Any potential market attracts firms and as more firms venture into the market, competition arises (Roy, p. 13). This paper will provide an analysis of the U.S department stores industry using the Porter’s five forces. However, the paper will focus on three forces namely; threats of new entrants, power of suppliers and the power of buyers.
Currently, the department industry in the U.S faces a low threat of new entrants. This is because the well established entities such as Wal-Mart, Jc Penny and Sears control the large share of the market (IBIS, p.24). These big firms have diversified their investments in the industry hence limiting other new firms from venturing into the market. Besides that, these companies have established strong brands that give them good customer exposure.
Besides that, venturing into these industry is costly and requires a firm to heavily invest in the starting the business. The high capital costs makes many firms not interested in venturing into the market. Recent industry performance results indicate declining revenue earnings for firms in the industry. Specifically, the industry has been recording an average decline of $ 163.6 billion in revenues (IBIS, p.4). The decline in revenues is due to shrinking consumer power due to high cost of living and lack of jobs, normally, the department stores industry relies on consumer spending to realize growth but when consumer spending power reduces they record low sales and hence reduced revenues.
The already established firms enjoy a cost advantage since consumers are aware of their pricing structures and they positively respond to it. Therefore, the cost-advantage gives the firms a competitive edge that limits new entrants from establishing a cost advantage. Moreover, a new firm may face challenges in establishing distribution channels since the already established firms control the distribution networks. Based on the current conditions of the industry it is clear that the existing firms have established mechanisms that help them reduce production costs. For instance, they have well established distribution channels and utilize best labor in the market. Although obtaining licenses is mandatory conditions for firms operating in this industry, it is not a strong barrier to entry (New York Times). Therefore, having the necessary documents cannot grantee a new firm to penetrate the industry.
Power of Suppliers
The power of suppliers in the department stores industry is low because many large firms such as Wal-Mart and Sears source their suppliers from a large pool of suppliers. Low supplier power makes it hard for the suppliers to control the operations of the industry. Ideally, clients are having more power than suppliers since they can influence the direction of pricing. For instance, the clients go for suppliers who provide products are reduced prices. Besides that, access to cheap supplies from low-wage foreign nations continues to weaken the power of suppliers. Customers have now started to focus on foreign suppliers who provide products at reduced prices. Moreover, the recent recession brought adverse impact on the strength of suppliers since they are now competing to establish relations with vendors who want to engage with suppliers who provide discounts and other offers.
Power of Buyers
There are many buyers in the department stores industry and this is because the stores provide a wide range of products that cater for the varying demands of the consumers. Presence of many potential buyers reduces the consumer’s bargaining power (Reuters). However, consumers use their numbers to push retailers to reduce the pricing of their products and services.
"Department Stores Industry Market Research & Statistics." Find Industry Reports, Company Profiles and Market Statistics. N.p., n.d. Web. 21 Apr. 2015.
IBIS. "Industry Research Reports." IBIS World Industry report. N.p., Apr. 2015. Web. 21 Apr. 2015.
New York Times. "Retail - Department Stores Industry Snapshot - NYTimes.com." Markets Overview - NYTimes.com. N.p., n.d. Web. 21 Apr. 2015.
Reuters. "Analysis: Department Stores Fight Back from Online Challenge." Reuters. N.p., 2014. Web. 21 Apr. 2015.
Roy, Daniel. Strategic Foresight and Porter's Five Forces: Towards a Synthesis. München: GRIN, 2009. Print.