Industry Dynamics

Porter (2008), provides a strategic framework with five competitive forces, which he means defines the competitiveness, profitability and the key success factors needed to maneuver inside an industry. On his notion, companies should position themselves strategically according to the competitive conditions that his five competitive force framework provides. The forces provide a non-exhaustive information structure that describes the competitive interactions and nature of an industry, and alongside earlier macroeconomic analysis, provides a more complete picture of the external environment, as these industry dynamics exist in the microeconomic environment (Grant, 2010).

The important forces to ascertain, are however those establishing the industry structure, rather than short-term tendencies in the industry. We will be applying this theoretical view in our effort to estimate and describe the strategic implications and key success factors needed to compete and maneuver in the apparel retailing industry.

The five forces framework provides a static picture, albeit potential trends and developments can be described, these have the potential to change very fast. As it is scoped more narrowly, the information needed to establish and update the model on an on-going basis is smaller than the PESTEL, but still of a certain size.

The forces and their dynamics are however based on microeconomic theory and exists as an extreme theoretical foundation, which is hardly applicable to the real world. However, the thoughts and notions do however describe the dynamics of an industry, and it is with these in mind that Porter established these forces and the relevant dynamics within them (Porter, 2008). Lastly, it is important to note in relation to porter’s five forces, that firms should not position themselves, only in accordance with the industry structure, but adapt and position themselves according to how their current capabilities match the industry structure (Grant, 2010).

5.2.1 Threat of entry

The accumulated threat from new entrants is based on various dynamics. As new entrants bring new capacity and a desire to capture market share, it potentially puts focus and pressure on costs, capital expenditure and probably most important, prices (Porter, 2008).

In the apparel and retailing industry, developed technology and access to leasing estate has made capital requirements very low. Essentially, low-scale production can be established cheap, as the industry is rather labor intensive (MarketLine, 2016). Further, there is easy access to production sites around the world,

34 whereas the needs of establishing this yourself is minimum, and focus can be kept on other value creating activities such as design, marketing and service (Porter, 2008).

As the industry isn’t affected by very strict regulation, and the resources needed to establish effective intellectual property rights protection is small, this makes it even easier to move into the business.

Furthermore, other complementary assets such as distribution channels have become very well developed, with high competition, enabling easy and cheap access to important complementary assets that helps new entrants capture value (Teece, 1986). One of the final affecting factors is the low switching costs set in relation to buyers, which is discussed more in the corresponding factor.

Overall, the threat from new entrants can be estimated to be moderate to high as fixed costs are low, complementary assets are easily and cheaply available, little regulation and difference between competitors exists and market growth is promising. However, depending on the positioning of new entrants, the fast-fashion and low-cost providers have established a solid market position by building scale and efficient supply chain networks and an integrated and efficient marketing vehicles (MarketLine, 2016).

5.2.2 Bargaining Power of Customers

The power that customers or buyers possess in the apparel industry is dependent and affected by multiple variables. The most dominant one is the consumer’s ability to effortlessly switch from one brand to another. The low costs of switching provide the consumer with relatively big bargaining power, as there are many alternatives available (MarketLine, 2016). Furthermore, consumers have high independence, as they are positioned in the final part of the value chain, and thus they do not have to interact with anyone else after purchases. Contrary, the consumer has limited financial muscle and buyer size, which from a firm perspective means that the loss of one customer has little effect on the financial results. Further, as apparel buyers are final consumers, they do not possess the ability to backwards integrate into the retailing and apparel industry, severely weakening their bargaining power (Porter, 2008). As clothes are linked to lifestyle and social status, companies have the opportunity to influence consumers by priming or nudging their demand and behavior, further decreasing buyer power (MarketLine A&F, 2016). However, the high amount of undifferentiated products and available competitors in the market allows the consumer to easily find products with the same perception and usefulness of the required good.

5.2.3 Bargaining Power of Suppliers

The different elements that affect the bargaining power of suppliers mirrors with a relatively high precision those of buyers. The impact of the elements is however entirely different. The factors imposing a high degree of supplier power is the importance of quality, cost and the lack of substitute inputs, with regards

35 to the expected good apparel retailers are require (MarketLine, 2016). As demand can vary greatly based on trends, it is important that apparel retailers enter great collaborations with their suppliers and find the needed quality of their goods. At the same time, if a product line misses’ consumer trends, it is important that the effects on the financial results are limited. Furthermore, substitute inputs to clothing, besides commodities such as wool and cotton are limited, although flexible materials such as polymers and elastics are used, consumers are expecting a ‘soft wear’ from the common natural materials (MarketLine, 2016).

Contrary, it is important to note that the size of suppliers is generally small. The producers are increasingly dependent on receiving production requests from their existing partners, and carry a sizeable amount of switching costs to changes in their production system, that is not carried over to the apparel retailers (MarketLine, 2016). Furthermore, as a lot of the value generated in the apparel industry is created in the design and service parts of the value chain, and suppliers have limited opportunities to integrate forward into the apparel retailing industry (MarketLine, 2016). As international trade and globalization of value chains has increased over the last decades, the availability and player dispensability is very high, lowering supplier power substantially (MarketLine, 2016).

Overall, the supplier power is considered to be low to moderate. The high availability of different suppliers makes it easy for apparel retailers to change their products origin. However, if producers show that they can match demand and adapt quickly to changes, their bargaining power increases substantially (MarketLine, 2016). This discussion however also puts Porters forces into perspective, as it is only considering competitive dynamics. But it should be very valuable to consider how cooperation and sourcing helps shape the competitive environment, as it could be an important part of the value chain.

Overall the bargaining power of suppliers is assessed to be low to moderate. It is important to find good and low cost suppliers, but at the same their power to bargain is very limited by their size and the easy availability of other producers, as it is an industry very hard to have a (sustainable) competitive advantage in (MarketLine, 2016).

5.2.4 Threat of substitutes

If looking at apparel and clothes as a whole, there are no real substitutes to clothing. However, if splitting it into different segments, substitutes exist in the way luxury wear is substitutable to casualwear, and how you can substitute casual wear with sportswear. Also, considering the split between apparel retailers and retailers, the availability of online shopping and existing omnichannels have allowed consumers to substitute more traditional brick and mortar retailing with online retailing (MarketLine, 2016).

36 Other substitutes to consider is the availability of second-hand clothes and second-hand market platforms such as eBay. Under these circumstances, it becomes a cheap alternative, and the costs of switching are low. However, it is important to note whether it is truly a beneficial alternative compared to the acquisition of new clothes. Lastly, it is possible to produce clothes yourselves by knitting or weaving, or buying cheap counterfeit products in some countries (MarketLine, 2016).

Overall, the threat from substitutes is considered weak, as there are really no alternatives to apparel, and it is a very tedious and time consuming process to create yourself.

5.2.5 Industry Rivalry

The degree of rivalry in the apparel and apparel retailing industry has a few elements of its own, while it is mostly affected by the former four forces. Affecting the degree of industry rivalry adversely is the numbers of apparel retailers on the market, as well as the similarity of them. Within the different segments of apparel, the amount of available players and products is relatively high, allowing for easy and low cost switching between brands and products, from a customer perspective. However, based on former excessive growth from new entrants, it seems there is still room for new smaller entrants into the market (MarketLine, 2016). Also affecting the rivalry, is the degree to which it is easy to expand without committing too much capital. This makes the industry competition even fiercer, as the need for capital is incredibly low (MarketLine, 2016).

Although capital requirements are relatively low, it implies that at the same time it is relatively easy to exit the industry, which drives down the degree of competition. At the same time, while e-commerce retail is increasing in appearance, having stores available to showcase clothes is decreasing in importance for less premium and expensive brands. However, to compete in the industry and capture additional market share apparel retailers are now, to a larger extent, using their own off-price selling points, such as outlets, and secondary retailers to sell their clothes through (MarketLine, 2016).

Alongside the increased linkages between the technological development and the apparel industry, it could seem that the expectations from consumers will create an even fiercer environment, as the wanted perceptions and quality will be even higher with many available competitors at hand (MarketLine, 2016).

Overall, the degree of rivalry in the industry is deemed to be moderate to high, as consumer trends can erode market shares relatively fast, while the degree of similarity and amount of players, especially in the less premium segments, result in a competition on prices. Especially, since fast-fashion companies are introducing new clothing lines just about every month (MarketLine, 2016). Alongside the earlier discussion of sourcing with suppliers, different design collaborations between apparel designers have created

37 increased hype and demand on different brands. Using such an approach to mitigate the degree of rivalry with those of your closest competitors could be a strategy Porter’s tool would not facilitate, though it could provide great success.