Porter’s Five-Forces Analysis Porter’s Five Force analysis breaks down competition into five market forces for industries or companies. It discusses the threat of new entrants, the bargaining power of new entrants, the bargaining power of customers, the bargaining power of suppliers and the threat of substitute products or services. A company can protect themselves and attack their rivals with proper knowledge of Porter’s Five Force analysis and applying it to their company. Let’s explore Costco Wholesale and the market forces in Porter’s Five Force analysis. Bargaining Power of Suppliers The bargaining power of suppliers is low in the industry that Costco Wholesale competes in. Costco has a short inventory turnover ratio and is constantly placing large orders in order to keep their shelves …show more content…
stock. Costco can set prices to buy from suppliers since they place so many orders and order in large quantities. Costco also uses various suppliers and if one supplier defaults from a contract, Costco could obtain the products from another supplier without interruption of operations or causing difficulties. With the vertical integration they obtained from their Kirkland brand, they could afford to loose a supplier for a certain product and cut cost by producing that product themselves. Suppliers like companies like Costco because they pay on time and also take advantage of discounts on products in exchange for a quicker payment. Since no one supplier delivers a large percentage of products to Costco, they have little to no bargaining power. Costco can easily change suppliers if a supplier does not want to sell to them at a certain price. Suppliers would rather give a discount on a large order than to loose the contract to another supplier who would be willing to give them the discount. Costco cannot be pressured by a supplier to buy at a higher price, better price for the supplier or better terms of sale for the supplier. This takes the bargaining power away from suppliers because Costco sets the prices and can easily changes suppliers if they do not like the terms of a sale from a supplier. Bargaining Power of Buyers The bargaining power of buyers in the wholesale industry that Costco partakes in is low. Since Costco has millions of members, no one member holds a significant portion of total sales. The members at Costco cannot negotiate over prices or terms of sale on an item. They can choose to not renew their membership but this would have no impact to their bargaining power. Buyers are affected by changes in price and Costco offers very low prices on their products. Costco caps its markup for name brand items at 14%, which is 6-36% lower than many grocery stores. They also offer their members Kirkland Products witch they cap its markup at 15% but most of the Kirkland products are about 20% less expensive than the name brand products. Threats of Substitute Products or Services—a strong competitive force Costco faces a high level of threat of substitute products.
Costco sells its products in bulk, and many households and small businesses do not need to shop in bulk. Customers do not a loyalty to buy at Costco; they will shop where it is more convenient for them, without having the price be extremely high. There are many alternative channels of distribution for products such as supermarkets, retailers, online retailers, specialty stores, etc. Costco has a limited selection on what items it stocks. Customers are willing to pay a little more to shop at retailers that have a larger selection of items. There are far more locations for supermarkets, retail stores and convenient stores than there are of Costco locations. One of the new substitutes that emerged in this industry is the online retailer. Amazon Fresh is one of the new ones, providing customers with the ability to shop from home and get groceries deliver that same day straight to their homes. Eliminating hassles such as driving to the store, looking for parking, waiting in long lines and being in a crowded store. There is no product differentiation between the products sold at Costco and those sold at other
retailers. Rivalry in the industry The rivalry Costco faces in the industry is high, with its main rivals being Sam’s Club and BJ’s Wholesale. All three wholesale warehouses offer super low prices to obtain members. It is easy to change memberships from one wholesale warehouse to the next, consequently creating rivalry. Sam’s Club and BJ’s Wholesale offer a wider selection of products to their members than that of which Costco offers its members. All three of the wholesale warehouses offer the same type of products and brands, making them hard to differentiate and adding to the rivalry. Costco also faces competition from other retailers like, Wal-Mart, Target, Kohl’s and Amazon.com. They offer many of the same types of products Costco offers and at low prices too. Warehouse clubs compete with low prices, locations, high quality products, selection of products and member service, the warehouses and retailers stated above can compete with Costco on different levels because of this. Potential of new entrants into industry The potential of new entrants into the industry is low due to the economies of scale Costco shares along with its rivals. In order for a new entrant to come into the industry they would need a sizeable amount of capital. They also would not be able to compete with Costco’s millions of memberships. The industry for wholesale warehouses is very competitive and has already three strong entities that work fiercely to protect their assets. Entry into the industry would be extremely difficult.
As strategy consultants of McCormick & Associates, we use Porters Five Forces Model as a framework when making a qualitative evaluation of a firm's strategic position (Appendix 1.2). These five forces determine the competitive intensity and therefore attractiveness of a market. These forces affect the ability of a company to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the market place.
There are ten elements needed to survive a zombie apocalypse: a steady food supply, clean water, medicine, transportation, gas, a defense system, a sturdy shelter, a safe place to sleep within the shelter, weapons, and simple tools. Costco supplies all of these items. According an article in The Concordian, “If you asked 100 people where they would hide during a zombie apocalypse, 98 would say Costco. Costco is a vast market that sells basically anything you would need to live there permanently” (Menexis). Unfortunately that still leaves those two out of one hundred people that disagree. Those people say that Costco would be an unwise place to be during the apocalypse because of its sheer size. They state that the massive size of a Costco store is too big for a person or even small group of people to defend. While this argument has a logical line of thinking behind it, there are several factors that render this viewpoint invalid. Costco does not need a huge defense system because it is literally a huge warehouse. This means that Costco is essentially a huge concrete box with two ope...
The suppliers bargaining power is generally strong because of the big monopolies and the high importance of purchasing components and operating system, therefore it decreases the profitability of the market players.
Costco Wholesale Corporation is an international chain of membership warehouses operating on the concept that offering members lower prices will produce high sales volume and rapid inventory turnover (“Annual Report” 4). While Costco warehouses are designed to help reduce costs for small-to-mid-sized companies, memberships are also available for individuals (“Company Profile”). The two memberships offered by Costco include Business and Gold Sta...
Promotion: Costco doesn’t have any conventional marketing/ promotion strategies like their competitors as they are not big on advertising. They email and mail their members flyers and product descriptions which help them maintain their customer retention. However, they don’t actively advertise to new customers, primarily relying on their current customers to advertise by word of mouth like Kimberley Peterson, the
Overall, Costco exploits the Porter’s value chain elements to increase the productivity and efficiency of its operations while also lowering the cost of margins related to the operations of the organization (Guo, 2016). These benefits result in different competitive advantages to the company, which in turn increases the profitability of the organization. For each of the Porter’s value elements, the different stakeholders of the company are also impacted positively. Financial Analysis of Costco Table 1:1 Financial Data in Comparison to the Competitors 2016 2015 2014 Costco Revenue 1620 1467 1350 Net Income 76 72
In the warehouse segment, Wal-Mart’s Sam’s Club competes harshly with Costco. Costco has fewer warehouses but greater sales and revenues. Costco customers also shop at Costco more frequently than Sam’s Club customers and, on average, spend more each visit as well. Costco’s dominance may be the result of better innovation. Costco offers luxury items and was the first to sell fresh meat and produce, and gasoline. This is important because innovation is a key factor in assessing competitors in an industry.
Porter’s Five Forces Model is a widely used tool by strategists to develop a competitive analysis, from which they will be able to develop strategies (David, 2013). When looking at Delta, it would be beneficial to look at the external forces this will help top management develop strategies to combat external factors, threats from external factors could potentially harm Delta. According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces: 1) Rivalry among competing firms, 2) Potential development of new competitors, 3) Potential development of substitute products, 4) Bargaining power of suppliers, 5) Bargaining power of
Porter’s five forces assist to evaluate where the firm’s power lie in a given market and the attractiveness of the firm to other companies and businesses with respect to buyer power, supplier power, threat of new entrants, competitive rivalry, and threat of substitution. With respect to Audible.com, their market is selling audio content online. Supplier power for Audible.com is medium to high. The firm has an advantage with its partners who offer only specific products through Audible.com less expensively as compared to other companies or websites. However, some of the audio content is offered through many other websites and stores, which can be used instead of Audible.com. As a result, this pulls the firm’s power from the highest on the market to medium power. In spite of that, Audible.com is a supplier of large audio content. The firm is famous for being respected and reliable. This implies that the commitment of outside firms offers the firm with a significant a...
Porter’s competitive forces model includes five forces that need to be analysed. These forces include the intensity of rivalry from traditional competitors, threat of new market entrants, threat of substitute products and services, bargaining power of customers and bargaining power of suppliers (Laudon & Laudon, 2007). See diagram below;
Porter’s five forces is a framework for analyzing an industry and business strategy development. It looks at forces that determine the competitive intensity of an industry and hence the overall attractiveness of that industry. The configuration of the five forces differs by industry. Understanding the competitive forces and their underlying causes reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition over time.
For assessing the industry profitability, Porter 5 Forces analysis tools were used to analyze one organization evaluation. In this case, the technique were used to analyze 7-Eleven Convenience Store specifically in Malaysia. Porter 5 Forces consists of 5 important area which is Threat of New Entrants, Bargaining Power of customers, Threat of substitute Products and services, Bargaining Power of suppliers, and competitive rivalry within the industry. Theoretically, the more powerful these forces in an industry, the lower its profit potential. The strength of each force differs by industry and changes over time. The competitive advantage that 7-Eleven has using these five forces is it has raised the barrier of entry for other competitors to enter the convenience store market as new competitors will require a huge capital investment in order to implement the information technology in their business in order to be competitive. Also, hypothetically being the first in the market, 7-Eleven could have made contracts with the Malaysia government to not allow other 24-hour convenience stores in the market for a certain time period, such as Astro had done, thus having a monopoly market in the beginning of their operations which will allow them to target a bigger market share.
The Porter five forces model (see Appendix 1) as an external analysis tool was established by Michael E. Porter and firstly announced in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980 . The main idea of the Porter five forces concept is that the attractiveness of a market depends on the characteristic of the five competitive forces that have an impact on a company (see Appendix 2).
These five forces include: bargaining power of suppliers, bargaining power of consumers, competitive rivalry, threat of substitution, threat of new entry. The bargaining power of suppliers, threat of substitutes, and threat of new entries are low for AVON, while the bargaining power of consumers and competitive rivalry is high. The beauty industry is less impacted by a recession; Brazil being a prime example. Competition is competitive in all markets both domestic and foreign. AVON entered the Brazilian market before the competition, but is now battle grounds for entry between L’Oréal and Sephora. AVON is the number one company for direct selling method and marketing (AVON, 2016). Porter’s five forces are similar between domestic and foreign
Another part of Amazon’s retail strategy is to serve as the channel for other retailers to sell their products and take a percentage of cut of every purchase. Amazon does not have to maintain inventory on slower-selling products. This strategy has made Amazon a ‘long tail’ leading retailer, expanding its available selection without a corresponding increase in overhead costs.