Examples of changes to the five forces

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In this section further examples are given of changes to the five competitive forces. Bargaining power of buyers

The increase in customer power and knowledge is perhaps the single biggest threat posed by electronic trading. The bargaining power of customers is greatly increased when they are using the Internet to evaluate products and compare prices. This is particularly true for standardised products for which offers from different suppliers can be readily compared through online intermediaries such as search engines and price comparison sites such as Kelkoo (www.kelkoo.com) or Pricerunner (www.pricerunner.com). For commodities, auctions on business-to-business exchanges can also have a similar effect of driving down price. Purchase of some products that have not traditionally been thought of as commodities, may become more price-sensitive. This process is known as commoditisation. Examples of goods that are becoming commoditised include electrical goods and cars.

In the business-to-business arena, a further issue is that the ease of use of the Internet channel makes it potentially easier for customers to swap between suppliers - switching costs are lower. With the Internet, which offers a more standard method for purchase through web browsers, the barriers to swapping to another supplier will be lower. With a specific EDI (electronic data interchange) link that has to be set up between one company and another, there may be reluctance to change this arrangement (soft lock-in due to switching costs). Commentators often glibly say 'online, your competitor is only a mouse click away', but it should be remembered that soft lock-in still exists on the web -there are still barriers and costs to switching between suppliers since, once a customer has invested time in understanding how to use a web site to select and purchase a particular type of products, they may not want to learn another service.

A significant downstream channel threat is the potential loss of partners or distributors if there is a channel conflict resulting from disintermediation (see section on new channel structures below). For example, a car distributor could switch to an alternative manufacturer if its profitability were threatened by direct sales from the manufacturer. The Economist (2000) reported that to avoid this type of conflict, Ford US are now using dealerships as part of the e-commerce solution and are still paying commission when sales are achieved online. This also helps protect their revenue from the lucrative parts and services market.

Bargaining power of suppliers

This can be considered as an opportunity rather than a threat. Companies can insist, for reasons of reducing cost and increasing supply chain efficiency, that their suppliers use electronic links such as EDI or Internet EDI to process orders. Additionally, the Internet tends to reduce the power of suppliers since barriers to migrating to a different supplier are reduced, particularly with the advent of business-to-business exchanges. However, if suppliers insist on proprietary technology to link companies, then this creates soft lock-in due to the cost or complexity of changing supppliers.

Internet EDI

Use of electronic data interchange standards delivered across nonproprietary Internet protocol networks.

Business-to-business exchanges or marketplaces

Virtual intermediaries with facilities to enable trading between buyers and sellers.

Barriers to entry reduced

For traditional companies, new online entrants have been a significant threat for retailers selling products such as books and financial services. For example, for the banking sector in Europe, traditional banks were threatened by the entry of completely new start-up competitors, such as First-e (www.first-e.com) (which later became financially unviable), or of traditional companies from one country that use the Internet to facilitate their entry into another country. US company Citibank (www.citibank.com) and ING Direct (www.ingdirect.co.uk) from the Netherlands used the latter approach. New companies were also created by traditional competitors, for example, Prudential created Egg (www.egg.com), the Abbey, Cahoot (www.cahoot.com), and the Co-Operative Bank, Smile (www.smile.co.uk). ING Direct has acquired millions of customers in new markets such as Canada, Australia and the UK through a combination of offline advertising, online advertising and an online or phone application process and account servicing.

These new entrants have been able to enter the market rapidly since they do not have the cost of developing and maintaining a distribution network to sell their products and these products do not require a manufacturing base.

However, to succeed, new entrants need to be market leaders in executing marketing and customer service. These are sometimes described as barriers to success or 'hygiene factors' rather than barriers to entry. The costs of achieving these will be high, for example, First-e has not survived as an independent business. This competitive threat is less common in vertical business-to-business markets involving manufacture and process industries such as the chemical or oil industries since the investment barriers to entry are much higher.

Threat of substitute products and services

This threat can occur from established or new companies. The Internet is particularly good as a means of providing information-based services at a lower cost. The greatest threats are likely to occur where digital product and/or service fulfilment can occur over the Internet. These substitutes can involve the new online channel essentially replicating an existing service as is the case with online banking or e-books. But, often, online can involve adding to the proposition. For example, compared to traditional music retailers, online legal music services such as Napster (www.napster.com) offer a much wider choice of products with different delivery modes (real-time streaming to a PC or the capability to burn onto a CD or download to a portable music device such as an MP3 player). In banking, new facilities have been developed to help customers manage their finances online by aggregating services from different providers into one central account. Such added-value digital services can help lock customers into a particular supplier.

From this review of the competitive forces, it should be apparent that the extent of the threats will be dependent on the particular market a company operates in. Generally, the threats are greatest for companies that currently sell through retail distributors and have products that can be readily delivered to customers across the Internet or by parcel.

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