Rivalry among departmental stores
The growth of the department stores industry in the recent past has intensified the rivalry among the many players. There are different fronts from which the competitive struggle is fought. It has almost become commonplace for department stores to engage in price wars, product design, intense advertising as well as huge promotional spending. Furthermore, the players in the department store are increasingly engaged in calculated direct selling efforts together with after-sale service plus support techniques (Daft, 2012). The intense rivalry has served to lower the prices of goods and services offered by the department stores to the benefit of the consumer.
The competitive nature of the department store industry makes the players to opt such competitive measures as enhancing product offerings to retain customers together reducing the prices to below break-even levels (Ehmke, 2010). There are a number of rivalries that influence the intense rivalry among competitors in the industry:
i) one big department store or several small firms may offer incentives to customers in the effort to become market leader. It is common to see intense rivalry between or among dominant department stores in the effort to attain the market leader status.
ii) Secondly, the rivalry is high because the goods dealt in are usually perishable and thus must be sold as quickly as possible. This results in the stores adopting aggressive pricing measures because of the threat of losing inventory resulting from spoilage or if the costs of storage are high.
iii) Non-homogeneous or non-unique commodities bring about intense competition among the department stores because of lack of any insulation from price competition that they face.
iv) The great freedom to switch between products on the side of the consumers heightens the rivalry among players because of the jostling for market share (Hill & Jones, 2009).
A s a means of survival, the players in the established department store industry react to the threat of rivals through a number of tactics. These include stepping down price wars, differentiating their products from those of competitors, laying emphasis on a unique cluster of the market, distribution of products through a novel channel, as well striving to build stronger relationships and establish customer loyalty. Furthermore, established department stores are increasingly managing the threat of rivalry by buying out their competition (Daft, 2012). Lastly, the department stores also make sure they are in constant communication with each other so that neither is caught off guard with a new strategy.
Threat of new entrants
The department store industry is increasingly attracting new investors. This is largely due to the low barriers pertaining to entry that are in the department store industry as compared to others. The conventional barriers to entry include: economies of scale, high starting investments and fixed costs, brand loyalty for customers, protected intellectual property such as patents and licenses, scarcity of important materials, control of raw materials and distribution channels by incumbent firms, and government legislation. Comparatively, therefore, the cost of entry for new entrants is relatively low besides the industry itself is nor guarded by regulations or stringent patents (Hill & Jones, 2009). As such, there is always threat of entrants who can open department stores provided they have just enough capital to undertake such investment.
The threat of entrants is further heightened by the fact that products dealt in are often gotten on discounts especially in the bulk purchases. Similar to the advantage provided by Porter’s rivalry element, the high risk of new entrants serves good the consumer because it lowers the prices of goods and services offered by the department stores in the market. It is on this background that established department stores are often discouraging potential competitors from venturing into the industry. They do so in an attempt to preserve their market share and keep their profit margins high because of the high prices. However, the new entrants are always finding a means to circumvent the barriers put in place the incumbent firms and thus increasing the competitiveness of the industry altogether (Hill & Jones, 2009). The new entrants often alter the key determinants of the market environment such as market shares, customer loyalty as well as prices of products and services.
Bargaining Power of Supplier
All businesses require input for example labor, materials and services. Therefore, the general cost of these inputs significantly affects the performance on of the company in terms of its profitability. In regard to departmental stores, the strength of suppliers will ultimately determine the amount of leverage or influence that they will exert and to a large extent influence certain terms and conditions of business dealings in their favor (Ehmke, 2010). For example, suppliers who sell goods at very high prices leave little room for profitability for departmental stores. However, if the force is weak one can easily negotiate favorable business dealing. Conversely, in cases where the force is strong the departmental store may have to pay the higher price or even have to part with a lower quality level of service or product.
Factors Affecting the Bargain Power of Suppliers in Departmental Stores
Suppliers have most influence in a number of ways:
When products required are available from relatively few supplies. For example you are required to stock the Apple products the departmental store will have little or no influence with Apple in determining the price of its products .
Secondly, when products required are unique thus making it very difficult to change suppliers. For example, if the departmental store in reliant of certain ERP system for managing its computer systems it will be extremely costly to acquire a new one. Therefore, in such case suppliers of such system have greater bargaining power.
Purchases that do not represent a large portion of the supplier’s business in such case the supplier is at will to supply given the terms and conditions. This makes the department store to have less influence or negotiate in its favor. In this respect, Wal-Mart has strong influence over its suppliers since their purchases usually account for large portions of their suppliers’ business (Ehmke, 2010).
Suppliers, especially manufactures, sometimes tend to bypass the retailers and sell directly to customers. For example, Apple computers opening Apple retail stores and compete with other departmental stores. Furthermore, a poor understanding of the supplier’s market and the dynamics in the supplier’s market leaves the department store with less influence to determine the supplier market forces and costs.
Most businesses tend to concentrate their efforts on their core business. By doing so, they spare less effort on resources that produce the input. Consequently, this tends to put them at a disadvantage in terms of inventory cost, inefficiency in the delivery of goods and services and adoption of new technologies. Departmental stores should embrace an approach that seeks for partnership with their suppliers which will result in a more even distribution of influence. This was well underscored by Dell Computers after partnering with key suppliers, reduced cost, improved on quality and became a market leader.
Bargaining Power of Buyers
The power of buyers will determine the overall profitability of the business. The interaction between the seller and buyer creates value between the parties. The buyer gets the goods or services while the department store realizes sales and gains profit. As such, it is mutually beneficial to both parties. Nonetheless, when the buyer exerts or have more power the department store’s ability to generate more value will decrease and so will the profit (Ehmke, 2010).
Factor Influencing the Bargaining Power of Buyers in Departmental Stores
first, the product represents huge expense to the buyer. For example, customers generally do not price the quote of oil, rather the price of purchasing a new car.
Second, customers have access to market and pricing information of certain products. This renders the sellers with less room to influence the buyer or negotiate for higher prices.
Third, if the product is not unique and can be easily bought from other suppliers the buyers tend to make their purchase decision on pricing of the product. Furthermore, buyers have more bargaining power if they have the potential to easily manufacture the product themselves as in the case of Heinz and Coors. It thus forces manufactures of such products to have improved packaging and used metal containers.
Another factor lifting the bargaining power of buyers in department stores is their tendencies to easily switch to other products while incurring little or no costs. This implies that buyers can easily move from one brand of departmental store to another at no cost in line with his or her preferences and taste.
Reducing the Bargain Power of Buyers
Departmental stores can reduce the bargaining power of buyers by creating loyalty programs in the business, employing direct selling or buying, and creating perceived value through branding. This way a department store is able to retain and maintain customers as well as enhance profitability in the business (Ehmke, 2010).
Threats of substitutes of products and services
Just like other industries, the department store is also greatly affected by the threat of substitutes. This is due to the fact that the bulk of products dealt in by department stores are undifferentiated. This is to say that department stores do not specialize in a single good or service but rather deal in a wide range of products and services. This increases the chance of customers to easily switch away from one department store to another because are guaranteed of finding the same product or service. This underscored the need for department stores to always put into consideration the options their customers have at their disposal to satisfy their needs. As such, department stores are forced to stalk products that are almost similar if not exactly the same (Daft, 2012).
The existence of alternative products having lower prices or superior performance or both is a real threat to the varied players in the department store industry. This is due to the tendency of substitutes to put a price ceiling on products and services. In effect, there is a shift in demand of high priced commodity or service offered by one department to an alternative that is supplied by another department store. Furthermore, the aspect that there are close substitutes in the department store industry, is often more difficult for a given store to adjust its prices upwards and reap greater profits without risking loss of customers.
In summary, therefore, substitutes pose a real threat to the players in the industry because it easy for consumers to switch to rival because the products of one store do not usually have particular benefit over those of others. Also, given that customers often have little brand loyalty, the threat of substitutes is enhanced especially because price is the key motivator of customers. Finally, the profitability of the industry is therefore undermined by the high threat of substitutes (Hill & Jones, 2009). It is only those stores that have products or services that are unique which have some advantages over their rivals. To counter the high threat posed by existence of close substitutes, many department choose to stay closely in tune with the preferences of the customer besides resorting to differentiate their products by branding. Well established department store use their great economies of scale to conduct massive advertising to levels that are unreached by the competitors (Daft, 2012). Lastly, much careful consideration is paid to the existing alternatives available to customers and then strategic measures employed to address them.
Future Trends of Departmental Stores
The current trends in the retailing will be greatly influenced by the role of technology in the real and virtual worlds. Technology will be used to gather information about what determines the buyer buying decisions. Furthermore, the buying experience of customers will be improved by the use of laser-scanners to get more information about products they wish to purchase. In this respect, E-Commerce will be transformed into a more inclusive Internet-based sales channel for the departmental store (Ehmke, 2010). It will also be used to determine the purchasing history of the buyer and when to anticipate the buyer next purchase. Therefore, use of targeted advertisement to induce the purchase of a product is a probable trend in the department store industry meaning products will be bought online and picked online.
Finally, departmental store owners will use technology to manage supplier’s data by creating directing links between their computer systems and their suppliers. The net result of this will be an improved overall turnover time, improved contact management along with an improved understanding on how each party operates.
References:
Daft, L. Richard, & Marcic, Dorothy. (2012). Understanding Management. Connecticut, Cengage Learning.
Ehmke, C., Fulton, J., & Akridge, J. (2010). Industry Analysis: The Five Forces. Agriculture Innovation and Commercialization Center , 1-13.
Hill, Charles, & Jones, Gareth. (2009). Strategic Management Theory: An Integrated Approach. Connecticut, Cengage Learning.
