Michael Porter developed the Five Forces Analysis model as a tool for the external analysis of firms.
Costco is among the leading brands in the retail industry. Apart from being one of the three leading retailers in US, it is also the leading membership based warehouse chain in the world. The brand has utilized an unconventional business model. It is best known for its low prices and its excellent customer service.
The brand holds immense clout over its suppliers and has created a strong brand image in the industry. Bargaining power of suppliers: The reason is that Costco is a large retailer brand that makes bulk purchases from its suppliers.
This gives it immense clout and bargaining power against them. In such cases, where the purchasing brand has higher influence, the suppliers are bound to follow the rules it sets. The same applies to Costco suppliers who have to follow ethical practices to remain a supplier.
All these factors reduce the bargaining power of the suppliers while giving the retailer better bargaining power. Bargaining power of buyers: Costco is a membership based retail chain.
Its buyers are members that generally buy products in bulk. However, when it comes to individual members, they do not hold enough clout or bargaining power. Moreover, the brand offers low prices to its members. They can switch to the other retailers like Walmart but the same convenience and kind of customer service is not available at all brands.
Moreover, a membership at Costco provides some exclusive advantages. All these factors keep the bargaining power of the buyers of Costco low. There are not many substitutes for the customers of Costco that can offer similar convenience or low prices. Apart from Walmart and target there is hardly a brand that can offer competing prices or convenience.
Customers can switch to the other brands but then the same convenience, customer service and matching prices will not be available. The threat of substitutes gets mitigated by the excellent customer serviced that Costco provides as well as its low prices and other exclusive benefits available to its members.
Overall, the threat of substitutes for Costco is low to moderate. Threat of new entrants: The threat of new entrants for Costco is low. The kind of supply chain and distribution system that Costco has managed is not easily imitable.
Its competitive advantages and brand image of an ethical and accountable brand cannot be obtained or imitated easily. There are other factors too that limit the chances of new players entering the market. Apart from capital investment, there is also a need of skilled human resources to build a brand like Costco.A firm planning to enter an industry should carefully analyze Porterâ??s five forces in the context of its own strengths and weaknesses, as well as its capacity to respond to these forces.
A Costco in Neihu, Taiwan. In Costco Wholesale Corporation’s Five Forces analysis (based on Porter’s model), the external factors in the retail industry environment emphasize competition, customers, and substitution as the strongest forces.
Amazon must address the major forces of competition, consumers and substitutes, based on the Porter’s Five Forces Analysis of the business. It is recommended that the company must address the strong force of competitive rivalry by emphasizing competitive advantage and .
Competition Analysis Porter’s five forces model analyzes the five competitive forces that shape every industry: intensity of industry competition, potential of new entrants into the industry, the power of substitutes, the power of suppliers, and the power of buyers.
The five forces model of analysis was developed by Michael E Porter. It is used widely across the industry for the analysis of the forces that shape competition and to analyse how favorable the situation is for any brand. Porter's Five Forces Model Porter's five forces analysis is the structure framework for industry analysis and business strategy development.
(Porter, M.E. ) Using Porter's five forces analysis is a way to figure out the different firms competition levels and force of said "attractiveness" of a market.