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FIVE COMPETITIVE FORCES OF 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 is shaped by five basic competitive forces: the threat of new entrances into
the industry, the bargaining power of suppliers to the industry, the threat of substitute
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).
 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 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 competition).
 the existence of barriers to entry (patents, rights, etc.)
 economies of product differences
 brand equity
 switching costs 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.
Sometimes rivals compete aggressively and sometimes rivals compete in non-price
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 costs relative to firm switching costs
 buyer information availability
 ability 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.
E-Commerce Industry
E-Commerce or Electronic commerce, 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 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’s, CD’s, PC’s, books, phones, mobiles, perfumes, bicycles, furniture, households
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, Internet marketing, online
transaction processing, electronic data interchange (EDI), inventory 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 large percentage of electronic commerce is conducted entirely electronically


for virtual items such as access to premium content on a website, but most electronic
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 as Business-to-


business or B2B. B2B can be open to all interested parties (e.g.commodity exchange) or
limited to specific, pre-qualified participants (private electronic market).

Electronic commerce is generally considered to be the sales aspect 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
projected to grow to $335 billion by 2012. Business-to-consumer (B2C) eCommerce
continues its double-digit year-over-year 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 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 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, caused by existence of many suppliers in the Industry. Firms like 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 in the e-commerce industry. There are threat of substitute 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.