta tage ge of elec electr tron onic ic comm commer erce ce is cond conduc ucte ted d enti entire rely ly elec electr tron onic ical ally ly for virtual for virtual item itemss such such as acces accesss to premi premium um conte content nt on a websi website te,, but most most electr electroni onicc commerce involves the transportation of physical items in some way. Online retailers are sometimes known as e-tailers and online retail is sometimes known as e-tail. Almost all big retailers have electronic commerce presence on the World Wide Web. Electronic commerce that is conducted between businesses is referred to asBusiness-toas Business-to business or B2B. B2B can be open to all interested parties (e.g.commodity (e.g.commodity exchange) exchange) or limited to specific, pre-qualified participants private (private electronic market). market). Electronic commerce is generally considered to be the sales aspect of e-business of e-business.. It also consists of the exchange of data to facilitate the financing and payment aspects of the business transactions. According to Forrester Research, US online retail reached $175 billion in 2007 and is proj project ected ed to grow grow to $33 $335 5 billi billion on by 201 2012. 2. Busi Busines ness-t s-to-c o-cons onsume umerr (B2C (B2C)) eCom eComme merce rce continues its double-digit year-over-yea year-over-yearr growth rate, in part because sales are shifting away from stores and in part because online shoppers are less sensitive to adverse economic
conditions than the average US consumer. Despite the continued growth of the channel, online retailers face several challenges to growth: Online stores are broadly perceived as a second choice for shoppers, online retail is becoming increasingly seasonal, and online shoppers rarely admit to browsing, which can drive valuable incremental incremental dollars during their Web shopping experiences.
An analysis of five competitive forces for this industry:
1) Threats of entrance of the new enterprises
The industry is very attractive. There are not significant barriers to entry on industry, because perhaps the firms of the industry have adopted a diversification diversification strategy of sell, the products available to customers are not very differentiated. 2) Rivalry among Existing Firms
It is strong; there are divers firms in the industry, such as eBay, Yahoo, MSN, FNAC, etc. This industry is growing, and the products that are being sold are not very differentiated. Some of the firms try to differentiate themselves by adding some competitions, blogs & a nice shopping for the customer to make him spend more time at the site. 3) Bargaining power of Buyers
It is strong, because it is easy to find other supplier in the industry. They have no loyalty to the brand. They look for cheap & better products. They are also provided with lots of options in the industry. 4) Bargaining Power of Suppliers
In general level, it is low, because the products existing in this industry are sold by many firms. In case of products like Books, DVD’s and CD’s the bargaining power of suppliers is low, low, caused by existence of many suppliers in the Industry. Industry. Firms like Microsoft Microsoft due to their position in the software product market, we can say that their bargaining power as supplier of firms that sells products like Office, for example is strong, perhaps to have others firms in the industry. 5) Threats of substitute products or services
In general, it is easy to sell in the internet, so, there are threats of substitute products or service service in the e-comme e-commerce rce industry industry.. There There are threat of substit substitute ute products products,, by fact of products sold in the industry could be sold by others firms that are inside or outside of industry, for example, if the buyer do not get satisfied with price of a DVD or Book supplied by Amazon.com, for example, these can choice to buy other product that is being sold by another firm that belongs or not this industry, to a price more low.
