The case study below will be accessing the competitive environment of hypermarket industry using Porter’s Five Forces, as well as its competitive advantage strategies.
1.1 What is Hypermarket
Hypermarket is basically a combination of supermarket and department store. It is a huge retail facility which provides a wide range of products under one roof. It attract customers by allowing them to satisfy their routine shopping needs, from food and other household items, to clothing and appliances in one single trip. The concept of hypermarket is to focus on high quantity but low margin sales (Dibb ; Simkin, 2001).
In Malaysia, some of the biggest players in hypermarket industry are like Carrefour, Giant, Jusco and Tesco. Other hypermarkets that are famous around the world are like Wal-Mart, ASDA, and Sainsbury’s. They are usually selling various products at a very low price, but in high volume.
1.2 What is Porter’s Five Forces
Porter’s Five Forces is developed by Michael E. Porter of Harvard Business School in 1979. It is a framework for industry analysis and business strategy. It studies how the five forces impact on an industry, and explains how the internal and external factors of an industry are effecting the competition within it. The five competitive forces that determine industry profitability are bargain power of buyers, bargain power of suppliers, threat of new entrants, threat of substitutes, as well as rivalry among existing firms. A successful business is to find out everything you can about your competition and industry dynamics, which refers to the commercial exchange among Porter’s Five Forces (Trump ; Gordon, 2007). Figure 1.1 shows the relationship among the five forces.
Figure 1.1 (Porter, 1998)
1.0 Porter’s Five Forces Industry Analysis
2.1 Bargain Power of Buyers
Porter used the term ‘buyers’ to describe what might also be called customers of an organization. It is one of the horizontal forces, including the bargain power of suppliers, which influence the appropriation of the value created by an industry. Buyers will have more power when buyers are concentrated, product is undifferentiated, low buyer switching cost, buyer are large and etc (Lynch, 2003).
In hypermarket industry, the bargain power of buyers is tremendously high because the switching cost for buyers is very low. Buyers can easily switch to another choice of hypermarket if they are unhappy with price, quality or services of a certain hypermarket. This strong bargain power of buyers had forced down the price of products in this industry. Since the products that are sold in hypermarkets are various, some of the factors that will affect buyers’ determination on where to shop are like the price of the products, choice of products, or even the shopping environment of the hypermarket.
The high bargain power of buyers will usually leads to price war because the switching cost for customers are very low. If the hypermarket can provide their products at the lowest price, customers will always wants to go back to them. One of the biggest hypermarkets in Malaysia which is Giant, their strategy to win the competitive advantage status is to ensure that their customers will always pay the lowest price for their products, bigger variety and great value (www.giant.com.my). This strategy applies the same for a lot of other hypermarkets such as Wal-Mart and Tesco, which means the price war in this industry, is actually very tight.
2.2 Bargain Power of Suppliers
In Porter’s Five Forces framework, the term ‘suppliers’ is defined as those that supplies raw material to a certain firm. The bargain power of suppliers is determined by the switching cost of firms, supplier concentration, importance of volume to supplier, and so on (Porter, 1998).
In hypermarket industry, the bargain power of suppliers is medium as there is a balancing point between the switching cost of firms, and the importance of volume to supplier. As hypermarkets are selling a wide range of products, there are a lot of different suppliers for a certain firm. The switching cost for firm is low as they can easily switch to another supplier. Also hypermarkets are usually selling their products in large quantity; suppliers will often lower their price to have a long term contract with a certain hypermarket as they can purchase products from suppliers in high volume and they will get more profit in long term. This situation is contrast for bigger suppliers like Unilever and Coca-cola, as hypermarkets will have to maintain a rate of inventory system (Rapley, 2005). Also, without products from these bigger suppliers, hypermarket would not be able to fill its shelves.
Most of the hypermarkets get a very cheap price from their suppliers due to their purchase in a huge amount. But to be differentiated and to get even cheaper price of products, some of the hypermarkets like Carrefour and Tesco have created their own brand. By having their own production, they can ensure that they sell their product at a cheaper price, in order to be competitive with other hypermarkets. Another strategy is to create a partnership relation with the supplier. For example, if one hypermarket has a partnership relationship with Unilever, they can ensure that they get some of their products at a cheaper price, being compared to the other hypermarkets.
2.3 Threat of New Entrants
Michael Porter claims that new entrants to an industry will bring new capacity, the desire to gain market share, and often substantial resources. The seriousness of the entry depends on the barrier of entry and there are six major sources of barriers to entry which are economic scale, product differentiation, capital requirement, cost disadvantages independent of size, access to distribution channels, and government policy (Hamermesh, 1983).
The barriers to entry for hypermarket industry are very high for a few reasons. The positions for some of the mass market player are so dominant and it is able to exploit significant economies of scale, and is sturdy enough to consolidate and extend their positions in the market (Rapley, 2005). Other than that, the capital requirement to open up a hypermarket will be very high because they will need a huge property and large amount of inventory. Also new firm will have cost disadvantage because products that hypermarket sells are from various suppliers and it is very hard for a new firm to get a lowest price from all the suppliers, thus the new firm will not be competitive in the industry. From all these reasons above, it is seen that the threat of new entrants in hypermarket is low.
Although the threat of new entrants in hypermarket industry is low, it is still possible that there will be new entrants. Existing firms should grow faster than the market to be differentiated from the others. If existing firms did not grow faster than the others, they will lose a portion of their potential client when there are new entrants because the switching cost for the customer in this industry is very low. Jusco Hypermarket’s core strategy is to accelerate the shopping center development. They channel their resource towards attractive, integrated commercial facilities which attract the customers (http://www.jusco.com.my). By applying this strategy, Jusco will be able to minimize the risk of losing potential customers when there are new entrants.
2.4 Threat of Substitutes
A substitute product is one that performs the same function as the industry’s product. Substitute’s product may appear to be different but they serve the same function as the industry’s product. Substitutes in effect place a ceiling on the prices that companies in the industry can charge. If the price of an industry’s product rises steeply, consumers will likely to switch to the substitutes.
Since hypermarkets provide a wide range of products, there are no particular substitute products in this industry. The threat of substitutes appears when there are a lot of substitute shops or specialized shops where customers can purchase a particular product. For example, hypermarkets sell clothing but customer may purchase clothes from boutiques; hypermarkets sell food but customer may buy foods from other food stores. Other than that, there are also some convenient stores that sell the same range of products with hypermarkets but in a smaller scale, like the 7-Eleven. These specialized stores and convenient stores are considered as substitutes for hypermarket industry, and thus the threat of substitutes is very high in this industry.
In hypermarket industry, the threat of substitutes is very hard to avoid as there are too much substitutes. In order to be competitive with all the other substitutes, one firm must make sure that their stores are easy to be reached, in another word, convenient for the customers. Hypermarket should be placed in strategic location especially near to residential area. Some stores of Tesco are opened 24 hours per day to ensure that it is convenient for the customers. To be differentiated from others, some hypermarket also created online shopping website, for example Wal-Mart.
2.5 Rivalry among Existing Firms
Rivalry among existing firms means the competitiveness among the same industry. It is placed in the center of diagram as seen in Figure 1.1, which means it is affected by all other forces, include the bargain power of buyers and suppliers, and the threat of new entrants and substitutes.
Rivalry among existing firms in hypermarket industry is very high, there is a lot of competition among each others, for example some of the mass players in this industry are like Carrefour, Tesco, Wal-Mart, Jusco and etc. Consequences of high rivalry competition are like price war, advertising war, introduction of new products and so on. These are expensive to compete and therefore the exits barrier is high. According to Michael Porter, when an industry has high exit barriers and high entry barriers, the industry will have high return and risky return. Thus, hypermarket industry will have high and risky return.
If all other competitors offer equally attractive products, then one will have very little power in this situation. To compete with these numerous of mass player in the market, one must come out with strategies that create the customer’s loyalty toward their hypermarket. A lot of hypermarkets created their own member card that entitles customers to get further discount, or collect points to exchange with gifts or other products. Co-operations with banks are also a good idea to maintain the customers for example those that apply ‘Giant-Citibank Credit Card’ will get a permanent discount at certain rate. This strategy can maintain some of the clients of Citibank to be the regular customers of the hypermarket as well.
2.6 Impact of Porter’s five Forces on Hypermarket Industry
According to the figure above, it is seen that the bargain power of buyers, threat of substitutes and rivalry among existing firms are having a high impact in hypermarket industry. The impact of bargain power of suppliers is medium, while the threat of new entrants is low. Michael Porter argued that when a competition in a certain industry is high, that industry became unattractive (http://www.brs-inc.com). Theoretically, hypermarket is an unattractive industry because the rival and competition within the industry is very high. Although the margins of hypermarket industry are low, the industry is still profitable because they are selling their products at a very high volume.
3.0 Generic Strategies for Competitive Advantage
Michael Porter argues that there are three fundamental, i.e. generic, strategies in which companies can achieve sustainable competitive advantage. These are cost leadership strategy, differentiation strategy, and focus strategy. According to the theory, every business needs to choose one of these strategic options in order to compete in the market place and gain sustainable competitive advantage (Lynch, 2003)
3.1 Cost Leadership
To be the cost leader in the market company must keep their overall cost in a low profile. The company must manage cots in every activity relate to the service. By keeping these expenses low they can achieve the target of outputting the lowest service to the customers. These costs are not only the buy and sell transactions but all the costs of interacting with every part of the company activities (Dess, Lumpkin, ; Eisner, 2003).For example, Tesco is maintaining a well balanced supply chain management. That’s the reason they can provide low cost goods for their customers. The key functional areas of cost leaders in retail market is to keep goods supply in a low range. Tesco is capable of achieving this challenge by introducing Tesco’s own brands and good supplier relationship. These moves from Tesco will help to minimize the threats from the five forces.
Differentiation strategy usually stress on delivering products where customers perceive as valuable and different. Differentiators target customers is smaller, well-defined segments who are willing to pay premium prices. The strategy used a low-volume, high margin approach. The ability to charge higher prices enables differentiators to outperform competitors that are unable to do the same. In hypermarket industry, the differentiation is more to own branding or differentiated shopping environment for the customers. To be differentiated from others, some hypermarkets provide different services such as home delivery, providing online purchasing, and so on.
Porter states that a focus strategy serves the needs of a particular segment or niche of an industry. The segment can be defined by geographical market, by type of customer, or by product line. Focused firms usually serve the needs of a segment so unique that broad-based competitors choose not to serve that same segment (Peng, 2006). A focused firm is known either as a specialized differentiator or a specialized cost leader. In hypermarket industry, most of the hypermarkets will be in focus cost-leadership segment since the concept of hypermarket itself is focus on low margin but high quantity.
3.4 Hybrid Theory
Hybrid theory is focusing on a combination of both cost-leadership and differentiation. There is various hypermarket focuses on both differentiation, in terms of customer services, look and feel of the stores, and loyalty schemes, and also the cost-leadership in terms of providing the products and services at a lower price but in high volume.
According to the research above, it is seen that Porter’s Five Forces does apply in all types of businesses and industries including the hypermarket industry. Porter’s Five Forces allows a firm to understand which of the forces are affecting their business. In order to gain the competitive advantage status and protect itself from the competitive threats such as the substitutes and new entrants, a firm should quantify which of the forces are affecting them and then choose the appropriate strategy, improve their weakness and strengthen their opportunity. Firms facing vigorous competition should continuously strive to reduce costs, boost product quality, raise productivity and develop innovative products.
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