Porters Five Forces Amazon

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The Online Retail Industry Competitive Rivalry 1995-2004

The Threat of New Entrants

The Power of Suppliers

Degree of Competitive Rivalry

Buyers

Substitutes

Introduction Before venturing into the online retail industry you need to be able to answer yes to the following questions. Are you entering an industry in which product development and innovation (as opposed manufacturing and marketing), play a central role in bringing products/services to markets? Is the industry structure highly fragmented and favourable for start- ups? (Shane 2003) In the following paper, by using the Amazon.com start up case study (1995-2004) as an example, I intend to describe the online retain industry, with a view to starting a business in this arena. I intend to investigate competitive rivalry using ‘Porters Five Forces Framework’ to describe how each forces impacts business choices, either positively or negatively and therefore increasing/decreasing competitive rivalry. 1. The Threat of New Entrants

The internet reduces barriers to entry such as the need for a sales force, access to channels and physical assets. New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. New entrants can develop their web sites in a short period of time with incredible final results. This can be the proof that a threat of new entries into the market is possible. The internet mitigates for such things as an established sales force or access to existing channels, reducing barriers to entry (Porter, 2001) - Economies of scale: In some industries, economies of scale are extremely important. However, startup costs for e commerce retail operation are a fraction of the costs of starting a traditional brick and mortar company. - Access to industry distribution channels: In many industries manufacturers have had control over supply and/or distribution channels. In the online retain industry this barrier has been overcome by new entrants who have bypassed retail distributors and sold directly to customer through e-commerce. - The likelihood of retaliation: If an organization who is considering entering an industry believes that the retaliation of an existing firm will be so great as to prevent its entry this is a

barrier. Just the knowledge that incumbents are prepared to retaliate is often sufficiently discouraging to act as a barrier. - Legislation or government action: Legal restraints on new entry vary from patent protection and government action. There are no legal restrictions at present in the online retail industry - Differentiation: providing a product or service with higher perceived value that the competition, increases loyalty. At the time of Amazon’s start up, there was no differentiation in the online industry (Harrison, Hitt, Hoskisson & Duane, 2008) 2. Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The generation of Internet approaches creates new substitution threats. By making the overall industry more efficient, the Internet can expand the size of the market The threat of substitute products depends on: -Price / Performance ratio: At the time of start up, this factor does not affect competitive rivalry and sits in the middle neither pushing it up or down. A substitute is still an effective threat even if more expensive, so long as it offers performance advantages that customer’s value. -Extra-industry effects: At the time of start up, this factor does not affect competitive rivalry and sits in the middle neither pushing it up or down. The higher the threat of substitution, the less attractive the industry is likely to be. (Johnson, Scholes & Whittington, 2011) 3. The Power of Buyers Initially consumers that buy goods online will become regular clients if prices are low and hard to reach by the competitor. Low prices are the...
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