Evaluate the Impact of the Five Forces That Drive Competition on the Retailing Industry

Name: Toh Jeu Lun

Student ID: 14WBR02709

RIN Year 3 Sem 1 Group 1

Tutorial 4 Question 18 (iii)

Evaluate the impact of the five forces that drive competition on the retailing industry.

Michael Porter (1980) considers that rivalry (competition) on the market is result of the five variables or main forces: rivalry level, bargaining power of customers and that of suppliers, the threat of new entrants and of substitute products. These variables are interconnected. They are illustrated in the matrix of the five competitive forces of Porter. These forces are using in several industrial sectors such as Retails, Telecom, Airline, Pharma etc.

• Threat of new entrants

In retail sector, the trend that started over a decade ago has been a decreasing number of independent retailers. Most of the retail stores are now chain stores. Although the barriers to start up a store are not impossible to overcome, the ability to establish favorable supply contracts, leases and be competitive is becoming virtually impossible. Their vertical structure and centralized buying gives chain stores a competitive advantage over independent retailers.

• Bargaining power of suppliers

Historically, retailers have tried to exploit relationships with suppliers. Bargaining power of buyers is moderate because of the size and concentration of major retailers. To reduce power and retain customers, retailers seek to differentiate products and create strong brands. Individual private customers have a relatively low bargaining power in front of large retail chains, however, their power is greater for small retailers, who are less organized. A contract with a large retailer such as Wal-Mart can make or break a small supplier. In the retail industry, suppliers tend to have very little power.

• Power of Buyers

Individually, customers have very little bargaining power with retail stores. It is nearly impossible to bargain with the clerk in supermarkets. But as a whole, if customers demand high quality products at bargain prices, it helps keep retailers honest.

• Threat of substitute products

The tendency in retail is not to specialize in one good or service, but to deal in a wide range of products and services. This means that what one store offers you will likely find at another store. Retailers offering products that are unique have a distinct or absolute advantage over their competitors.