Competitive analysis of Chinese E-Commerce Industry with Porter’s Five Forces model (1980)

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Competitive analysis of Chinese E-Commerce Industry (B2C Sector) with Porter’s Five Forces model (1980)

Around 1980, Michael Porter (1985) introduced his highly influential concepts of the five forces model and the value chain and the five forces model according to him could determinate an industry’s attractiveness by looking into five external forces:
1. Competitive rivalry within an industry
2. Bargaining Power of Suppliers
3. Bargaining Power of Customers
4. Threat of New Entrants
5. Threat of Substitute Products

The five forces are also the five key players in most business markets, the interaction and bargaining between these five forces is believed to be critical and of great importance to the determination of the competitive extent of an industry or market. Below we will implement a competitive analysis using the Porter’s Five Forces model (1980) to see how intense the competition would be in the Chinese B2C market.

 Competitive rivalry within an industry – medium level

Competitive rivalry among the existing firms in an industry is the extent to which firms respond to competitive moves of other incumbent firms (Stahl & Grigsby 1997, p.147). Various data and new reports suggest that with the further spread of Internet applications, B2C and other e-commerce model are in the booming in these few years in term of a dramatic growth. Based on the analysis think tank that recently released, “the third quarter of 2011, China’s B2C market quarterly monitoring” data demonstrating that during the third quarter of 2011, the Chinese B2C market transactions grew by 137%. Strong demand results in even stronger supply growth, based on the CNZZ data which suggested that during the calendar year of 2010 the number of B2C website grew in a surprising speed from 10,100 in early of December to 1.18 million, the growth rate of 20.45%, a growth rate that exceeds the overall industry growth speed of the e-commerce. What is more the CNZZ June data also show that, B2C industry, the total number of sites had totaled 12,200 and still with a more than 200 per month rate of growth (ixwebhosting.mob 2011).

Another factor that increases the intensity of the internal competition in the B2C industry is the existence of the large B2C websites such as the largest Taobao Mall, QQ Mall, Jingdong, Amazon and Dangdang. For example so far in 2011 many of the existing B2C websites have already raise campaign to compete with each other. The first moves of the QQ Mall launched the “million marketing resources in the run,” commitment to the business community to provide “an efficient, high quality, low-cost e-commerce platform”, and only pay 20,000 yuan deposit costs, eliminating fees for technical services. Dangdang is committed to continue to maintain the industry platform for business charges a lower level, such as business management platform to maintain about $500 per month, the same proportion of sales commissions, etc. Just on the line items together near grand network is launched at one go 12 incentives, including fee-free three-year technical services (5888 yuan per year), donated 50,000 yuan platform advertising resources ( 2011).

Chart 1 The online shopping market growth in China
Source: 2011

But still two factors contribute to the medium level of rivalry within the exiting companies in the B2C market in China rather than a seeming high level of competition: the first factor is the on going increase the B2C market size. According to iResearch’s data as the chart shows, each segment of China online shopping market has the growth of different level and the fastest growth rate belongs to the B2C sector (including and which has a growth rate of 19.5% ( 2011). With an enlarging market size, it is expected that many B2C companies will focus on getting the attention of the new customers rather than gaining the competitors’ share by intense marketing efforts which means that the direct fierce competition among the existing players will be lowered to some extent; the second factor contributing to the medium level of rivalry rather than a high level within the exiting companies in the B2C market in China is the differentiation of the B2C business model. In a growth stage of the B2C industry, we can see that there are different models of B2C such as the raise of the D2C (designer to customer) model. When these sub market appears, differentiation will help avoid direct price competition because product are marketed and positioned differently.

Bargaining Power of Suppliers – low

The bargaining power of the suppliers can be shown in their ability to charge a high price in the supply demand relationship with the B2C companies. Based on the perspective of Robert P. Greenwood (2002, p. 128) since the suppliers wish to charge the highest prices for their products a power struggle arises between organizations and their suppliers, the advantage accruing to the side which has more choices or less lose if the relationship ends. To the B2C market in China, the supplier bargaining power is in a low level for the following three reasons: first of all, the input contributed by the suppliers is not indefensible to the B2C platforms. Most people who go the the B2C website are looking for products with similar functions and they probably would not name a specific brand which means the input offered by the suppliers is not a must to the B2C websites; the second reason is that there is little switching cost for B2C companies to change to other product suppliers since the products are not sold in a physical store, changing the suppliers would in most case equals to the changes of pictures and description in the websites. What is more, the fact that there are usually no substantial warehouses held by the B2C companies actually minimize the switching cost of the B2C companies and hence reduce the bargaining power of the suppliers; thirdly, the B2C companies are very important customers of the suppliers. Because of the usual large scale of the B2C companies in term of large volume of purchasing such as Taobao Mall, the importance of these B2C companies have at the same time reduce the bargaining power of the suppliers.

Bargaining Power of Customers – Medium

Buyers or customers have a great power if buyers are concentrated and there are few of them or if the product from the organization is not clearly differentiated from the product from other suppliers (Berger 2010). In the B2C market, the customers are the individual customers who tend to have medium bargaining power for the following four reasons: first of all, the individual customers are scattered in different places and they purchase products on line via the B2C website in different times and also they tend to have little communications with each other so that they are in most time alone and thus have little bargaining power with the large  B2C websites; secondly, the units purchased by the individual customers each time tend to be small in volume. As according to my online shopping experience and also some of my friends’ experiences, many individual customers go to the Internet time by time when they are looking forward for some products but the each time purchasing volume would not be large in most time because the demand are individual needs rather than group needs; thirdly the individual customer could have increased their bargaining power by choosing a different B2C websites since the switching cost would not be high either, the threat of changing to the competing websites will be strengthened by the current trend that the B2C websites are growing in numbers, there would be more choices to the individual customers; fourthly, the individual customer could have increased their bargaining power by using group purchasing which could be traced to China where tuángòu or team buying was executed to get discount prices from retailer when a large group of people and it has becoming more and more popular in the recent years. And with this trend, many B2C websites have already supported the group purchasing function and it will leverage the power of collective bargaining to provide incredible online deals that offer huge savings for consumers while also promising spectacular sales numbers to participating merchants ( 2010).

Threat of New Entrants – High

Threat of the new entrants depends for instance on the extent to which entry barriers are present in an industry (e.g. economies of scale, capital requirements, access to distribution channels and so on) (Lebel, Lorek & Daniel 2010, p.181). The threat of the new entrants in the B2C market in China will be in a high level for the following reasons. First of all, the capital requirements to open a B2C website are relatively low. B2C websites could be in large scale or in a smaller scale depending on the visiting volume of the customers, for example the investment of a large scale B2C website could begin with a smaller scale one because in the beginning the visitors are small in numbers. And to many companies that have their own products, they could also enter into the B2C market by adding the B2C functions into their official websites; secondly, many exiting successful C2C website with the current popularity could easily enter into the B2C market using their existing customer base. For example, Taobao has long been China’s large C2C website but its growth into the B2C experiences a rapid process. As an independent B2C platform, Taobao Mall (Tmall) on April 10, 2008 on the line, now attracts more than 70,000 brands to enter, the highest single-day turnover reached 936 million yuan. Research released in April 2010, top 30 online retailers, B2C rankings, Taobao Mall 30 billion in annual trade among the first in the absolute superiority over the other 29 combined turnover of B2C Web site. Last year, Taobao Mall occupies nearly 50% of China’s B2C market share, ranking Jingdong Mall Second, the market share of 18.1%, Dangdang only 2.2% ( 2011). Thirdly, the distribution channel is not proprietary to the existing players. The distribution channels are the pathways that companies use to sell their products to end-users. Both B2C and B2B companies can sell through a single channel or through multiple channels that may include: direct/sales team, Internet, Value-added reseller and dealers and etc ( 2009). And to most B2C websites, Internet will be the major distribution channel and it would not be priertary to the B2C websites. What is more the logistic service is also open for all B2C companies and C2C shops.

Threat of Substitute Products – High

Substitute products refer to products in other industries. The threat of substitutes is higher, the stronger the supply of substitute goods affects the price elasticity. If the supply of substitute goods leads to a great change in demand and price of the substituted good, because the customer can switch easily to the other good, the threat form substitutes becomes very high (Mateo 2010, p. 36). Customers have several other choices when they do not choose to visit the D2C websites. First of all, they could choose to use the C2C platforms in which there could be thousands of online shops operated unofficially by the individual merchants and these merchants could usually provide even cheaper price than the product manufacturers because the manufacturers need to protect the wholesalers’ interest and keep the online retail price in a certain level; Secondly, the customers could straightly go to the physical stores and other various retailers to purchase the products rather than buying on line through which the customers could only view by pictures and descriptions but can not touch the product by their hands.

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