The Five Forces’ analysis suggested by Porter (2008) serves as a framework for analyzing industry and business strategy. It is based on industrial organization economics, and depicts the five forces that determine the intensity of competition and a market’s general attractiveness.
The online retail market consists of numerous small consumers who enjoy lack of differentiation, in the sense that products are purchased based on price alone. The strong market growth and low fixed costs are appealing to new customers. The following is a Five Factor analysis of the online retail market in Europe, based on research conducted by Marketline (2013).
Buyer power is detracted to an extent by the increasing number of online consumers, as the use of internet throughout Europe is becoming more widespread. Nevertheless, buyer power is equally increased due to the lack of switching costs, allowing consumers to base their purchase on price alone. Another factor contributing to consumer fluidity is that products are relatively similar, though on the other hand consumers may opt to remain with the same retailer due to security concerns. In general, buyer power is assessed as moderate.
Supplier power is increased when supplying specialist products rather than commodities, though in the event that the product is also supplied by a rival large supplier, this power is reduced. Internet retailers purchase products from a variety of suppliers, therefore there is significant competition between suppliers. The relative ease and cost-efficiency of online retailing as opposed to managing a physical shop promises further integration of suppliers into the online retail market. In general, supplier power is assessed as moderate.
New entrants may come in the form of a new company or diversifying an existing company’s product line. Maintaining an online presence, whether exclusively selling on line or in addition to a physical store holds the promise of increasing revenue and customer base. Low regulation and ease of access to suppliers facilitates entrance into the online retail market. In the UK, a recent loophole allowing the sale of VAT free commodities was closed, therefore making it easier to compete with the large online companies that were making these sales. In conclusion, the likelihood of new entrants is assessed as strong.
Threat of substitutes for online retailers exists in the form of catalog and store retail, as these have remained relevant purchasing options due to consumers’ preference to see and try the product in-vivo, as well as fear of or lack of access to online transactions. According to the authors, the threat of substitute is moderate.
According to Grant (2010), there are several aspects that should be considered when analyzing a market using the Five Forces model. First, the external environment in which the market operates. This consists of the general market tendencies, current status and general forces influencing the market, specific industry features and prevalent competition. The second aspect includes the industry environment, consisting of suppliers, competitors and customers. These aspects appear in the Five Forces model, but in the area of online retail markets, one should pay special attention to these factors, seeing as this is an ever-changing environment. Thus, for instance, one should note not only supplier power as appears in the Five Forces model, but also the cost-effectiveness of being an online supplier and the special circumstances connected to acting as one. These unique features are not reflected in the supplier power dimension, as its scope of analysis is limited to demand characteristics.
Moreover, though the Five Forces model includes the three key influences on industry profitability, namely the product’s value to the customer, the competition intensity and relative bargaining power at different value levels, its analysis is segmented. It seems that these three influences are referred to in the model, but not as a whole. Thus, for instance, relative bargaining power consists of supplier power, rivalry and threat of substitutes. These are three separate forces in the model, but should also be viewed as a whole.
The suppliers' bargaining power is determined by the variety of possible inputs, the cost of switching suppliers and firms within the industry, the competition posed by substitute inputs and the importance of volume. For instance, if volume is an important factor in the suppliers' bargaining power, such as bulk sales and manufacturer retail, then a small home-based online store would not be in a good bargaining position, seeing as its production and shipping costs would be much higher than those of a large global company.
Buyers' bargaining power is determined by two factors- bargaining leverage and price sensitivity. Buyer leverage consists of buyer volume and the cost of switching suppliers. In addition, the amount of substitute products affects the ability to bargain and/ pr switch suppliers. Price sensitivity consists of the brand identity and its impact on product quality, as well as product differences. Thus, a buyer seeking to purchase a widespread commodity such as a cell phone cover will be at a much better bargaining position than a buyer searching for a special or rare book. While the former can easily choose between hundreds of suppliers and his choice will be guided by accessibility and low price, the latter does not enjoy a large choice and may very well be dependent upon one supplier with no bargaining leverage at all.
The threat of substitutes is determined by the competitors' relative price performance, the cost of switching from one supplier to another and the buyer's propensity to substitute. In the instance of a cell phone case, the buyers may have a significant propensity towards switching suppliers, as there is no cost of switching suppliers.
The threat of new entrants consists of the prominent rivalry, brand identity and diversity of competitors. Cellular phone cases may not be brand-specific to most buyers, and the competitors are diverse.
In conclusion, one model through which an industry or market can be analyzed is Porter’s Five Forces Model. This model consists of five factors, including buyer power, supplier power, new entrants, threat of substitutes and degree of rivalry, striving to portray a forecast of a certain market’s attractiveness. While the model can be successfully used to analyze the online retail market, it seems that a less segmented approach including more holistic aspects can prove to be useful.
Grant, R. M. (2010). Contemporary strategy analysis and cases: text and cases. New Jersey: Wiley.
MarketLine (2013). Europe- online retail. Retrieved December 30th, 2013, from Market Line Business Information Centre.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 78.