Many managers look at competition too narrowly. According to Michael Porter, there are different forces of competition that should be looked at by any business. A business will not gain a return on investment of the forces are too intense in the industry. When the competitive forces are favorable, many of the companies in the industry are profitable. When formulating a strategy, the manager needs to understand that some forces are stronger than other forces. These strong forces will determine the industry's profitability. Focusing on the strong forces more than the weak forces, allows a manager to develop a strategy that will ensure the business remains profitable. An industry's structure will set the industry's profitability in the end and will provide a model for influencing and anticipating competition and profitability. The five competitive forces identified by Porter Michael E. 26()
are threat of new entrants, power of buyers, power of suppliers, threat of substitute services or products, and rivalry among the existing competitors.
New entrants within an industry will bring with them new capacity and a desire to gain a considerable market share Afuah and Utterback 193.
This will put pressure on the costs, prices, and rate of investment required to compete in the industry. The existing companies will have to keep their prices low or boost their investments in order to deter new entrants. The physical entry of new entrants does not drive profitability down, but the threat of new entrants does. Powerful customers will capture more value by demanding better services or products, force prices down, and playing the participants within an industry against one another. These actions will reduce the profitability within the industry, as the players will have to listen to the buyers. Buyers have power if they posses negotiating advantage, especially if they are sensitive to prices, and they can use their advantage to push for price reductions. Negotiating power of buyers is high if there are few buyers within the industry, the products are undifferentiated or standardized, there are few switching costs when changing vendors, and the buyers can threaten to integrate backwards in order to produce the product themselves.
Powerful suppliers have the capability of capturing more value for themselves by limiting quality, charging higher prices, or shifting their costs to industry participants. Suppliers have power if they do not depend on the industry for revenues, the suppliers are few and buyers are many, when there are no substitutes and switching costs are high, suppliers have differentiated products, and supplier group could integrate forward. A substitute product or service will offer the same functionality, but using a different method. A substitute threat is high if the substitute will offer an attractive price performance, buyers switching cost is low, or if the companies are unable to understand each other due to various reasons Michael E. Porter 142.
Rivalry among competitors depends on the basis that competitors compete and the intensity of their competition. Rivalry becomes destructive to profitability if it moves only towards price. Rivalry intensity is greatest if there are numerous competitors, there are high exit barriers, slow industry growth, and despite performance, rivals are highly committed.
Gilt Groupe specializes in highly discounted designer products. When the company started it focused mainly on women's clothing, but it has diversified over the years and currently includes baby products, men's clothing, travel deals, food deals, household goods, and deals in major cities. Gilt is in the e-commerce industry where it offers "Flash sales" to its exclusive members Matthew Carrol 1.
The company sends emails to its members offering them items at discounted prices of close to 60%. The items offered do not stay for long on the website and the members have to make purchases immediately. The deals offered by the company have a timing and supply constraint, which compels buyers to take an immediate action. The company is able to generate fifty percent of its revenue in the first hour of initiating a sale. The main buyers from Gilt are sophisticated urban middle to upper class income consumers. Gilt leveraged on the Social Web in order to communicate with consumers and potential consumers. The emails sent out to the customers are customized for each customer, which provides more personalization for the customer's shopping experience Ryan 45()
In order for Gilt to get products, it initially depended solely on fashion designers, but it has expanded this to include food outlets, event organizers, and travel agents. Having multiple suppliers allows Gilt to have some negotiating power as a buyer. Diversifying into other products and markets instead of focusing on fashion and clothing has allowed the company to stay ahead of its rivals, and diversified its portfolio. Gilt's success in the flash market industry spurred hundreds of competitors to join the industry. The new entrants focused on the same products that Gilt was interested in, and this resulted in a market shift. The suppliers (brands) were now the price setters, while before the new entrants suppliers were price takers. Gilt competitors include Rue La, Ideeli, Beyond the Rack, Hautelook, and MyHabit. The competitors were able to match the idea behind Gilt's business model, which made it easy for them to enter the market.
The five competitive forces applied to Gilt Groupe
Threat of new entrants
New entrants into the flash sales industry affected cost and prices of the goods. The new entrants were ambitious and were interested in gaining the market share. This increased competition coupled with the great recession resulted in reduced remnant inventory from fashion houses. The barriers to entry in the industry are low, which encourages more competitors to start or enter the industry. The increase in competitors led to an increase in demand for brand products. The suppliers noticed this increase, and they now had an advantage over the buyers. The suppliers were able to set the prices that the companies had to conform towards. This reduced the profitability within the industry. Gilt Customers did not have high switching costs, which meant that the customers could move to a competitor easily.
The capital requirements for the flash sales industry were not restrictive enough to discourage new entrants. Start-ups like Rue La, Beyond the Rack, and Ideeli were able to penetrate the market and the companies have consistently increased their membership numbers. Gilt had some advantages over its competitors, as it was the first entrant into the industry. The fashion houses have a good relationship with the company, which provides the company with favorable advantages. The new entrants were not threatened by Gilt. Gilt did not offer a protracted or vigorous reaction towards new entrants, which allowed the competitors to easily enter the industry. Gilt did not have substantial resources for fighting back new entrants. Gils should have leveraged on its good relationship with the fashion houses to discourage the new entrants. Having a solid relationship that would not allow the fashion houses to sell their inventory to other competitors would have ensured that the new entrants had a hard time trying to compete with gilt.
The power of buyers
Buyers in the flash sales industry had little to no power. This was mainly because the only alternative that the buyers have is purchasing the product or service at a higher price. The competitors in the industry are unable to influence the price offered by the fashion houses or the other products. This has made it difficult for the companies to bargain for a price reduction or threaten the suppliers. Having many buyers has resulted in the suppliers determining the price for the products. Members of the flash sales websites only have a limited time for making a decision on the purchase. This reduces their ability to conduct market research and establish if they can find the product or service at another location for a lower price. Providing a limited time and limited supply for the product ensures that the flash sales company is able to gain its revenue from selling half of the inventory. Impulsive buying is the main idea behind the industry's success. The companies have few switching costs from one vendor to another, but they do not have the power to bargain for lower prices. This limits their capability to offer huge discounts.
Gilt has had to diversify its portfolio in order to increase its profitability. The company has included other products and services instead of focusing solely on fashion brands. This diversification has impacted its initial members negatively. Previously, members would receive emails containing well-known brands that have their prices discounted, but currently, the company deals with less known brands and the consumer does not get the excitement they used to receive from opening Gilt emails. The customer would be less inclined to open subsequent emails from the company. In order to counter this negative effect, the company has diversified into other categories, which have little competition and offer better discounts.