(A) Threat of New Entrants: Market segments with high barriers of entry and exit creates challenges for existing firms. An exit would be difficult and the companies would remain in business. For example, it would be difficult to start a grocery market because existing firms use product differentiation and other aggressive marketing strategies to improve their sales.
The threats of new entrants are encouraged by the capital requirements of the investment, the economics of scale and the ability to switch products, poor brand techniques and poor product differentiation. If the barrier of entry and exit are low, new companies are formed easily and this would reduce the profit of similar products. When the barrier of entry is low and the barrier of exit high, the firms would operate at different speeds.
Product Differentiation: High barriers will help the company utilize market strategies to gain 5% of its customers in the grocery market. The company will reduce the cost of transportation utilized by the customers thus, using package differentiation to increase sales. For example, Fresh Direct would remain in business if it delivers refrigerated products such as beef, milk, and chicken using home delivery vans.
Another way of establishing product differentiation is quality management. Fresh Direct has a board online system that manages its order catalogue, creating a simple but unique access to online customers.
The standards of packaged foods are high and its delivery vans uses quality control procedures to verify the safety of its fresh products. Direct business transaction encourages home delivery and reduces middlemen transactions thus, controlling the price and strategy of operations. Product identity encourages customers desire to maintain a particular supplier.
Capital Requirement: High barriers would require new firms to invest huge capital. This will be used for operational cost, product delivery, product preservation and maintenance. This will be a difficult task and will limit new entry.
Switching Costs: Segments with low barriers would improve the marketing strategy of similar markets. Each firm would use an aggressive marketing strategy to maintain its customer’s strength. Consumers may switch from one shop to another without much difficulty. The consumer may decide to shop directly from a supermarket thus, reducing his or her online activities.
Customers would maintain his or her present supplier if the cost of switching is expensive. The location of the suppliers affects this segment. When suppliers are concentrated in one location, the customer may switch without difficulty. When the suppliers are scattered in different locations, the customer is forced to buy from a particular store. The customer will consider the cost of moving from his or her location to find another supplier.
Access to Distribution Channels: The easy flow of products would influence the sale of particular products. The availability of delivery trucks, access roads, and a valid address gives the company a competitive advantage over similar competitors. Customers flood a particular market when the routes to the market are simple and accessible.
This reduces the difficulty in locating the market and time wasting. For example, Fresh Direct can increase sales by creating more distribution channels for its direct sales. The online deliveries would require adequate trucks to convey customer’s goods. The easy access to its products would differentiate the company from similar firms.
(B) Threat of Substitutes: Products substitute creates challenges for existing firms. Manufactured goods are affected by this factor. Customers are willing to switch from one product to another due to price or quality. Companies with huge sales may lower their prices to attract customers, thus, creating a loss for close rivals. For example, Fresh Direct provides home delivery of frozen foods but may face a challenge from local show owners in the same region.
In the food industry, it can be seen as a product-by-product or the replacement of the required goods. Customers would easily walk into the local store to buy fresh foods at cheaper prices. When these products are sold at different locations and at cheaper prices, it would be easier than making online orders. To tackle this challenge, Fresh Direct must add quality services and innovations to its delivery services and safety of the products.
(C) Bargaining Power to the Buyer: Fresh Direct website provides customers with a variety of fresh foods updated at regular intervals. The strategy would promote customers’ satisfaction and meet customers’ requirement. It will reduce transportation cost of the customer.
A customer will consider the cost of a product, its quality and availability as variables for bargaining power. Using these variables to satisfy the customer would sustain the business and increase product sales. This strategy has influenced the establishment of home delivery markets in America. A busy job schedule has forced many parents to use online home deliveries to their advantage. Fresh Direct will remain in business because of the busy schedules of American workers.
(D) Bargaining Power of Suppliers: The strength of the supplier is his or her ability to buy products directly from the producer. The location of the suppliers determines his or her bargaining power. This variable affects the market segment of existing firms. The relationship between vendors and manufactures affects the business transaction of the supplier. Product retailers may trade directly with the manufacture thereby reducing the demand of major suppliers.
For example, Fresh Direct does not produce fresh foods; it relies on the producers to stay in the market. The demand of these products is open to a different supplier and business transactions become easier when the producers and suppliers have good business relations. This factor influences the easy switch from one supplier.
1. The suppliers are concentrated in a particular location.
2. The customers are powerful.
3. Switch from one supplier is expensive.
4. Integration poses treat to the supplier
The bargaining power of the supplier is weak because:
1. The produce is standardized
2. The buyers are concentrated in a particular location
3. The bargaining power of the customer is weak
(E) Bargaining Power of Competitors: The food industry is a large market segment. Many factors influence the bargaining power of competitors. To achieve product differentiation, a business firm would utilize various market strategies to differentiate its products. This high-level interaction between market variables increases the competitiveness of business markets. Fresh food companies would strive to maintain their high standards in quality and consumers’ satisfaction.
This strategy would influence the introduction of promotions and incentives to maintain its sales. For example, Fresh Direct utilizes an aggressive market strategy to promote its products. Home deliveries are properly managed to meet customers’ requirements. Similar markets such as Trader Joe and Fairway will struggle to perform better than Fresh Direct.