Business Studies – Business Policy
CSE3, 0010028
Using Porter’s five forces explain how the internet/world wide web is making retailing industries less “attractive” for retailing players. Introduction Since early 1980s, Michael Porter’s Five Forces (Porter, 1980) has brought breakthroughs to the conventional business strategy concepts, and has become the “bible” guide for leaders from nearly every business and industry to perform effective strategic analysis. The Five Forces model is generic enough and applicable to explain the behaviour of many different markets. Though after 20 years of its introduction the model is challenged and reinterpreted by some other analysis techniques such as the Creative Web (Conklin and Tapp, 2000)
and the Delta Model (Hax and Wilde, 2001) for its
limitations to certain areas, it is still nevertheless valid when coping with the analysis of the market behaviour under the revolutionary development of Internet and e-Business in recent years. In this article we will show this by employing Porter’s five forces to analyse how the development of Internet and e-Business is affecting the existing retailing industries. Impacts Impacts of the Internet to retailing industries Since the Internet became part of our daily life in the late 1990s, the development of the technology has enormously shortened the distance between people and provided niches for new forms of business. Successful examples such as Amazon.com and Dell have significant implications to the potentials for e-Retail businesses to take over the market shares of their traditional retailing competitors. This phenomenon can be explained using Porter’s five forces: Supplier Power In the case of Amazon.com, like its retailing competitors, its supplier companies are mainly publishers. Just as many readers, there are thousands of publishers in the world, thus they are not concentrated at all. Most publishers rely their income from the profit of book sales, hence the Page 1 of 5
Business Studies – Business Policy
CSE3, 0010028
readers, i.e. the buyer industry, is an important customer of them. The 24-hour easily-accessible service of Amazon.com provides a broader range of potential buyers than its retailing competitors, which attracts suppliers more. Many readers do not always need to find a particular book in bookshops – they may have an interested topic and would browse through similar books to choose a right one for them. So the books of particular publishers (product) are not an important input for the readers (buyers). The searching facilities in Amazon.com help reinforcing this fact more than its retailing competitors. Moreover, publishers have limited amount of productions and are less likely to set up bookshops by themselves; it is also less likely for them to acquire existing bookshops (either retailing ones or online ones) due to cost effectiveness, therefore there is no much threat of forward integration. Buyer Power Amazon.com started its business in the form of a website, and its customers are visitors and potential visitors to the Web site and its competitors’ sites (Kyle, 2002) .
One of the advantages for the business to take the form of a
website over conventional retailing approach is to minimise the running cost of renting and opening stores to sell books, and hence the books they sell can be priced lower than other non-website competitors to balance out the postal fee expenses. Another important advantage is to provide a 24-hour, with no physical location limitation and customisable book-search service to customers. The effectiveness of this selling model yields savings on auxiliary costs (such as transportation time and costs) and hassles, where buyers may become less price sensitive to postal fees of different delivery options and even minor price gaps of the books with all these advantages are taken into account. Amazon.com’s customised and reliable service helps creating loyalty and thus the “lock-in ” effects - the customers might consider buying books online more even when they walk pass a bookshop physically, simply because they don’t bother to carry heavy books which are not needed urgent! Compare to those of the conventional retail bookshops, these “lock-in” effects further weaken the already-weaken bargaining power of buyers. Page 2 of 5
Business Studies – Business Policy
CSE3, 0010028
Threats of Substitutes The way how e-Retail business works today creates a lot of substitute threats to conventional retailing players. Amazon.com itself started as a substitute of conventional bookstore – it provides other means and sources for the same products, services, or information (Kyle, 2002) as its retailing competitors provide. The impacts of typical B2C (Business-to-Consumers) e-Retail business are mainly regarding to the reforms in distribution channels and value chains. Retailers traditionally take goods from wholesalers and distribute them to consumers. The chain model is being challenged by the Internet’s distance-shortening power, where wholesalers and even manufacturers can now distribute their goods to consumers easily and directly. The B2C model imposes a new type of substitutes which was unforeseeable for conventional retailers in the old days, resulting in making them become less attractive. Barriers to entry Most businesses in UK and also the rest of the world are SMEs and even self-employed businesses (EIM, 2000) . It is not uncommon that even unskilled or old people can set up a little retail business such as take-away or second-hand fashion shops fairly easily. Therefore the conventional retailing markets are easy to enter in general. E-Retail is a new-born and difficult-to-master business. Since the “technology bubble” burst two years ago, many people are threatened to enter the game. This is because e-Retail businesses such as Amazon.com have high entry barriers, which include the expensive setup (or switching) and maintenance costs of equipments and expertise; compliance of government regulations on data protection and privacy; the possible use of patents and proprietary resources; asset speciality of businesses etc. (Porter, 1980, 1985) .
Rivalry The rival intensity of the conventional retail markets is high because there are usually a large number of retailers competing to each other for the same Page 3 of 5
Business Studies – Business Policy
CSE3, 0010028
source of customers, but it may not be the same for e-Retail markets. In the Amazon.com case, its competitors include The Waterstones, WH Smith, The Books Etc., The Borders, and many other smaller bookshops, but not many of them have as well-established and automated online system as Amazon.com’s. Other competitive advantages of e-Retail businesses over conventional ones are: -
Goods storage costs are much lower, as goods can be ordered dynamically according to the orders received.
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It is easier to provide differentiated products on the website to test the market’s demand than to put the physical ones onto the shelves.
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The e-Retail market is rapid-growing with alongside the new Internet technologies.
However, e-Retail businesses themselves do have their own kind of rivalry issues: heavy investment means difficult to exit , and this encourages competitions between the businesses; as the technologies become more mature, more competitors join in. Conclusions As discussed above, conventional retailing businesses have low entry and exit barriers which yield low but stable returns; e-Retail businesses with high entry and exit barriers, on the other hand, can generate higher but riskier returns. Porter’s five forces help us visualising the dynamics of conventional retail markets and e-Retail ones, and explains why the former is less attractive than the latter nowadays. But the world always repeats itself – when the e-Retail markets saturate, they will soon have the same situation as the conventional retail markets have today. References Conklin, D. W.; Tapp, L. (May/Jun 2000); The Creative Web , Ivey Business Journal Vol. 64 Issue 5 EIM Small Business Research and Consultancy , The European Observatory Page 4 of 5
Business Studies – Business Policy
CSE3, 0010028
for SMEs Sixth Report 2000. Hax, A.; Wilde II, D. (August 2001); The Delta Model: discovering new sources of profitability in a networked economy , European Management Journal, Volume 19, Issue 4, August 2001, Pages 379-391 Kyle, Bobette (2002); Strategies for Your Web Site Marketing Plan , Web Site Marketing Plan (available at http://www.websitemarketingplan.com/strategies.htm) Porter, M. E. (1980); Competitive Strategy: Techniques for Analyzing Industries and Competitors , NY: The Free Press Porter, M. E. (1985); Competitive Advantage: Techniques for Analyzing Industries and Competitors , NY: The Free Press Bibliography Porter's Five Forces: A MODEL FOR INDUSTRY ANALYSIS , QuickMBA.com (available at http://www.quickmba.com/strategy/porter.shtml) Slater, S. F.; Olson E. M. (January-February 2002); A fresh look at industry and market analysis , Business Horizons Word count: 1157 words (excluding references and bibliography)
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