ARTICLE: Porter’s Five Forces Model of Woolworths

A strategic tool of management which is used to examine the industry refers to Porter’s Five Forces Model.

Michael Porter gave the model. In his article “Five Forces that Shape Strategy” he detected five forces which have a direct impact on the profitability of a business enterprise in the industry.

Following five forces are:

  1. Risk of new entries
  2. Negotiating power of suppliers
  3. Negotiating power of buyers
  4. Risk of substitute products
  5. Conflict among the market players

Woolworths Ltd. Which is known as Australia’s one of the top firms which deal in the Food sector, uses Porter’s Five Forces Model. They use to model to examine how the five forces affect the profitability and increase their competitive advantage in Food and Staples Retailing Industry.

Let us now continue with understanding how Woolworths Limited is using Porter’s model to develop and maintain its place in the Food industry.

Risk of new entries

Whenever there are new entries in the Food and Staples Retailing Industry, they bring with them the new methods and processes of doing things. As a result, Woolworths Ltd gets pressurized. To protect itself from the competitive edge, it has to cope up with all the challenges and build operative barricades to restrict the entry of new firms.

How Woolworths deals with the situation?

  • By creating new and unique products which help in attracting new consumers and retains the existing ones. New products give the customers a purpose of buying Woolworth’s products.
  • To decrease the cost per unit, it builds economies of scale.
  • By spending money on research and development, Woolworths restrict the entry of new firms because the new entrants are always less likely to enter such an industry where the market players outline their standards on a regular basis. Hence, this situation discourages new entrants into the market.

Negotiating power of suppliers

Every company in the Food sector buy raw material from suppliers. It is in the hands of suppliers to increase and decrease the margin a company can earn in the market. The suppliers who are in the dominating position, can with the help of their bargaining power abstract more prices from the firms. The impact of suppliers’ bargaining power results in the decrease in overall profitability.

How Woolworths deal with the situation?

  • By maintaining contact with numerous suppliers.
  • By using different raw materials for designing the products. It helps the company to make use of another raw material in case the prices of one raw material rises.
  • By making the suppliers dedicated and dependent on their firm.

Negotiating power of buyers

Consumers nowadays want to buy the best products at minimum possible prices. The profitability of Woolworths gets affected in such a situation. In the case of the powerful customer base, the ability to look for more discounts increases.

How Woolworths deal with the situation?

  • Woolworths create new products with the help of innovation. Consumers ask for discounts only on the existing products. Launching new products helps in reducing the bargaining power.
  • By structuring a massive base of customers. It has two-fold benefits, i.e. decrease the bargaining power of customers and restructure the process of sales and production of the firm.

Risk of substitute products

The profitability of a firm suffers when a product starts meeting the needs of customers in diverse ways. For example, the substitutes for storage hardware drives are Dropbox and Google Drive.

If a new substitute product offers value to the consumers that are different from the existing products, then its threat tends to increase.

How Woolworths deal with the situation?

  • The company deal with the situation by being service oriented instead of product oriented.
  • By understanding the needs and preferences of the customers.
  • By enhancing the cost of switching for the consumers.

Conflict among the market players

Prices and profitability tend to fall in case of intense disputes among the market players. The industry in which the Woolworths Limited operated is very competitive which affects its profitability in the long run.

How Woolworths deal with the situation?

  • By indulging itself in maintainable differentiation.
  • To compete in a better way, it builds economies of scale.
  • To enhance the size of the market, Woolworths team up with the competitors.

You can also read: PEST Analysis of Woolworths