Retail Challenges & Theories

Michael Porter, a professor from Harvard Business School, designed a framework named Five Forces Analysisfor structured analysis of industries. This framework helps to understand the degree of competition in the industry. Let us see according to his framework, what are the five fundamental forces of competition in the retail industry −

Five Forces Analysis

Threat of New Competitors

The easier it is for a new company to enter the industry, fiercer is the competition. Any new entrant poses a threat to the existing players as it can decrease the profit share of existing players. The factors that limit new entrants are −

●      How loyal are end consumers in the industry?

●      How difficult it is for the consumer to switch to the new product?

●      How large is the amount of capital required to enter into the industry?

●      How difficult it is to access distribution channel?

●      How hard it is to acquire new skills for the staff?

Threat is high when…          Threat is low when…
Products of the retail company are not differentiated.Products of the retail company are differentiated.
Consumer perception is not good for existing product and switching cost is low.Consumer perception is healthy for existing product and switching cost is high.
Retail brand is not well-known.Retail brand is well-known.
Accessing distribution channels is easy.Accessing distribution channels is remote.
Proprietary technology and material, government policies, and location are not troublesome issues.Proprietary technology and material, government policies, and location are troublesome issues.
The number of buyers of existing product are low.The number of buyers for existing product are high.

For example, Pizza Hut, an old player in food services retail, was founded in 1958 at Kansas, US. The entry of Dominos in 1960 at Michigan posed a threat of competition to it. But following their different marketing policies, they both have acquired prominent places in the market.

New Competitors

Threat of Substitutes

Substitutes are the products or services that provide the same functionality. A successful product leads to creating other similar products. While entering into retail, one should think of −

●      How many near substitutes are available in the market?

●      What is the price of the substitute?

●      What is the consumer perception about those substitutes?

By advertising, marketing, and investing in R&D for the product or service, a retail business can elevate its position in the industry.

Substitute threat is high when…      Substitute threat is low when…
Products of the retail company are not differentiated.Products of the retail company are differentiated.
Products are costly.Products are inexpensive.
Consumer’s brand loyalty is low.Consumer’s loyalty is high.
Cheaper parallel products of the same category are available.No cheaper parallel products are available.
Threat of Substitutes

For example, Google+ and Facebook both are social platforms the consumers use for socializing. They provide similar features such as posts, chat, share text, graphics and media content, forming groups, etc.

Bargaining Power of Buyers

It is the position of buyers and likelihood of their ability to gain benefit while buying. If there are many suppliers and few buyers, the buyers are at advantageous position while pricing and they generally have the last word. The retail managers need to think of the following −

●      How large market share the retail company has?

●      What size of consumers is the company depending upon for its sales?

●      Are buyers buying in large volumes?

●      How many other retail competitors are in the same product line?

Bargaining Power of Suppliers

It is the ability of the supplier to control the cost and supply of the products in the market. If the suppliers are at a dominating position over the company while product pricing, threatening to raise price or reduce supply, then that retail industry is said to be less attractive. The retail managers need to find out answers for the following −

●      What are the substitute products other than what the supplier provides?

●      Is the supplier providing goods to multiple industries?

●      Is the supplier-switching cost high?

●      If the supplier and the company are capable of entering into one another’s business?

Intensity of Rivalry among Existing Competitors

The rivalry is intense when there are more or less equal sized competitors in the market and there is no unparalleled market leader.

Intensity of Rivalry is high when…Intensity of Rivalry is low when…
There is no or very less product or service differentiation.The product or service is in differentiation.
There are less competitors.There are more competitors.
Availability of product in a particular area is less.The product is widely available in a particular area.

Theories of Development

In retail management, theories can be broadly classified as follows −

Environmental Theory (Natural Selection)

It is based on Darwin’s theory of survival: “The fittest would survive the longest”. The retail sector comprises consumers, manufacturers, marketers, suppliers, and changing technology. Those retailers that adapt to changes in demography, technology, consumer preferences, and legal changes are more likely to survive for long and prosper.

Cyclical Theory

McNair represents this theory by Wheel of Retailing that explains the changes taking place in retailing.

According to him, the new entrant retailers are often into low cost, low profit margin, low structure retail business, which offers some unique, real benefit to the consumers. Over some time they establish themselves well, prosper, and expand their products with more expensive facilities, without losing focus on their core values.

Cyclical Theory

This creates a place for yet new entrants in the market thereby creating threat of competition, substitution, and rivalry.

Conflict Theories (Evolution through Dialectic Process)

Within a broad retail category, there is always a conflict between the retailing of similar formats, which leads to the development of new formats. Thus, the new retail formats are evolved through dialectic process of blending two formats.

Evolution through Dialectic

Say, Thesis is a single retailer around the corner of the residential area. Antithesis is a large departmental store nearby the same residential area, which develops over some time in opposition to Thesis. Antithesisposes a challenge to Thesis. When there is conflict between Thesis and Antithesis, a new format of retail is born.

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