Blue Nile Porter\'s Five Forces Analysis Focuses

Blue Nile

Porter's five forces analysis focuses on the factors that influence a firm's ability to earn a profit: the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes, the threat of new entrants and the intensity of rivalry within the industry. The online jewelry business, and Blue Nile in particular, has only a moderately favorable business environment. The company is relatively small in the jewelry business at 0.005% of the total jewelry business that it has weak bargaining power with its suppliers. Blue Nile deals with this by cutting out layers of wholesalers in order to contain costs with suppliers. It also has low bargaining power with buyers, because there is some degree of buyer skepticism about buying jewelry online vs. in-store where the merchandise can be viewed with the eye. In addition, offline jewelry stores represent a high threat of substitutes, and there are few barriers to prevent new entrants into the business (especially leading online retailers like Wal-Mart or Amazon). For Blue Nile, the company may have enough pricing power with consumers to earn a profit but it does not have the pricing power in the industry that would result in the company having a strong competitive position.

Of the five forces, the most important is probably the bargaining power with buyers. This is an issue on two levels. The first is that buyers often know little about the product, relative to the price they are paying. It is a safe bet that Sanjay Bargave, if buying a car, would know more about that car than the $20,000 diamond ring he ponied up for. While men are willing to spend on engagement rings, they know nothing about them. This can be a significant advantage or disadvantage depending on how the firm decides to approach the situation. For Blue Nile, it has decided to provide more knowledge to the buyer, so that the buyer feels comfortable not only with the purchase but perhaps with spending more on that purchase. It is an interesting paradox of this industry that providing the buyer with more information gives the buyer confidence not to bargain better, but to accept the price offered by the company.

The other reason why the bargaining power of the buyer is important is because there is intense competition in the industry. Other firms have a similar approach to Blue Nile, and as a result Blue Nile needs to show the customer that it is the company that delivers the best value. This impacts on the approach Blue Nile has, because the competition empowers the buyer to take the knowledge that sellers are providing and use that against the supplier. Engagement rings in particular are a purchase that typically involves extensive research, so the buyer will seek out competitors -- Blue Nile needs to keep its prices low in order to win the business. Thus, the bargaining power of the buyer is critical. For Blue Nile, the company needs to empower the buyer to spend more while discouraging the sort of comparison shopping that would result in the customer going elsewhere for a better deal.

2. There are a number of factors that will contribute to success in the online jewelry business in the next five years: international sales, brand equity, and pricing power are the most important. Pricing power is critical. Blue Nile is a profitable firm because it has been able to operate an efficient supply chain that gives it a competitive advantage. Of the two largest firms, Tiffany has been able to earn a profit but Zale's lost money last year. The ability of a firm to either a) justify a premium price to consumers as Tiffany does or b) operate as a price leader like Blue Nile will determine the degree to which the company can succeed.

International sales are also critical to long-run growth. The best brands in online retail, such as Amazon, have a strong international profile and the best offline brands (be they Wal-Mart, Starbucks or McDonalds) are also strong internationally. It is essential then that Blue Nile is able to build out its international properties. The company's CEO already believes that 50% or more of business for the company will eventually be international. This points to the importance of international markets for online jewelers as well. Many jewelers have a strong regional or national presence but with the exception of the industry leaders (Zales is strong in Canada and Tiffany is international) there are few jewelers competing internationally. The key to growth for Blue Nile, then, is to move into international markets and capture first-mover advantages.

The third critical success factor for online jewelers in the next 3-5 years is to develop a strong brand. Blue Nile still is a very small part of the overall jewelry business, indicating that there is still substantial room for growth in the online jewelry industry. If there is still strong room for growth, this indicates that establishing a strong brand today is going to be essential for capturing this growth, especially in concert with building an international presence. The strongest brand in the business might be Tiffany, and Blue Nile is seeking to establish itself at the lower end of the market. Other firms with strong brands might enter the industry as well -- Wal-Mart is a particularly strong threat. As a result, when the business is ten times the size in 2016, Blue Nile is going to want to have its current market share or higher. This implies rapid growth, but it also implies establishing its market position in the same way that other Internet players like Amazon or YouTube established themselves as the dominant website for their product/service. By establishing Blue Nile as the go-to site for jewelry, the company will be able to grow rapidly and have a viable market share when the time comes that the industry itself is substantially larger and dangerous new entrants are threatening the industry's existing players. At that point, only the strongest will survive and that is why it is essential that Blue Nile or anybody else builds its brand now before the major players arrive.

3. Blue Nile at present is seeking to compete on two different strategies. As generic strategies go, Blue Nile is in essence a cost leader. The company has structured its supply chain to give it a cost advantage, and it basically needs a cost advantage to offset the marketing disadvantage of not allowing customers to see the merchandise in person prior to purchase. Blue Nile seeks to leverage its structural cost advantage to undercut major competitors as its core competitive advantage.

The company also competes as a differentiated provider, in that it is the leading online jeweler. This differentiates Blue Nile in terms of its service delivery in particular. However unlike cost, this competitive advantage is not sustainable. Many high-end jewelers offer online sites already. The low barriers to entry in the industry mean that many other firms will soon be able to offer the same online shopping experience that Blue Nile offers, including the education, and this will reduce the competitive advantage that the company enjoys. As a result, Blue Nile has a secondary strategy of differentiation that has allowed it to build its market share to this point, but will not sustain the company in the long run.

At the end of the day, the strategy that Blue Nile is most likely to sustain in the long run is the cost leadership strategy. The company's education of the customer gimmick, while valuable, is easily replicated. The website method of sales and distribution is also easy to replicate and there are potential competitors in online retailing that have superiority in many aspects of online merchandising. Blue Nile's supply chain structure, however, gives it the ability to offer lower prices than an offline firm of the same size would have. This is of significant benefit to the company, and is something that it may be able to maintain even in the face of strong new entrant competition. Its brand, however, will be key to making this strategy work.

4. What I like about the Blue Nile business model is that it is able to deliver jewelry at a low cost despite being a relatively small firm in a very large industry. For a startup to be able to undercut firms that have significant advantages in economies of scale is significant, and impressive. So the systems with respect to ordering and production that allow Blue Nile to be a cost leader even without economies of scale are something that the company should focus on What I dislike about Blue Nile's business model is that other than the company's brand, there is no real source of sustainable competitive advantages. If Blue Nile does not become much larger and much more dominant in its field, it will find that it will have trouble competing against the major firms in online retailing. If we consider the case of Amazon, they are having trouble fending off Wal-Mart and they were a much more dominant firm in their industry -- and much larger -- when Wal-Mart entered than Blue Nile is today. Blue Nile simply needs to become much larger and much better if it wants to survive in the long run.

5. Blue Nile has a couple of strengths from which it derives competitive advantage. The first of these is the company's brand, but a more important strength is Blue Nile's supply chain structure, as this allows it to be cost competitive even with larger firms. The main weakness of Blue Nile is that the company is relatively small, and a large segment of the jewelry market either has not conceived of purchasing online or still does not trust it: Blue Nile's reach is still too small to make its own case.

There are significant threats to Blue Nile. Most of these come from competitors, but there are other threats as well. Jewelry spending typically declines during periods of economic weakness, so the state of the economy is a threat. In addition, any troubles with its shipping agent, FedEx, could undermine the trust that consumers have with the company and its ability to deliver low-cost, unique jewelry safely. That said, there are considerable opportunities in the market. Growth is the big one -- both the domestic and international markets are by no means saturated. This should allow Blue Nile to grow rapidly if it can manage other aspects of its external environment.

6. Blue Nile's financial performance appears to have flatlined. The company's revenues are lower than 2007 levels, as are its earnings per share. This is not encouraging, but is indicative of the degree to which Blue Nile's success is correlated with the broader economy. The company is liquid, with a current ratio of 1.34. The company still has a 2-to-1 debt/equity ratio, indicating that its debt is at a fairly high level for the company's stage of life cycle, and this relates to its stagnant growth in the past few years. However, the company is liquid and solvent, so there is little immediate concern about its finances. If the economy improves, it is likely that Blue Nile's balance sheet will become stronger as a result.

7. Blue Nile has good competitive strength within its industry. It has access to more diamonds than its competitors, which also means it has access to diamonds that they do not have access to. Blue Nile has a strong brand name and appears to do more business than any of its main online rivals. There are significant weaknesses at some competitors (no education at ice.com, for example) and few have any significant advantages over Blue Nile. James Allan appears to be the strongest competitor, based on the number of diamonds it has access to and the features on the website. If Blue Nile can remain cost competitive with James Allan, it should be able to stake out a strong position within the industry. It does not appear, however, that Blue Nile has a sustainable competitive advantage within the industry. Most other firms utilize the same business model and all of the features of Blue Nile's website are replicable. Only the company's brand is a source of sustainable competitive advantage -- and this can be overcome quickly by a superior competitor.