Trader Joe s Porter Five Forces Analysis
Posted by Zander Henry on Aug-22-2018
Porter Five (5) Forces Model
Porter Five (5) Forces Model was proposed by Michael E. Porter in 1979. The purpose was to assess and evaluate the competitive positioning and strengths of business organisations. The model has three horizontal competitive forces (Threat of Substitute Products or services, the threat of new entrants and rivalry among existing firms) and two vertical forces (Bargaining power of buyers and bargaining power of suppliers).
These forces shape the competition within any industry. The overall industry competitiveness declines when these forces reduce profitability. Porter found SWOT analysis lacking in rigour. Many new companies use the Porter Five (5) Forces Model to decide whether it is profitable to enter in a particular industry.
Here is the pictorial presentation of the Porter Five (5) Forces Model:
Trader Joe s Porter Five (5) Forces Analysis
Application of this model can help Trader Joe s to determine the industry attractiveness and understand its competitive positioning in the market. The analysis can also be used to make some strategically wise decisions that could improve the performance of Trader Joe s and ensure long-term survival.
Threats of new entrants
Threat of new entrants reflects how new market players impose threats to the existing market players. If the industry will be profitable and barriers to enter the industry will be low, it will attract more players and hence, the threat of new entrants. will be high.
Here are some factors that reduce the threat of new entrants for Trader Joe s:
- Entry in the industry requires substantial capital and resource investment. This force also loses the strength if product differentiation is high and customers place high importance to the unique experience.
- Trader Joe s will face the low threat of new entrants if existing regulatory framework imposes certain challenges to the new firms interested to enter in the market. In this case, new players will be required to fulfil strict, time consuming regulatory requirements, which may discourage some players from entering the market.
- The threat will be low if psychological switching cost for consumers is high and existing brands have established a loyal customer base.
- New entrants will be discouraged if access to the distribution channels is restricted.
Trader Joe s will be facing high new entrants threat if
- Existing regulations support the entry of new players.
- Consumers can easily switch the brands due to weak/no brand loyalty.
- Initial capital investment is high.
- Building a distribution network is easy for new players.
- Retaliation from the existing market players is not a discouraging factor.
How Trader Joe s can tackle the Threat of New Entrants?
- Trader Joe s can develop brand loyalty by working on customer relationship management. It will raise psychological switching costs.
- It can develop long-term contractual relationships with distributors to widen access to the target market.
- Trader Joe s can also an investment in research and development activities, get valuable customer data and introduce innovative products/services to set strong differentiation basis.
Threat of Substitute Products or services
The availability of substitute products or services makes the competitive environment challenging for Trader Joe s and other existing players. High substitute threat shows that customers can use alternative products/services from other industries to meet their needs. Various factors determine the intensity of this threat for Trader Joe s
The Threat of Substitute Products or services increases when;
- A cheaper substitute product/service is available from another industry
- The psychological switching costs of moving from industry to substitute products are low.
- Substitute product offers the same or even superior quality and performance as offered by Trader Joe s’s product.
However, this threat is substantially low for Trader Joe s when;
- The switching cost of using the substitute product is high (due to high psychological costs or higher economic costs)
- Customers cannot derive the same utility (in terms of quality and performance) from substitute product as they derive from the Trader Joe s’s product.
How Trader Joe s can tackle the Threat of Substitute Products or services?
- Trader Joe s can reduce the Threat of Substitute Products or services by clearly emphasising how its offered product/service is better than the available substitutes.
- It should provide convincing reasons to the customers by offering a better experience and high value for money.
- It can raise switching costs by working on loyalty.
- Lastly, it can improve the quality, maximise value for money and set strong differentiation basis to discourage customers from using the substitute product.
Rivalry among existing firms
The Rivalry among existing firms shows the number of competitors that give tough competition to the Trader Joe s High rivalry shows Trader Joe s can face strong pressure from the rival firms, which can limit each other’s growth potential. Profitability in such industries is low as firms adopt aggressive targeting and pricing strategies against each other.
The Rivalry among existing firms will be low for Trader Joe s if;
- There are only a limited number of players in the market
- The industry is growing at a fast rate
- There is a clear market leader
- The products are highly differentiated, and each market player targets different sub-segments
- The economic/psychological switching costs for consumers are high.
- The exit barriers are low, which means firms can easily leave the industry without incurring huge losses.
Similarly, there are some factors that increase the Rivalry among existing firms for Trader Joe s For example, the company will face intense Rivalry among existing firms if market players are strategically diverse and target the same market. The rivalry will also be intense if customers are not loyal with existing brands and it is easier to attract others’ customers due to low switching costs. Competitors with equal size and offering undifferentiated products with slow industry growth tend to adopt aggressive strategies against each other. These all factors make the Rivalry among existing firms a major strategic concern for Trader Joe s
How Trader Joe s can tackle the Rivalry among existing firms?
Trader Joe s should focus on the implicit needs and expectations of its customers to strengthen the differentiation basis. It should raise switching costs by developing long-term customer relationships. The organisation should also invest in research and development activities to identify new customer segments. In some cases, collaborating with competitors can be mutually beneficial. The organisation can look for this option as well.
Bargaining Power of Suppliers
Bargaining power of suppliers in the Porter 5 force model reflects the pressure exerted by suppliers on business organisations by adopting different tactics like reducing the product availability, reducing the quality or increasing the prices. When suppliers have strong bargaining power, it costs the buyers- (business organisations). Moreover, high supplier bargaining power can increase the competition in the industry and lower the profit and growth potential for Trader Joe s Similarly, weak supplier power can make the industry more attractive due to high profitability and growth potential.
Bargaining power of suppliers will be high for Trader Joe s if:
- Suppliers have concentrated into a specific region, and their concentration is higher than their buyers.
- This force is particularly strong when the cost to switch from one supplier to other is high for buyers (for example, due to contractual relationships).
- When suppliers are few and demand for their offered product is high, it strengthens the suppliers’ position against Trader Joe s
- Suppliers’ forward integration weakens the Trader Joe s’s position as they also become the competitors in that area.
- If Trader Joe s is not well educated, does not have adequate market knowledge and lacks the price sensitivity, it automatically strengthens the suppliers' position against the organisation.
- Other factors that increase the suppliers’ bargaining power include-high product differentiation offered by suppliers, Trader Joe s making only a small proportion of suppliers’ overall sales and unavailability of the substitute products.
Contrarily, the bargaining power of suppliers will be low for Trader Joe s if:
- Suppliers are not concentrated
- Switching costs are low
- Product lacks differentiation
- Substitute products are available
- Trader Joe s is highly price sensitive and has adequate market knowledge
- There is no threat of forward integration by suppliers.
How Trader Joe s can tackle the Bargaining Power of Suppliers?
Trader Joe s can strengthen its position against suppliers by decreasing the dependency on one or a few suppliers. It will increase its price sensitivity. Developing the long-term contractual relationships with suppliers from different regions not only lowers their bargaining power but also allows Trader Joe s to improve its supply chain efficiency. Finally, Trader Joe s can find the alternate ways of producing the product if product demand is high enough and the firm has required competencies and expertise. However, it requires detailed cost-benefit analysis to determine its feasibility. Product redesign and diversification of the product lines can also help the organisation reduce the suppliers’ power in the market.
Bargaining Power of Buyers
Bargaining power of buyers indicates the pressure that customers exert on the business organisations to get high quality products at affordable prices with excellent customer service. This force directly influences the Trader Joe s’s ability to accomplish the business objectives. Strong bargaining power lowers profitability and makes the industry more competitive. Whereas, when buyer power is weak, it makes the industry less competitive and increase the profitability and growth opportunities for Trader Joe s
There are some factors that increase the bargaining power of buyers:
- A more concentrated customer base increases their bargaining power against Trader Joe s
- Buyer power will also be high if there are few in number whereas a number of sellers (business organisations) are too many.
- Low switching costs (economic and psychological) also increase the buyers’ bargaining power.
- In case of corporate customers, their ability to do backward integration strengthen their position in the market. Backward integration shows the buyers' ability to produce the products themselves instead of purchasing them from Trader Joe s
- Consumers’ price sensitivity, high market knowledge and purchasing standardised products in large volumes also increase the buyers' bargaining power.
Some factors that decrease the bargaining power of buyers include lower customer concentration (means the customer base is geographically dispersed), customers’ inability to integrate backwards, low price sensitivity, lower market knowledge, high switching costs and purchasing customised products in small volumes.
How Trader Joe s can tackle the Bargaining Power of Buyers?
Trader Joe s can manage the bargaining power of buyers by increasing and diversifying their customer base. It can be done by introducing new products, targeting new market segments and adopting the product diversification strategies. Marketing and promotional strategies can also be helpful in this regard. Building loyalty by embedding innovation and offering excellent customer experience can raise the switching costs, which will ultimately reduce their bargaining power. Trader Joe s can adopt these strategies to strengthen its competitive positioning in the market.
Porter 5 force model implications
The application of Porter five (5) forces model in real-world context allows organisations to .make wise strategic decisions. Impact and importance of each of the five forces is context dependent. By using Five Force analysis, Trader Joe s can determine the industry attractiveness, make effective entry/exit decisions and assess the influence of these forces on their own business and competitors. Moreover, the dynamic analysis of this model can reveal important information. For example, Trader Joe s can combine the Porter 5 force model with PESTEL framework to determine the industry’s potential future attractiveness. In some cases, companies do not have the required information to analyse five forces. In such a scenario, the analysis can be conducted with the help of assumptions. Mostly, consultants consider this model as a starting point, and other frameworks (like PESTEL and Value Chain) are used in conjunction for a better understanding of the external environment.
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