Business Studies – Business Policy CSE3, 0010028

Using Porter’s five forces explain how the internet/world wide web is making
retailing industries less “attractive” for retailing players.

Introduction

Since early 1980s, Michael Porter’s Five Forces (Porter, 1980) has brought
breakthroughs to the conventional business strategy concepts, and has
become the “bible” guide for leaders from nearly every business and industry
to perform effective strategic analysis. The Five Forces model is generic
enough and applicable to explain the behaviour of many different markets.

Though after 20 years of its introduction the model is challenged and

reinterpreted by some other analysis techniques such as the Creative Web
(Conklin and Tapp, 2000) and the Delta Model (Hax and Wilde, 2001) for its
limitations to certain areas, it is still nevertheless valid when coping with the
analysis of the market behaviour under the revolutionary development of
Internet and e-Business in recent years.

In this article we will show this by employing Porter’s five forces to analyse how
the development of Internet and e-Business is affecting the existing retailing
industries.

Impacts of the Internet to retailing industries

Since the Internet became part of our daily life in the late 1990s, the
development of the technology has enormously shortened the distance
between people and provided niches for new forms of business. Successful
examples such as Amazon.com and Dell have significant implications to the
potentials for e-Retail businesses to take over the market shares of their
traditional retailing competitors. This phenomenon can be explained using
Porter’s five forces:

Supplier Power

In the case of Amazon.com, like its retailing competitors, its supplier

companies are mainly publishers. Just as many readers, there are
thousands of publishers in the world, thus they are not concentrated at all.
Most publishers rely their income from the profit of book sales, hence the

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readers, i.e. the buyer industry, is an important customer of them. The

24-hour easily-accessible service of Amazon.com provides a broader range
of potential buyers than its retailing competitors, which attracts suppliers
more.

Many readers do not always need to find a particular book in bookshops –

they may have an interested topic and would browse through similar books
to choose a right one for them. So the books of particular publishers (product)
are not an important input for the readers (buyers). The searching facilities in
Amazon.com help reinforcing this fact more than its retailing competitors.

Moreover, publishers have limited amount of productions and are less likely
to set up bookshops by themselves; it is also less likely for them to acquire
existing bookshops (either retailing ones or online ones) due to cost
effectiveness, therefore there is no much threat of forward integration.

Buyer Power

Amazon.com started its business in the form of a website, and its customers
are visitors and potential visitors to the Web site and its competitors’ sites
(Kyle, 2002). One of the advantages for the business to take the form of a
website over conventional retailing approach is to minimise the running cost
of renting and opening stores to sell books, and hence the books they sell
can be priced lower than other non-website competitors to balance out the
postal fee expenses. Another important advantage is to provide a 24-hour,
with no physical location limitation and customisable book-search service to
customers. The effectiveness of this selling model yields savings on auxiliary
costs (such as transportation time and costs) and hassles, where buyers
may become less price sensitive to postal fees of different delivery options
and even minor price gaps of the books with all these advantages are taken
into account.

Amazon.com’s customised and reliable service helps creating loyalty and

thus the “lock-in” effects - the customers might consider buying books online
more even when they walk pass a bookshop physically, simply because they
don’t bother to carry heavy books which are not needed urgent! Compare to
those of the conventional retail bookshops, these “lock-in” effects further
weaken the already-weaken bargaining power of buyers.

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Threats of Substitutes

The way how e-Retail business works today creates a lot of substitute
threats to conventional retailing players. Amazon.com itself started as a
substitute of conventional bookstore – it provides other means and sources
for the same products, services, or information (Kyle, 2002) as its retailing
competitors provide.

The impacts of typical B2C (Business-to-Consumers) e-Retail business are

mainly regarding to the reforms in distribution channels and value chains.
Retailers traditionally take goods from wholesalers and distribute them to
consumers. The chain model is being challenged by the Internet’s
distance-shortening power, where wholesalers and even manufacturers can
now distribute their goods to consumers easily and directly. The B2C model
imposes a new type of substitutes which was unforeseeable for conventional
retailers in the old days, resulting in making them become less attractive.

Barriers to entry

Most businesses in UK and also the rest of the world are SMEs and even
self-employed businesses (EIM, 2000). It is not uncommon that even unskilled
or old people can set up a little retail business such as take-away or
second-hand fashion shops fairly easily. Therefore the conventional retailing
markets are easy to enter in general.

E-Retail is a new-born and difficult-to-master business. Since the

“technology bubble” burst two years ago, many people are threatened to
enter the game. This is because e-Retail businesses such as Amazon.com
have high entry barriers, which include the expensive setup (or switching)
and maintenance costs of equipments and expertise; compliance of
government regulations on data protection and privacy; the possible use of
patents and proprietary resources; asset speciality of businesses etc. (Porter,
1980, 1985).

Rivalry

The rival intensity of the conventional retail markets is high because there
are usually a large number of retailers competing to each other for the same

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source of customers, but it may not be the same for e-Retail markets. In the
Amazon.com case, its competitors include The Waterstones, WH Smith, The
Books Etc., The Borders, and many other smaller bookshops, but not many
of them have as well-established and automated online system as
Amazon.com’s.

Other competitive advantages of e-Retail businesses over conventional

ones are:
- Goods storage costs are much lower, as goods can be ordered
dynamically according to the orders received.
- It is easier to provide differentiated products on the website to test the
market’s demand than to put the physical ones onto the shelves.
- The e-Retail market is rapid-growing with alongside the new Internet
technologies.

However, e-Retail businesses themselves do have their own kind of rivalry

issues: heavy investment means difficult to exit, and this encourages
competitions between the businesses; as the technologies become more
mature, more competitors join in.

Conclusions

As discussed above, conventional retailing businesses have low entry and exit
barriers which yield low but stable returns; e-Retail businesses with high entry
and exit barriers, on the other hand, can generate higher but riskier returns.

Porter’s five forces help us visualising the dynamics of conventional retail

markets and e-Retail ones, and explains why the former is less attractive than
the latter nowadays. But the world always repeats itself – when the e-Retail
markets saturate, they will soon have the same situation as the conventional
retail markets have today.

References

Conklin, D. W.; Tapp, L. (May/Jun 2000); The Creative Web, Ivey Business
Journal Vol. 64 Issue 5

EIM Small Business Research and Consultancy, The European Observatory

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for SMEs Sixth Report 2000.

Hax, A.; Wilde II, D. (August 2001); The Delta Model: discovering new sources
of profitability in a networked economy, European Management Journal,
Volume 19, Issue 4, August 2001, Pages 379-391

Kyle, Bobette (2002); Strategies for Your Web Site Marketing Plan, Web Site
Marketing Plan (available at
http://www.websitemarketingplan.com/strategies.htm)

Porter, M. E. (1980); Competitive Strategy: Techniques for Analyzing Industries

and Competitors, NY: The Free Press

Porter, M. E. (1985); Competitive Advantage: Techniques for Analyzing

Industries and Competitors, NY: The Free Press

Bibliography

Porter's Five Forces: A MODEL FOR INDUSTRY ANALYSIS, QuickMBA.com

(available at http://www.quickmba.com/strategy/porter.shtml)

Slater, S. F.; Olson E. M. (January-February 2002); A fresh look at industry and

market analysis, Business Horizons

Word count: 1157 words (excluding references and bibliography)

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