The five forces model can be applied to the retail sector.
The five forces model is a strategic analysis tool developed by Michael Porter, a Harvard professor and the godfather of contemporary strategic management. Porter identified five forces, external to a business, that can threaten the business: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes and rivalry among competitors. It is simple to apply the five forces model to a retail business simply by considering each one of these forces individually as they exist in the market of the retail business.
Instructions
1. Write down a list of the suppliers that the business depends on and then write down the degree to which they have bargaining power. If your supplier is the exclusive supplier of a product, or if it supplies a rare product, it has a lot of bargaining power. If there are many suppliers offering the same product, your supplier has low bargaining power.
2. Write down your main customer segments. Consider how much bargaining power these segments have and write down your assessment of this bargaining power. Individual consumers generally do not have much bargaining power except to negotiate slightly on the price in some retail environments. There may, however, be exceptions to this.
3. Write down a list of opportunities for new entrants to enter the market. Assess how easy it would be for them to enter and write down an assessment of how strong the threat of new entrants is. If you have an exclusivity deal with your supplier, you know that the threat of new entrants is very low. Another factor that affects the threat level is how expensive it is for new entrants to enter the market.
4. Write down a list of potential substitutes for your business. An example of a threat to book retailers is the advent of online commerce. Write down your assessment of how strong this threat is. You need to consider all possible products that could replace your business or take a large portion of its business away.
5. Write down your assessment of the level of competition that your business currently faces in the marketplace. If you have few competitors, you have a low level of competition. If you are in a crowded marketplace, the level of competition that your business faces is much higher.
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