Amazon's online retail success and entering into offline retail segments - Case study in reference to Porter's Five Forces Model

 

Porter’s Five Forces of Competitive Analysis

And Amazon entering into retail market

 

Porter’s Five Forces Model

Introduction:

Micheal E Porter developed the five forces model. The five forces model is therefore called as the Porter’s five forces model. The 5 forces model was developed to assess the competitiveness of a firm in an industry and thereby helps to develop its corporate strategies accordingly.

Porter’s five forces model is an analysis tool that uses five industry forces to determine the intensity of competition in an industry and its profitability level. The five forces model determines the profitability of a firm operating in a specific segment or industry. Micheal E. Porter has described the five elements to determine the competitiveness strength for a firm in an industry. The Five Forces were Porter’s conclusions on the reasons for differing levels of competition, and hence profitability, in differing industries. They are empirically derived, i.e. by observation of real companies in real markets, rather than the result of economic analysis. The five forces can be described with the help of below diagram. The five forces are:

The five forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.

Porter's five forces are:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers  5. Threat of substitute products

  

In reference to the case given from Amazon entering into traditional retail segment, we can now analyze the Porter’s five forces model to determine the expected level of profitability and competition for Amazon in traditional retails segment.

Let us start our discussion with understanding the competition in the retail industry.

This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when: -

·         There are many competitors

·         Exit barriers are high

·         Industry growth is slow or negative

·         Products are not differentiated and can be easily substituted

·         Competitors are of equal size –

·         Low customer loyalty

We can observe that Amazon is a premier brand in online retail market segment, now it wishes to enter into traditional physical retail store segment. The traditional retail store industry is giving huge external competition to Amazon from large retail players like Wal-Mart and Target.  There are already various competitors’ operating in the market, making it a monopolistic competition. It means Amazon can face various competitions in the offline retail industry as regards to the followings:

·         Amazon will be a latecomer in the industry so it could not get the first mover advantage which it got in online segment.

·         It is a monopolistic market structure for Amazon thus it had to follow immense price discrimination and product differentiation strategy for attracting customers. While if we closely observe immense competition of Amazon it seems only oligopoly market structure with immense competition from Walmart and few other big players. But it is clear that Amazon will get competition in retail segment in offline business from both big and small players.

·         Walmart is one of the biggest competitors for Amazon in both online and offline segment.

·         We can observe that though the market is loaded with traditional retailers but there are few big retailers to compete with Amazon and so Amazon need to have a sound market policies formulation and strategic implementation process in place.

In Amazon’s case, the strong force of competitive rivalry is based on the following external factors:

High risk of investment (Strong force)

High aggressiveness of firms (strong force)

Low switching costs (strong force)

We can easily understand from the above discussion that Amazon will face strong competition from Walmart and few other big players in offline retail segment. There are few large players with substantial competition, though huge number of small chains will also make competition intense. The switching cost for customers is low and so makes the project investment riskier.

Now, let us move our discussion to understand the Bargaining power of suppliers.

Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when: -

There are few suppliers but many buyers

Suppliers are large and threaten to forward integrate

Few substitute raw materials exist –

Suppliers hold scarce resources

Cost of switching raw materials is especially high.

If we refer to Amazon’s case we can surely observe that Amazon has got a strong supply chain driver in case on online segment. Amazon is also the manufactures of various products with its own brand so we can observe few points:

·         Amazon has well managed its backward integration and thereby managed a proper supply chain management.

·         Amazon has maintained its strategic warehouses to manage online retail business which could be a competitive strength in offline industry as well.

·         Amazon has demonstrated its competitiveness in its marketing and supply chain management.

 

The third point of our discussion in Amazon’s case understands Bargaining power of buyers.

Customers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers.

Customers exert strong bargaining power when: -

Buying in large quantities or control many access points to the final customer –

Only few customers exist –

Switching costs to other supplier are low –

They threaten to backward integrate –

There are many substitutes –

Customers are price sensitive

Depends on the marketing channel used for Amazon

Online stores & Traditional Offline stores

Super Markets

Convenience Stores

Amazon is having a large customer database online. It is premier in online business segment and thus have created a well satisfied client base by introducing varied innovative techniques for its clients.

We will understand now the Threat of New entrants in case of Amazon’s offline entry into retail business.

This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants.

Threat of new entrants is high when: -

Low amount of capital is required to enter a market

Existing companies can do little to retaliate

Existing firms do not possess patents, trademarks or do not have established brand reputation

 There is no government regulation

There is low customer loyalty

Products are nearly identical

Economies of scale can be easily achieved

In reference to Amazon’s case we have observed that there is already existing competition in the market with the huge players operating and competing with Amazon. The competition with Walmart is immense as regards to both online and offline business.

 

Though Amazon will not face much competition with new comers in offline retail industry from large players as Initial investment is high for setting up the retail set up. Though if we consider mid-size retailers can create a big monopolistic market competition for Amazon and other big players as well.

Amazon must consider the risk of competitors coming in the market from both mid-size and large scale retailers.

The last but not the least force is the Threat of Substitutes. Amazon’s case can be analyzed in reference to the retail industry operation in traditional model.

This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.

Determining Factors :-

First, if the consumer’s switching costs are low

Second, if the substitute product is cheaper than the industry’s product

Third, if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high

Fourth, if the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product

 

In this case we can observe that customers can switch from offline retail industry to online mode. Amazon is already having a first mover or a leader in online segment. It is coming up in the traditional retail model. The substitutes for physical retail customers are online mode of purchasing only. The Amazon is already operating profitably leading the online retail segment. Hence even if we talk about the substitutes Amazon will get the best advantage and competitive position.

 

The above diagram clearly shows the growth rate percent and increased contribution of retail industry in overall GDP of our country from 2008-2018.

Summing up: We can conclude from the Amazon’s case that as Amazon is already operating well in online retail mode it can invest into the offline retail stores. It may not have sufficient experience, but being a large player and having a proper manufacturing and supply chain base with good online customer base can provide a challenging base for Amazon to enter into traditional mode of Retail business.

Enjoy learning !

Youtube channel : (PSB Training Academy ) https://youtu.be/6w47hFkwIkY

Blog: https://mbaandbba.blogspot.com/2020/07/

Podcast:https://overcast.fm/itunes1507693104/management-session-by-amrita-jha

Facebook :https://www.facebook.com/mbaamrita

Linkedin: https://www.linkedin.com/in/amrita-jha-682340b2/

www.psbtrainingacademy.com