Attractiveness of the E-Commerce industry is analysed through Porter’s 5-Force model (Competition within Industry, Threat of new entrants, Threat of substitutes, Bargaining power of suppliers and Bargaining power of customers).
Porter’s 5-Forces Model for E-Commerce
Using Porter’s 5 Forces model, the current E-Commerce industry is analysed for the rivalry within the industry, threat of new entrants, threat of substitute products, bargaining power of suppliers and the bargaining power of buyers.
Threat of New Entrants:
Current E-Commerce industry has a lot of potential for growth for all the players. With E-Commerce industry estimated to reach 56 Billion USD by 2023 there is wealth of opportunities for lot of new players to gain market share and expand their business. There are no entry barriers for starting up a new E-Commerce business and all you need is well managed platform to showcase your products, swift operations team to deliver product quickly and a customer service team to excel in customer satisfaction. In addition, the initial capital investment needed for starting an E-Commerce business is very less and for most of the start-ups with around 100 SKUs (Stock Keeping Unit), the capital needed us well within INR 10 Lakhs. With 51% of FDI allowed in multi brand retail for market place, there is lot of funding options for the new players when they look for expansion. All these factors pose a huge threat of new entrants to the current E-Commerce Industry.
Threat of Substitutes:
In the E-Commerce industry, that too specifically in the Market place, there are a lot of options and varieties available for the same product with less differentiation. Since there are a lot of suppliers competing in the same space, pricing plays a vital role in gaining more market share. With no switching cost for the buyers, the current E-Commerce industry has a huge threat from substitute products.
Bargaining power of Suppliers: For the manufacturers, E-Commerce is one among multiple channels for selling the product to the customers. The bigger manufacturers who are already having a good brick and mortar presence can easily forward integrate to start the online retail channel also on their own.
Bargaining power of Customers: With E-Commerce industry in full expansion mode, there are a lot of campaigns, policies and processes to gain and retain customers. Customers have access to pricing information across different E-Commerce players. With no product differentiation there is no switching cost. Cash on delivery, Easy returns, Cheap price, Exchange offers and Same day delivery etc. – all these are initiatives towards gaining more and more customers. With more intense completion in this E-Commerce industry, Customers have good bargaining power.
Rivalry within Industry: With high threat of new entrants and no entry barriers, the competition in the E-Commerce industry is so intense and getting more intense day by day. Business have to come up with new initiatives every often and spend more in marketing to be in the competition. With high chances of forward integration on few segments by large manufacturers/suppliers and the competition from the traditional brick and mortar business fuelled the competition still more.
With intense competition within the industry, no entry barriers posing threat of new entrants, no product differentiation posing huge threat from substitute products, huge possibility for suppliers to forward integrate and huge bargaining power of customers makes the current E-Commerce industry unattractive.
But with only two exceptions:
1. If you have an UNIQUE product idea with an UNIQUE competitive advantage; Ecommerce can be used a channel to reach out to customers
2. Player in offline using Ecommerce as an extended channel part of their distribution strategy.
Post by #AlvisLazarus
Note: All the views part of this post are my personal views and also the data collected are as of Mid 2014. Please use them accordingly and use the right Citations (as required).
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