Five Competitive Forces Of E Comerce Industry a1o67

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

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relative price performance of substitutes

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buyer switching costs

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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.)

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economies of product differences

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brand equity

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switching costs or sunk costs

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capital requirements

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access to distribution

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absolute cost advantages

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learning curve advantages

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expected retaliation by incumbents

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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

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rate of industry growth

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intermittent industry overcapacity

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exit barriers

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diversity of competitors

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informational complexity and asymmetry

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fixed cost allocation per value added

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level of advertising expense

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Economies of scale

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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

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bargaining leverage, particularly in industries with high fixed costs

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buyer volume

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buyer switching costs relative to firm switching costs

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buyer information availability

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ability to backward integrate

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availability of existing substitute products

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buyer price sensitivity

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differential advantage (uniqueness) of industry products

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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

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degree of differentiation of inputs

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presence of substitute inputs

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supplier concentration to firm concentration ratio

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threat of forward integration by suppliers relative to the threat of backward integration by firms

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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 encom 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 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-tobusiness 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 it 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.