Porter’s Five Forces Analysis of The E-commerce Industry

Porter’s Five Forces is a tool used for understanding the competitiveness of a business environment, and for identifying the potential profitability of a business strategy. This analysis is useful, because understanding the forces that could affect a business’s profitability enables owners to be proactive in making adjustment accordingly. The five forces are composed of the following elements: buyer power; supplier power; the threat of new entrants; the threat from substitutes; and the threat from competitors. The threat from rivals are often times reviewed as well. This following report will outline these elements as it corelates to the e-commerce retail industry.

Buyer Power Factor (Strong Force) :

The Ecommerce industry has flourished during the last few years. An increase in world economics and an increase in the growth of technology have been major contributors. Both of these factors influence the growth of the e-commerce retail industry. Within the e-commerce industry several small and big brands have cropped up. As a result, there is not much switching cost for the customers. In today’s society, customers are well informed. Consumers have access to high quality information regarding the services of online retailers and the products they sell. As a result, it affects the ability of e-commerce brands’ customers to find alternatives to the company’s online retail service. Furthermore, many brick- and- mortar retailers have also entered the e-commerce market. This has created additional pressure with the addition of physical retail markets. An example of this can be seen with the Wal-Mart and it’s attempt to enter the ecommerce market in efforts to keep up with the likes of Amazon. As a result, the bargaining power of the buyers is strong in the ecommerce industry. There are factors such as brand image, quality of products/ service, and prices that can moderate brand bargaining power.

Supplier Power (Moderate Force):

Within the e-commerce industry, brands have the upper hand whereas the bargaining power of suppliers is moderate. There is a small population of suppliers that can meet the needs e-commerce businesses, especially the likes of giants such as Amazon. For those that can, they are empowered to build themselves up as a strong force to the e-commerce industry. For example, changes in equipment prices from a small number of major suppliers could directly impact an e-commerce company’s retail operational costs. Contrastingly, the moderate forward integration- moderate degree of control that suppliers have in the sale of their products to firms- presents limitations on suppliers’ actual effect on e-commerce brands. As such, many ecommerce brands are careful with their supplier relationships. Brands will often times create a code of conduct encompassing quality, labor, wages as well as sustainability. Despite the increasing number of players in the industry, suppliers do not have many options and therefore are bound by the rules that the brands have set.However, the size of most manufacturers and suppliers limits their influence on e-commerce companies

Threat of New Entrants (Moderate Force): 

New firms pose threats to existing e-commerce brands as it can lead to reduction of market share. The easy shifting of consumers to competitors, empowers them to impose a strong force against companies. This is a result of the low switching costs, or the low negative effects of transferring from one provider to another. However, the high cost of brand development in online retail weakens the influence of new entrants on the performance of bigger entities such as Amazon. It would take years and billions of dollars to create a brand as strong as Amazon or a brand that could become a direct competitor. Additionally, e-commerce companies benefit from high economies of scale making the nature of the business strong and viable for new entrants. As such, although the barriers to entry are moderately high, the threat of new entrants is low to moderate in the ecommerce industry.

Threat From Substitutes (Strong Force) :

The low switching costs of consumers is why they can easily transfer between companies. For example, consumers can easily decide to buy from Walmart stores or other retail establishments instead of buying from Amazon.com. The high availability of substitutes and the low product costs increase the influence of substitutes against the company. Whether it’s a physical or e-commerce retailer, they both can easily become substitutes preferred by consumers. As a result, brands try to gain a competitive advantage by offering low prices, better quality of products or through a better overall customer experience.  

Threat From Competitors/ Rivals (Strong Force):

E-commerce retail firms tend to be aggressive having a strong competitive rivalry among each other. The level of rivalry in the industry is high because of the large number of players. The number of local and global brands in the ecommerce market have grown and led to higher competition.This can be seen in Amazon competing against giants like Walmart, who is continuously improving their e-commerce presence. The frequent threat of substitutes exists because of their high availability. This can be seen with Walmart and other brick-and-mortar store efforts to match Amazon’s online retail services. Furthermore, the low switching costs create low barriers for consumers to transfer between retailers. As such, the threat for new competitors and rivals is high.

In conclusion, when it comes to competitive rivalry within the e-commerce retail industry-competition must be a strategic priority to ensure my company’s long-term competence. Retailersmust consider the strong bargaining power of buyers as a major factor in addressing business challenges in the online retail industry environment. Due to the high level and threat of competitors and substitutes, prioritizing the strategies for long-term success in the online retail industry environment is imperative.

References:

Amazon is seeking to transform the competitive landscape in logistics. (2019, May 26). Retrieved from https://www.intotheminds.com/blog/en/amazon-transform-competitive-landscape-logistics/

Dudovskiy, J., & Dudovskiy, J. (2020, April 1). Amazon Porter’s Five Forces Analysis – Research  Methodology. Retrieved from https://research-methodology.net/amazon-porters-five-forces-analysis/

Greenspan, R. (2019, February 24). Amazon.com Inc. Five Forces Analysis & Recommendations (Porter’sModel). Retrieved from http://panmore.com/amazon-com-inc-five-forces-analysis-recommendations-porters-model

Michele, BillT, Mind Tools Content Team, Mind Tools Content Team, & Mind Tools Content Team. (n.d.).Porter’s Five Forces: – Understanding Competitive Forces to Maximize Profitability. Retrieved from https://www.mindtools.com/pages/article/newTMC_08.htm

Pratap, A. (2018, October 08). Ecommerce Industry Five Forces Analysis. Retrieved October 18, 2020, from https://notesmatic.com/2017/11/five-forces-analysis-ecommerce-industry/