Analyzing Retail Industry: Porters Five Forces Perspective

Describe about the Five Forces Model of Retail Industry for Strategic Management.

Threats of New Entrants- The retail industry face strong forces of threats from the new entrants. This is because; new retail firms can easily enter the market, as most of running business is low; capital cost is also moderate. Small retailers can compete with the existing giant firms in terms of locality; specialty and convenience.

Threats of Substitutes- Substitute of retail products are not available in any other industry. The threats of substitutes exist among the firms under industry, for example, people can shift from Wal-Mart to Tesco. Hence, force is strong. However, there is variety of products in the retail sector and there is no other ways to shift.

Bargaining Power of Buyer-Though the number of buyers is large and has strong forces, the individual purchase amount is too small. Therefore, there is weak pressure that buyers can impose in this industry. The purchase of each buyer is also diversified that cannot put force on the firms under this industry.

Bargaining Power of Supplier- There are large numbers of supplier in this industry. Therefore, this industry can easily affect them. Due to tough competition among the suppliers and availability of supplies, make it difficult for them to affect the retail industry.

Intensity of Rivalry- The firms under this industry are engaged in bottleneck competition. The large number of firms in this industry imposes strong rivalry in this industry. they are oftrn engaged in price war.

Political: Government of United States focuses on the reducing pollution from the production of automobiles. The government of this country assists for technical innovation. The trade agreement with this nation is also increasingly growing. However, the pollution laws or laws regarding the environment are strictly enforced by US government.

Economic: Growth in the economy of US is an opportunity for the automobile industry. The high growth rate of the developing market is generating demand for the US automobile products. However, strength of US dollar is a disadvantage for the industry as their export has been becoming costlier in the global market.

Social: The consumers’ preference for electric automobiles and its increasing demand for vehicles is the opportunity for Automobile industry. The US consumers are attracted to after-sales services. Therefore, this industry has more opportunity to grow.

Technology: In US, the research is growing rapidly in order to innovate new technology and to develop new products. Therefore, the technological environment is supportive for the automobile industry. However, limited availability of alternative fuel is a disadvantage of this country.

Threats of New Entrants

Economic and Social factors are of major importance for Automobile industry of US. The economic condition of the global and domestic market significantly influences this industry. the social factor like customer’s changing pattern is also of major importance.

The firms are related to the three levels of external environments. The remote or broader level of external environment takes into account the economic; political; technological and social factors. The industry environment constitutes of competitive rivalry; power of buyers; power of suppliers; barriers for entry and threats of substitute. The operating environment influences the firm through suppliers; competitors; customers; creditors; government bodies; labor union or the workers and the local community.

In the operational external environment, the supplier; customers and the competitors are of most important. These particular stakeholders are highly affected and they face instant consequences when the firm faces any uncertain change.

The direct competitors of a firm or an organization are those firms those have similar resource endowment and similar market product. Direct competitors also produce identical products and services.

While identifying the direct competitors, the management team often misses out to consider the potential entrants in the same industry. Hence, they remain unidentified. Moreover, rivals often give misleading signals that divert the focus from them. Identified competitors may have different approach of business because they face different challenges. Therefore, such competitors are not the direct one.

The competitors can be identified through technology analysis; by market access and by identifying the reputation of the firm. The operating knowledge and skills are another tools of examining the competitors.

The firm is considered to be a potential entrant when it has sufficient capital to invest in order to set up new business and has a existing customer base. Moreover, if an existing firm with high brand value is diversifying in new market with new product then the firm is a potential entrant in the industry.

If the demand for a product falls due to availability of another product, then the good is considered as substitute. If the degree of fall in demand is high, then the product is potential substitute.

Company’s strategy is often influenced by environment. The organization is successful if the organization adapts all the environmental forces. The company determines the environment by developing relationship with the stakeholders and other activities.

Strategic choice incorporates recognition and assessment of alternative plans and then it decides upon some specific choice. Strategic choice assists the firm to obtain the goals of the company. The approaches of making strategy choices are different. There are, planned approach; experience based approach; enforced choice approach and command approach.

Threats of Substitutes

Stakeholders approach recognizes the stakeholders of the company frames the model according to their need. The stakeholders are affected by the performance of the firm and on the changes strategy according to their need. The consumers; suppliers; government and employees are major stakeholders of companies.

The enactment of strategy makes the environmental changes less aggressive. This process is more favorable for the success of the organization. in this process the company attains continuity and coordination.

By adaptation, it is meant that how the companies responds to the environmental changes by modifying its strategy according to the needs of the business.

The resource of the company generates value for the consumers that are difficult for the competitors to imitate. Therefore, the resource-based view of the firm provide basis for sustainable competitive advantage. This view incorporates recognition of potential resources and derives strategy in order to create synergy. Valuable; rare; inimitable and non-substitutable resources can achieve competitive advantage in the long run.

The four principles of Blue Ocean strategy are: creating uncontested market; making competition irrelevant and new demand creation and breaking the value cost trade-off.

There are major differences between porter’s five forces and Blue Ocean Strategy. Porter’s model opined that business has to determine how to compete in the existing marketplace. However, the Blue Ocean theory focuses on creating a new market. Blue ocean strategy completely avoids the competition in the market. it also encourages to focus less on the competitors and instead encourage to find alternative products to create a competition less market. This strategy focuses on current customers instead of existing potential customers. However, the porter’s Five Forces emphasizes on power of existing buyers; sellers; substitutes and competitors.

Porter’s Five Forces model is competing approach and Blue Ocean approach is the innovation approach. This is because; Blue ocean looks for new market and Porter looked for surviving in the competitive strategy.

The generic level competitive strategies are of three types, such that, focus; differentiation and cost leadership. 

Cost leadership can be implemented through creating low-cost position of the company. It also helps the company to capture the significant portion of market share. The disadvantage of this strategy is that due to huge cost of investment, new and advanced technology may not be implemented in the company that can reduce the cost of production.

R&D and innovation offers high quality product in order to make their product different from others. Therefore, differentiating strategy makes the product attractive. However, innovation or the new product can be copied or imitate by other firms. Therefore, if other firm steals the product then the company will not enjoy benefits of differentiating product.

Bargaining Power of Buyer

The business strategy of Focus formulates concentration on the niche market. this requires understanding the customers and market. The limitation is that focus strategy is that concentration focuses in small segment with low capacity and company is unable to serve in the broader market.

• Partnership/ Merger and Acquisitions/ Joint Venture
• Foreign Collaboration
• Expansion
• Diversification
• Modernization

Example of company external growth strategy: Nokia’s acquisition of Siemens network.

Example of company internal growth strategy: Apple’s diversification in mp3 Player; online music store etc.

Approaching the market place with strategy of differentiation based upon speed, this entails that speed of production or the speed of services has to be improved. In such case, the supporting activity like technology development and human resource management will become primary activity, in the value chain. This is because; more labors are required and through technology advancement, the speed can be directly improved. To distinguish the products in terms of speed from other products, the outbound logistics and distribution must be improved in the value chain.

In the phase of introduction of a new product, promote of the product by advertising method will be the competitive strategy of a company in order to develop a market for product. In the phase of growth, the firm emphasizes on building brand value and attempts to capture major market share through implementation of different strategic. In the maturity stage of the product cycle, the goal of the competitive strategy will be to achieve greatest profit. In the stage of decline of the product, the firms may choose several strategies to continue its business. For example, if product sale of is falling, the firm may choose to operate in another market and will develop its business. In this stage, a general approach of the firm is to diversify its production, bu focusing on developing different items.

When the transaction costs are too high to persuade a company to produce goods and services in-house instead of purchasing it in the open market, then it is known s market failure.

When a firm creates part of its requirement by itself and buys rest of the things from the open market, then it is known as taper integration.

When a firm is not involved in the entire adjacent business units in the supply chain, then it is known as quasi integration.

The firms themselves do not produce entire goods and services, rather it buys inputs or other parts of final goods from the suppliers. This reduces cost of production. Hence, the firm violates principles of market failure, in order to ensure better flow and to have control over the operations and supply chain. Thus, the business organizations follow taper integration, produce some parts by their own, and buy some of its ingredients from outsiders.

Bargaining Power of Supplier

The functional level strategy must be steady between functions; within the function; and with the generic-level strategy. This approach facilitates to attain business level and corporate  level objectives by exploiting the resource and productivity. Hence, this strategy must be reviewed from time to time in order to be consistent with the business level approach and supportive of corporate level approach. The functional strategy must be consistent with the capabilities in order to formulate higher-level strategies. It must be consistent with the delivering of products or services; manufacturing as it manages various functional and operations. Functional level strategy should be formulated in such a way so that it helps the company to accomplish its goals of the business and corporate level.

Concurrent control incorporates the control or regulation of continuing process. The monitoring system is made in real time. Concurrent control also necessitates understanding particular tasks involved in the process and the relationship between them. It starts with standards of the product and all other activity of employees against standards. This control ensures best possible quality and services.

The process control or the control of the process is associated with entire process of the production and service. Process control ensures whether the products or the outputs are meeting conditions. This control makes sure that the progress of the firm and its success continues at every stage of production.

Customer’s survey is an important tool of the strategic control. Through this survey of the customer, entrepreneur or the marketers will be able to have an idea in order to improve their strategy in the proper direction. Consumer’s survey enables the company to measure how well their standard of customer’s satisfaction is.

Structure of capital and funds are provided by the finance strategy. Human resource strategy focuses on the reducing hiring cost and number of hiring. These are account-based measures, which can be influenced. Therefore, the control measures cannot be formulated based on only the numerical values of the performance of the company. Therefore, the executives prefer market-based measures to alleviate the difficulty of account-based measures as control measure. Market based measure is not restricted to the sole aspect of firm’s performance.

Concentration strategy focuses on a single product and market. This strategy prefers to invest in the resource and marketing of the particular product that it plans to improve. This strategy creates loyalty among the customers and builds up reputations. The limitation of this plan is that since the firm is focusing on single product or market and if customer’s preference of that market shifts from that product, the product will be obsolete. This might cause failure of the business. An example of firm with concentration strategy is McDonalds Corporation

Integration strategy improves the overall competency of the company through strategic alliances. Integration can be in the form of Merger and Acquisition; Partnership or joint venture. It reduces cost of production in the overall supply chain. The disadvantage of this strategy is that, in order to have enough supply for downstream operations the upstream capacity is also requires to be formed efficiently. This in turn hit backs the suppliers of the previous stage. Integration also makes raw materials limited that creates barrier for the new firm to enter the market. An example of firm with integration strategy is Amazon.com.

The diversification strategy refers to entering into the new market for a new product. This strategy enables the company to create more customers base. This helps the company to grow fast by increasing profits and cash flow of the company. The limitation of this strategy is that the consumers may not like the new product, which will lead to failure of the strategy. An example of firm with diversification strategy is Nestle.