Implementation of the Porters Five Forces Model on the Cosmetic Retail Industry

Implementation of the Porters Five Forces Model on the Cosmetic Retail Industry Cosmetic retail is quite developed industry. However, every industry has its peculiarities, which are sometimes hard to understand. Thus, in order to better understand the context in which this or that the company operates, it is crucial to use Michael Porter’s Five-Forces Model.Advertising We will write a custom essay sample on Implementation of the Porter’s Five Forces Model on the Cosmetic Retail Industry specifically for you for only $16.05 $11/page Learn More As stated by Berger, this framework â€Å"considers the five competitive forces that influence a business success or failure† (10). Each of the forces has variables. Five variables have been chosen for each force and rated on a scale of 1 to 5 according to their importance for the cosmetic industry. Rivalry among competing firms Number of competing firms Product differences Fixed costs/Value added Industry growth Switching costs According to David, it is â€Å"the most power ful of the five forces† (75). Thus, the number of competing firms matters a lot. The difference of cosmetic is wide, so there is an opportunity for rivals to sell different products. The industry growth influences the development of competition. If fixed costs are high and switching costs are low, they increase the rivalry in the industry. Potential Entry of New Competitors Barriers to entry (rights) Economies of scale Capital requirements Brand equity Switching costs If there are no considerable barriers to enter, there may be many new entrants (Berger, 11). For the cosmetic industry, the most important barriers are the exclusive rights and economies of scale. However, this industry has large capital requirements since the differentiation of products that are sold in it. Moreover, cosmetic retail is more widespread as chain stores or exclusive brand retailers, which also make up chains. Potential Development of Substitute Products Ease of substitution Buyer inclination to substitute Buyer switching costs Relative price performance of substitute Quality depreciation For the cosmetic industry the crucial issue is the way for buyers to substitute and their willing to do this. For the retailers it is better to sell unique products, for example to sell one cosmetic brand. The less valuable is the change of quality, due to the fact that retailer cannot influence the quality of products they sell. Bargaining Power of Suppliers Supplier concentration to firm concentration ratio Strength of distribution channel Impact of inputs on cost or differentiation Switching costs of firms in the industry Differentiation of inputs Suppliers tend to have very little power in the retail industry. However, for the cosmetics the exclusive suppliers matter a lot and influence the market. They can make retailers have large inputs on the scale of orders. If the supplier is exclusive, the switching costs are very high. As for the cosmetic retail – the inputs are sligh tly differentiated, so this variable is less crucial. Bargaining Power of Consumers Buyer information Substitutes available Brand identity Buyer volume Price sensitivity As for cosmetics retail, â€Å"buyers are fragmented no buyer has any particular influence on the product or price† (Porters Five Forces:A Model For Industry Analysis, para. 18). Still, buyer has to be provided with the information and has a choice of substitutes. Some buyers tend to choose only one brand. Buyer volume and price sensitivity are less important because cosmetic is what people tend to buy all the time, and prices do not react on the slightest changes.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Berger, Alexander. Contemporary Development in Business and Management: Beiersdorf. Pakistan: GRIN Verlag, 2011. David, Fred R. Strategic management: concepts and cases. 13th ed. New Jersey: Pre ntice Hall, 2011. â€Å"Porters Five Forces: A Model for Industry Analysis.† QuickMBA. n.d. 3 Nov. 2011. quickmba.com/strategy/porter.shtml.