In America in the 1940s Sam Walton opened his first retail store, over the next 50 years Walton would go on to create one of the most successful companies in history. At the time Americans were benefiting from a post war boom with an “era of rising living standards and growing consumption” Adams (2006:214). In order to analyse the attractiveness of discount retailing Porters competitive forces framework can be used. Porter (1980:3) states that “competition in an industry depends on five basic competitive forces”. As seen below in figure 1.
Threat of new entrants
Porter (1980:7) states that there are “six major sources of barriers to entry”; economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels and government policy. “New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete” (Porter 2008:80). The start up of any business demands an initial capital investment and in the case of the discount retail industry, it is no different. “The need to invest large financial resources in order to compete creates a barrier to entry” (Porter 1980). One of the main barriers to entry in terms of financial provisions would be the start-up cash flow required to purchase the large amount of stock required in this new layout superstore. This financial requirement makes the discount retail industry unattractive.
Bargaining Power of Suppliers
“Suppliers can exert bargaining power over participants in an industry by threatening to raise prices” (Porter 1980:27) and in the case of suppliers to the discount retail industry this was the case. The manufactures had the Retail Price Maintenance policy in which they set the price of a product to the wholesalers, retailers and consumers, which was achieved by printing the price on a product. This law was reinforced further by the Miller-Tydings Act...
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