Industry profitability depends upon just five factors, the so-called "five forces" argues Michael Porter.
Introduction
Intensive competition among firms in the same industry tends to be one of the major characteristics of modern market-led economies caused by the pace of globalization of markets and industries as well as technological developments in areas such as information communication technologies, ( Johnson & Scholes, 2002). It is unsurprising as a result to see firms in many industries seeking to create competitive advantages in response to increasingly demanding customers and crowd markets which are a feature of their markets. Porter’s (1980) five forces framework which refers to potential entrants, buyers, suppliers, substitutes and industry competitors provides a useful means of analysing industrial environments in order to assist companies in choosing effective competitive strategies. However due to different features within various industries which can be defined as the collection of organisations with similar technologies and products with markets and customers in common it is vital to be aware of the forces forming change driven models within particular industries, (Hooley, Saunders & Piercy, 2004).There is growing interest in the study of retailing which itself has reflected the growth of the retail industry with Potter (1982) describing the academic study of retailing as ‘the Cinderella of the Social Science’. Particularly due to the features related to the fashion (and high-street clothing specifically) retail industry the rapid pace of changes tends to shape the forms of competitive strategies available to UK high-street fashion retailers such as River Island, Selfridges and Primark.
Analysis
Gilbert (1999) defines retail or retailing as any business that put its marketing efforts mainly towards satisfying the final consumer (end user) based on the organisation of selling goods and services. Bearing this in mind there is a need to be aware of the role of retailers who are situated at the end of the distribution chain. Therefore retailers set up business to trade with the general public and attempt to provide convenience-based buying channels for customers. Flexibility thus in the retailing industry is a critical element in considering and securing competitive position. In terms of fashion retailing retailers seek to satisfy customers’ need for fashion goods such as for example through the provision of the latest styles at lower prices through low-cost suppliers based in South-East Asia, (Mintel, 2005a). However the characteristics in this continuing mature industry strategy which are designed to maintain competitive positions in retailing have come under challenge. It is obvious that in a mature industry intensive competition results in lower customer loyalty or in other words buyer power in a relative fashion increases dramatically.
Industry Competitors
This intense competition is because the retail marketplace is at the mature stage of the industrial lifecycle with an accompanying slow down in growth making competition both extensive and intensive. Competition then not only comes from existing competitors but also potential entrants such as supermarkets who tend to be compatible new competitors for traditional fashion retailers when they enter and diversify product ranges from groceries into clothing as an example. Porter (1980) argues that competition in an industry will continually drive down the rate of return generating negative influences on the profitability of firms in the entire industry. Such a feature has been seen in recent years in the UK clothing retail industry with many of the major retailers experiencing significant reductions in profits, (British Council of Shopping 2004, Mintel, 2005b). Buyers in Porter’s (1980) model tend to compete with the industry by forcing down prices and bargaining for higher quality products and services at lower prices.
Power of Buyers and Suppliers
It is true to see that consumers pose a credible threat of backward integration to retailers however in order to compete effectively against the backdrop retailers as a result seek different ways of improving performance by adopting strategic schemes of work based on relationship marketing which aim to build greater customer loyalty and long-term relationships with suppliers. This new feature provides a critical perspective of fashion retailers’ behaviour in the integration process between suppliers, retailers and customers. Egan (2001) argues that closer relationships at higher levels between suppliers and retailers in terms of B2B models would seem to generate effective performance in competitive terms. However the power of brand names for retailers also has a significant influence on the balance of power between suppliers and retailers. Additionally there have been significant trends for retailers in integrating backwards namely UK high-street clothing retailers have sought to buy suppliers’ plants in order to have more control over the design and cost of production of clothing goods, (Baxter, 2004). Customers at this stage are able to benefit from lower priced products whilst fashion retailers are able to build up effective relationships with both suppliers and customers.
This is to say that in the case of high-street clothing retailers the relationship tends to be controlled by retailers in which the principle of relationship theory instead of driving forces tends to be unrealistic. Additionally in relation to buyer power in the retail industry such as fashion retailers Walters and Hanrahan (2000) and Christopher et al (1996) proposed as a response the idea of schemes seeking to enhance customer loyalty through a focus on enhancing existing relationships while aiming at winning new customers also and tying them into long term relationships with companies. This could be seen now as a typical feature in retailing where scheme and strategic methods used by clothing retailers in retaining customers through personalised data analysis by advanced computer systems aims to build customers’ knowledge of the retailer and vice versa, (Blythe, 2003). Such measures also have entailed the development of different forms of loyalty rewards such as loyalty cards which are widely used by clothing retailers, (Mintel International Group 2004).
Substitutes
The position of substitute products is a matter of searching for other products that can perform the same function as the product of the industry or player in the industry, (Porter, 1980). While clothing can generally not be substituted for other products by the majority of people the nature of the organisation supplying them and the manner in which products or services can be supplied have become highly substitutable with technological developments. Based on this the emergence of e-shopping methods is and will continuously shape traditional clothing retailer’s competitive positions in the market. Due to technological developments and wide interest in and adoption of the Internet customers have and will accept e-shopping methods more and more benefiting from the development of credit systems, improvement of issues related to security and privacy as well as changing life styles such as less time for shopping. E-shopping for clothing goods particularly deserves attention in terms of price competition among traditional retailers, (Gilbert, 1999). However traditional fashion retailers such as Next have generally integrated online shopping models in supporting their traditional operations and as such substitutes have become part of their competitive strategies. This characteristic itself causes challenges in considering Porter’s (1980) framework.
Potential Entrants
There are traditional clothing retailers in terms of department stores such as Marks & Spencer as well as the newer high street stores such as Top Shop. It is obvious that the decreasing level of customer loyalty has resulted in higher degrees of competition while threats have also come from new entrants to this industry, (Mintel, 2005b). Supermarkets for example such as ASDA and Tesco have operated successfully in introducing clothing product ranges into their operations. Porter (1980) believes that new entrants are able to bring new capacity to the industry in such a way as that long term industrial growth will be achieved. Supermarkets at this stage have attempted to exploit a sharing function in order to achieve economies of scale in relation to clothing retailing with other businesses operations in the company. However the concern for supermarkets is mainly on low cost clothing while high street clothing retailers have pursued a differentiation strategy such as that of Selfridges in terms of luxury products in order to maintain competitive position, (Baxter, 2004). In general there are various forms of new entrants for established clothing retailers and some companies have exited the industry due to decreasing profit margins and increased competition. It is fair to say that branding strategy plays a critical role in maintaining long term customer bases which itself reflects the increasing power of customers.
Conclusion
Porter’s (1980) five force framework provides a basic view towards the analysis of competitive environments for companies in particular industries. However due to the forces of change in external environments such as rapid technological development as well as changing customer interests and life styles it is necessary to be aware of these new features in applying the five forces model to one industry. Both literature and practical business operations has begun to pay significant attention to relationship marketing rather than a competitive driving force model in a way in which effectiveness is able to be generated during a cooperative process, (Egan, 2001).
References
- Baxter, J. (2004) Clothing Retailing KeyNote Marketing Report, Hampton, UK
- Blythe, J. (2003) Marketing Strategy, McGraw-Hill Education, London UK.
- British Council of Shopping, C. (2004). The shopping centre industry: its importance to the UK economy: 2004 report., BCSC, London
- Egan, J. (2001) Relationship Marketing: Exploring Relational Strategies in Marketing, FT Prentice Hall, London UK.
- Gilbert, D. (1999) Retail Marketing Management, FT Prentice Hall, London UK.
- Hooley, G., Saunders, J. & Piercy, N. (2004) Marketing Strategy and Competitive Positioning 3rd edition, FT Prentice Hall, London UK.
- Johnson, G. & Scholes, K. (2002) Exploring Corporate Strategy: Text and Cases 6th edition, FT Prentice Hall, London UK.
- Mintel International Group, L. (2004). Store cards, finance intelligence, October 2004., Mintel International Group Ltd, London
- Mintel International Group, L. (2005a). Clothing Retailing- UK Intelligence, July 2005., Mintel International Group Ltd, London
- Mintel International Group, L. (2005b).Retail Review: Special Report, March 2005., Mintel International Group Ltd, London
- Porter, M.E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors, The Free Press, New York USA.
- Walters, D. & Hanrahan, J. (2000) Retail Strategy: Planning and Control, MacMillan Business, London UK.