Challenges to the Retail Sector (As per Michael Porter’s Five Forces Model)

Michael Porter’s Five Forces Model helps in the determination of the industry attractiveness and in analyzing the prospects of growth and opportunities by assessing the competitive trends and the intensity of the rivalry amongst the existing competitors. It is a major strategic tool used for determining the industry potential/prospects and the possible threats which may limit the attractiveness of this industry and prevent new entrants from joining the competitive battle. It provides key insights to the organizations for crafting and implementing both long-term and short-term strategic plans.

The Five forces are Threat from the Competitors, Threat from the Substitutes, Buyer Bargaining Strength, Supplier Bargaining Power and the Intensity of the Competitive Rivalry. Let’s analyze each of these forces from a retail industry perspective:

Threat from the Competitors

This is one of the key factors which will ultimately be deciding the attractiveness of the retail industry. New entrants will be able to learn from the mistakes of the existing players and may join the industry with improved strategies or corrective measures. The new entrants can offer low-cost offerings with improved features for luring the customers.

The competition in the retail industry is quite fierce and intense. As a result of this, the existing players may impose barriers to entry in the industry for the new players. These barriers can be imposed by strengthening the distribution infrastructure and the supply chain framework. Barriers for the new entrants can also be imposed by gaining a cost advantage or low-cost leadership and also in the form of economic regulations or trade barriers for foreign players. Apart from this, the threat to the entry of new players could be from the differentiation of the product, capital investment strength and strong loyalty of the customers for the existing players.

Threats from the Substitutes

The existence of substitutes will definitely affect the attractiveness of the industry and lower the profitability. This is because substitutes directly influence the prices of the products and the demand for the products from the customers as well. In the retail industry, the threat from the substitutes is very high. With the availability of more substitute products, the buyers will get more options to choose from the available alternatives for satisfying their requirements. The willingness of the buyers to buy the substitute products is directly dependent upon various factors such as quality, prices and the performance of the substitute products.

If we analyze the retail industry, various factors such as availability of alternative options for buying like online shopping, different modes of payment, availability of home delivery service, and cost of the substitute products can intensify the threats from the substitutes.

Bargaining Power of the Buyers

Buyers are the firms or the individuals who are the ultimate purchasers of the industry products and services. Buyers include the end consumers, distributors, retailers and the industrial purchasers.

A buyer’s bargaining power is expected to be higher if the scope for switching from one supplier to another exists. Moreover, if concentrated numbers of buyers purchase a large quantity of products, then the bargaining power of the buyers is expected to be higher. Apart from this, the industry bargaining power will be expected to be high for those products for which quality is given utmost importance.

Therefore, in case of the retail industry, the bargaining power of the buyers is expected to be very high because of the easy availability of plenty of substitutes with better price offerings, volumes purchased by the buyers, sensitivity towards the pricing/cost related factors and poor loyalty towards the brand.

Bargaining Power of the Suppliers

Suppliers supply the required raw materials or the inputs to the industry players. These inputs can be in the form of man, material, finance or technology related support from the suppliers. Various factors determine the bargaining power of the suppliers. The suppliers bargaining power is expected to be high if the quality of the raw material or the inputs are unique. The factors which govern the strength of the bargaining power of the suppliers are the uniqueness of the inputs or the raw materials, the quality of the product which is offered by the suppliers and more demand for the supplier’s products will increase the bargaining power of the suppliers.

The intensity of the Competitive Rivalry

The higher the intensity of the competitive rivalry in the industry, the lesser will be the profitability of the firms. In the retail industry, the intensity of competitive rivalry is affected by a gamut of factors such as:

  • Intensification of competition with new competitive players joining the industry.

  • Gaining a competitive edge over the counterparts by achieving economies of scale in production

  • Stiff competitive rivalry amongst the established retail tycoons or major industry players.

  • Varieties offered in the product offerings for maximizing customer satisfaction and strengthening customer loyalty.

The other crucial factors which determine the intensity of the competitive rivalry are the pricing of the products, service quality, strategic alliances as mergers/acquisitions, etc. High competitive rivalry can be regarded as a threat because it weakens the profit prospects and the prices. On the other hand, low competitive rivalry can be viewed as an opportunity because this will open new avenues for maximizing profits for the firms.

To sum up, retail industry globally has been witnessing a paradigm shift since last few years. The industry is faced with cut-throat competition and is still ruled by unorganized players though the organized retail sector has shown an incredible performance. Various factors such as entry barriers, bargaining power of the buyers/suppliers, the intensity of competition and economies of scale should be taken into consideration by the retailers and work towards them for enjoying economies in scale and achieving a competitive edge in the industry.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.