Question

After reviewing Michael Porter’s “Five Forces Model”, discuss each of the forces within the context of the industry in which your organization operates. Which of the forces have the greatest impact upon your industry…and why? How should your organization’s strategy account for these factors? Do these forces have any correlation to your industry life cycle?

Answer 1

The following is the analysis of Alibaba by Porter's five forces model:

Threat of new entrants

Threat of new entrants refers to the threat posed by the new entrants to the existing competitors in any industry. Following is the analysis of Alibaba with respect to new entrants:-  

Barriers to entry

Barriers to entry in e-commerce are generally low and this is true in case of Alibaba as well. Internet is known to level the playing field between a giant and a newbie. Anybody can open a website and start business. And this can be one of the reasons why Alibaba is still a bit vulnerable. In India, government allowed 100% FDI in e-commerce industry and this might lead increase in the no. of new entrants, thus increasing the competition.

Economies of scale

Alibaba, despite being different from what Amazon is, still works on economies of scale. Profits per transaction are low in this industry and companies have to do business on a very large scale to have a chance of making profits. This nature of e-commerce industry or online marketplace works in favor of Alibaba and helps them in stopping the entry of new entrants.

Government policy

Government policies in India and abroad regarding e-commerce and online marketplaces have been mostly favorable to various businesses. In India government has allowed 100% FDI which helps to make this sector even more attractive for the new entrants. Even in China, where Alibaba is a big force, government policies are very friendly towards e-commerce companies and thus it creates some competitive pressure on Alibaba.

Expected retaliation

Expected Retaliation is something that any new entrant should take into account. E-commerce, in general has companies like Amazon and e-bay that can put loads of money to drive their competitors out. This is true for Alibaba as well. With its massive cash reserves, it can handle some loss as well if it helps them in driving out their competitors. Hence, overall entry for any company thinking about competing with Alibaba is very difficult.

Distribution Network, Geographic Factors and Brand Name

Alibaba boasts of one of one of the best distribution networks in industry. This helps it to minimize delivery time and costs. Replicating this type network will be very newcomer. Also, China is Alibaba’s playground and has a massive market share there. As China is a country which doesn’t allow too much foreign investment, Alibaba is left with basically no competitors there. With that, Alibaba has a big advantage of brand name. A person looking for various products under one roof would rather visit Alibaba instead of any other new entrant.

Bargaining power of suppliers

Suppliers of Alibaba don’t have much bargaining power. There are thousands of suppliers that sell their products on Alibaba. If a supplier is adamant about certain things, Alibaba at point of time decrease its supplies from that supplier and choose another one over it. This hurts suppliers’s profits, and hence the supplier has no option other than going with Alibaba’s demands. Also because Alibaba has a diverse distribution channel, no single distributor has enough power to counter it. Thus, this is a positive thing for Alibaba.

Bargaining power of buyers

Product differentiation

Alibaba doesn’t sell any product that is different from its competitors. All the products sold by Alibaba can be sold by any other e-commerce business as well and consumers can buy these products from them. This puts some power into the buyer’s hand. Despite of this effect, Alibaba with its amazing product handling capacity has come out on top.

Availability of Product

This is one of the biggest strengths of Alibaba. When buyers have to purchase lots of products, or customized set of products, they tend to purchase everything from a single place only. This works in favour of Alibaba because of its diverse product range. Not every e-commerce business can host a television set and a shirt together. But Alibaba does exactly that and thus offer buyers a massive range of products to choose from.

Threat of substitute products

In case of Alibaba, the threat of substitutes is moderate to high, given the fact that there are other business models that can eat up the share of Alibaba. Despite of the fact that the competition from substitutes depends upon the quality of service and cost, other competitors like Amazon etc. and logistic companies like FedEx have been able to compete with Alibaba. This puts Alibaba to improve upon their performance and come up with something new to keep their competitors at bay and handle the threat of substitutes.

Intensity of rivalry

Capital Requirements

Alibaba is different from Amazon in the sense that it doesn’t have any inventory of its own. It provides an online marketplace kind of an environment for retailers who want to sell their products online. It doesn’t sell products of its own either. This makes Alibaba far lesser capital intensive than any other e-commerce company and helps it grow faster. This gives them an edge over companies like Amazon and Flipkart(India). Amazon in December 2014 and Alibaba in March 2015 generated nearly $6 billion cash from operations. Amazon spent more than $4 billion of this cash in capital expenditure, which was primarily towards developing an additional capacity for its operations. Of this, about $500 million were spent towards internal use software and website development. Alibaba, on the other hand, spent only $769 million on capital expenditure last fiscal year. Since Alibaba's capital expenditure is primarily on its technology platform, it is much lower than that of Amazon. (Team, 2015)

Exit Barriers

In Ecommerce industry, the barriers to exit, similar to barriers to entry, are low. There are no patent issue and very little government regulations to care about before exiting the market. This, despite promoting entry of new businesses, throws out the weaker businesses in the long run. This characteristic of ecommerce industry proves beneficial to the companies like Alibaba and increases their profits.

Complementary’

Complementary’ are products or services that can be purchased along with the main product. The best part about Alibaba is that one doesn’t have to visit any other online store to purchase a product related to a different product. You can get everything under Alibaba’s umbrella, and this makes Alibaba such a strong force in case of complementary products.

Switching costs

Switching costs in case of ecommerce industry are pretty low. People tend to buy products from stores where they find it cheaper. Thus this is a factor that restricts Alibaba to a certain extent.

Access to distribution channels

Distribution channel of Alibaba is something that throws a lot of its competitors out of the market hands down. With its products reaching even the remotest of places in China, Alibaba has pretty much covere this front of their business.