Written byEwan Murphyam 20. November 2018
Porter's Five Forces Analysis
A model was suggested by Michael. E. Porter in a 1979 Harvard Business Review article. This model, known as Porter's Five Forces Model, is a strategic management tool that helps determine an industry's competitive landscape. Each of the five forces mentioned in the model and their strengths help strategic planners understand the inherent profit potential within an industry. The strengths of these forces vary from industry to industry, meaning each industry is different in terms of profitability and attractiveness. The structure of an industry, while stable, can change over time. These five powers of Porter are as follows:
- Threat of newcomers
- bargaining power of suppliers
- bargaining power of buyers
- Threat of Substitute Products or Services
- rivalry between existing firms
Porter's Five Forces model can be used to analyze the industry Zara operates in for attractiveness through inherent profit potential. The information analyzed using the model can be used by strategic planners for Zara to make strategic decisions.
Zara Porter's Five Forces Analysis
This section analyzes Zara against each of the five forces of Porter's model.
Threat of newcomers
- Economies of scale are quite difficult to achieve in the industry Zara operates in. This makes it easier for large-capacity manufacturers to gain a cost advantage. It also makes production more expensive for newcomers. This makes threats from new entrants a weaker force.
- Product differentiation is strong within the industry, where companies in the industry sell differentiated products rather than standardized products. Customers are also looking for differentiated products. Great importance is also attached to advertising and customer service. All of these factors make the threat of new entrants a weak force within this industry.
- The capital requirements within the industry are therefore high, making it difficult for new entrants to set up businesses due to the high expenditure involved. The investment outlay is also high because of the high research and development costs. All of these factors make the threat of new entrants a weaker force within this industry.
- Access to distribution networks is easy for newcomers who can easily build their distribution channels and get into the business. With few retail stores selling this type of product, it is easy for any new entrant to get their product on the shelves. All of these factors make the threat of new entrants a powerful force in this industry.
- Government guidelines within the industry require strict licensing and regulatory requirements to be met before a company can start selling. This makes it difficult for new entrants to enter the industry, making the entrant threat a weak force.
How can Zara counter the threat of new entrants?
- Zara can capitalize on the economies of scale it has within the industry and fend off new entrants with its cost advantage.
- Zara can focus on innovation to differentiate its products from those of new entrants. It can issue onmarketing to build strong brand identification. This will help him retain his customers instead of losing them to newcomers.
bargaining power of suppliers
- The number of suppliers in the industry in which Zara operates is very large compared to the buyers. This means suppliers have less control over prices and this makes suppliers' bargaining power a weak force.
- The products from these providers are fairly standardized, less differentiated and have low switching costs. This makes it easier for buyers like Zara to switch suppliers. This makes the bargaining power of suppliers a weaker force.
- The suppliers do not compete with other products in this industry. This means that there are no substitutes for the product other than those supplied by the suppliers. This makes the bargaining power of suppliers a stronger force within the industry.
- The suppliers do not pose a credible threat to forward integration into the industry in which Zara operates. This makes the bargaining power of suppliers a weaker force within the industry.
- The industry in which Zara operates is an important customer for its suppliers. This means that the industry's profits are closely linked to those of the suppliers. These providers must therefore offer reasonable prices. This makes the bargaining power of suppliers a weaker force within the industry.
How can Zara address the bargaining power of suppliers?
- Zara can buy raw materials cheaply from its suppliers. If the costs or products don't suit Zara, Zara can switch suppliers because the switching costs are small.
- It can have multiple suppliers in its supply chain. For example, Zara may have different suppliers for its different geographic locations. In this way, it can ensure efficiency within its supply chain.
- As the industry is a key customer for its suppliers, Zara can benefit from developing closer relationships with its suppliers that benefit both.
bargaining power of buyers
- The number of suppliers in the industry Zara operates in is far greater than the number of companies that make the products. This means that buyers have few companies to choose from and therefore do not have much control over prices. This makes the bargaining power of buyers a weaker force within the industry.
- Product differentiation within the industry is high, which means buyers cannot find alternative companies that manufacture a specific product. This difficulty in switching makes the bargaining power of buyers a weaker force in the industry.
- The income of buyers within the branch is low. This means there is pressure to shop at low prices, making buyers more price sensitive. This makes buyer purchasing power a weaker force within the industry.
- The quality of the products is important to buyers, and these buyers make frequent purchases. This means that buyers in the industry are less price sensitive. This makes the bargaining power of buyers a weaker force within the industry.
- There is no significant risk for buyers to integrate backwards. This makes the buyers' threat to negotiate a weaker force within the industry.
How can Zara address buyer bargaining power?
- Zara can focus on innovation and differentiation to attract more shoppers. Product differentiation and product quality are important to buyers within the industry, and Zara can attract a large number of customers by focusing on this.
- Zara needs to build a large customer base as the bargaining power of buyers is weak. This can be done through marketing efforts aimed at building brand loyalty.
- Zara can use its economies of scale to develop a cost advantage and sell at low prices to the industry's low-income buyers. In this way it will be able to attract a large number of buyers.
Threat of Substitute Products or Services
- There are very few substitutes for the products made in the industry in which Zara operates. The few available substitutes are also produced by less profitable industries. This means there is no cap on the maximum profit companies can make in the industry Zara operates in. All of these factors make the substitute product threat a weaker force within the industry.
- The few substitutes available are of high quality but much more expensive. In comparison, companies that produce in the industry Zara operates in sell at a lower price than substitutes if they are of reasonable quality. This means buyers are less likely to switch to substitute products. This means that the threat of substitute products within the industry is weak.
How can Zara counter the threat of substitute products?
- Zara can focus on higher quality of its products. As a result, buyers would choose their products that offer higher quality at a lower price compared to substitute products that offer higher quality but at a higher price.
- Zara can focus on differentiating its products. This ensures that buyers see their products as unique and don't easily switch to substitute products that don't offer those unique benefits. It can offer such unique benefits to its customers by better understanding their needs through market research and providing what the customer wants.
rivalry between existing firms
- The number of competitors in the industry in which Zara operates is very small. Most of them are big too. That means companies in the industry don't go unnoticed. This makes rivalry between existing companies a weaker force within the industry.
- The very few competitors have a large market share. This means they engage in competition to gain their position and become the market leader. This makes the rivalry between existing companies a stronger force within the industry.
- The industry in which Zara is growing every year and is expected to continue to do so for a number of years. Positive industry growth means competitors are less likely to take complementary actions since they don't need to capture market share from one another. This makes rivalry between existing companies a weaker force within the industry.
- Fixed costs are high in the industry Zara operates in. This is forcing companies within the industry to use their full capacity. This also means that these companies lower their prices when demand falls. This makes the rivalry between existing companies a stronger force within the industry.
- The products that are made within the industry Zara operates in vary widely. As a result, it is difficult for competing firms to win customers from each other since each of their products is unique. This makes rivalry between existing companies a weaker force within the industry.
- The production of products within the industry requires an increase in capacity in large steps. This makes the industry vulnerable to supply-demand imbalances, which often lead to overproduction. Overproduction means companies have to lower prices to ensure their products sell. This makes the rivalry between existing companies a stronger force within the industry.
- Barriers to exit within the industry are particularly high due to the high investment needs of capital and assets to operate. The exit barriers are also high due to government regulations and restrictions. This leads to companies within the industry being reluctant to go out of business and continue to produce even at low profits. This makes the rivalry between existing companies a stronger force within the industry.
- The strategies of the companies within the industry are diverse, which means that they are unique in terms of strategy. This causes them to clash head-on in terms of strategy. This makes rivalry between existing firms a powerful force within the industry.
How can Zara handle the rivalry between existing companies?
- Zara needs to focus on differentiating its products so that competitors' actions have less of an impact on its customers who seek its unique products.
- As the industry grows, Zara can focus on new customers instead of acquiring those from existing companies.
- Zara may conduct market research to understand the supply and demand situation within the industry and prevent overproduction.
Impact of Porter Five Forces on Zara
By using information from Zara's Five Forces Analysis, strategic planners can understand how different factors under each of the five forces are affecting the profitability of the industry. A stronger force means lower profitability, and a weaker force means higher profitability. Based on this, an assessment of the profitability of the industry can be made and used in strategic planning.
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What is the Five Forces analysis explain briefly? ›
These forces include the number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute products that influence a company's profitability. Five Forces analysis can be used to guide business strategy to increase competitive advantage.How does the five forces of competition affect Zara's business level strategy? ›
Zara Five Forces analysis helps to analyze its current position in the market based on multiple internal and external factors like competitors, customers, suppliers (vendors and partners), financial strength, future scope & alternate solutions.What is Porter Five Forces analysis used for? ›
Porter's Five Forces Model is an important tool for understanding the main competitive forces at work in an industry. This can help you to assess the attractiveness of an industry, and pinpoint areas where you can adjust your strategy to improve profitability.What are the five forces Porter presented? ›
Porter's Five Forces are Threat of new entrants, Bargaining power of buyers, Bargaining power of suppliers, Threat of new substitutes, and Competitive rivalry. This framework helps strategists understand what makes an industry profitable and provides insights needed to make strategic choices.What Five Forces analysis can offer to us? ›
The Five Forces analysis is a tool that analyzes a business' industry based on five factors: threat of new entrants, threat of substitutes, bargaining power of customers, bargaining power of suppliers, and competitive rivalry.What competitive strategy does Zara use? ›
The company is owned by textile giant Inditex and is its flagship brand. 7 Zara's ownership of its supply-chain steps allows for more rapid product turnover; Zara can design a product and have it sold in stores a month later. Zara's strategy is to offer a higher number of available products than its competitors.What are the key points in Zara's business model? ›
Zara's value proposition focuses on keeping up with fast-changing fashion trends. Its activity configuration allows it to spot trends and launch new pieces in less than three weeks. Competitors show two collections per year and take over nine months to get items to stores.What are the main characteristics of Zara's strategy? ›
Zara's overarching strategy is achieving growth through diversification with vertical integrations. It adapts couture designs, manufactures, distributes, and retails clothes within two weeks of the original design first appearing on catwalks.