Impacts of the Internet on the Five Competitive Forces

Introduction

The business environment has changed significantly over the years and from industry to industry. In the past, the five competitive forces could be used to describe the business environment completely and even determine the potential for success of businesses. As much as the five forces still impact on corporate performance, the manner in which they affect business operations has changed since the internet and connectivity have affected each of the forces in one way or another. Aspects such as barriers to entry have affected businesses that are unwilling to innovate or to solve emerging issues in the use of the internet.

The threat of New Entrants

One of the five competitive forces is the threat of new entrants to an industry. The existence of barriers to market entry reduces the threat of new entrants. New entrants affect the market environment by influencing customer loyalty, shifting market shares, and product and service prices among other things (Roy 2011). Barriers to market entry could arise from factors, such as economies of scale, initial investment costs, brand loyalty, intellectual property protection, resource constraints, and high switching costs for customers and control of distribution channels (Team FME 2013). A factor that affects the entry barriers will inevitably affect the threat of new entrants. The internet use, for instance, increases costs associated with the development of business IT infrastructures. Therefore, this increases the initial investment costs, thus increasing entry barriers. Moreover, the internet may also affect communications between the entrepreneurs and the customers. This implies that as new entrants seek to attract customers, the existing product and service sellers also appeal to their customers through constant communication, better marketing practices, and even close business relationships through social media.

The bargaining power of suppliers

Suppliers refer to those who provide resources for successful operations of businesses. Where the bargaining power of suppliers is high, the business environment is likely to be challenging for those who need suppliers. With high supplier bargaining power, the industry faces high pressure on supply cost margins, which results in the reduction of strategic options for the business. The bargaining power of suppliers is considered high when there are single huge suppliers of materials rather than fragments of different suppliers for the same materials, and the supplier’s customers are fragmented hence cannot bargain as a group. It is also regarded so when the inputs have no substitutes, buying industry is more profitable compared to the supplying industry, buying industry has a high threat of new entrants, and switching costs from one supplier to the other are high (Porter 1980). The relevance of the bargaining power of suppliers is even higher with the use of the internet in the business sector. For suppliers, the internet can be instrumental in enhancing bargaining power if used appropriately. The internet provides an opportunity for suppliers to form new business partnerships and to manage existing ones. This helps them identify opportunities and to take advantage of them

Bargaining power of customers

When customers have high bargaining power, it implies that the sellers have to set their prices as low as the customers with them to reduce. The implication of this is a reduction in the profit margins of the business, about similar industries with lower customer bargaining power. Customer bargaining power can impact negatively on the sales volumes as well as on the cumulative profitability of the business. According to Recklies (2015), customer bargaining power increases when the buyer concentration is high, supplying industry is a fixed cost market; supplying industry consists of fragmented small-scale traders, customer understands the production costs of the business. It also augments when there is a risk of backward integration for the customer, many substitutes available for the product, the products are not of strategic importance to the customer, and the customers are price sensitive and have low operational margins. The bargaining power of customers can be boosted through the use of internet-based technologies. Similarly, the internet could also foster competition among the suppliers, resulting in greater fragmentation and increased customer bargaining power.

Threat of competition

One of the benefits of the internet in the contemporary business environment is that it fosters communication with and among customers. Consequently, customers can share any stories from product use amongst themselves, corroborate their experiences, and develop fan groups through which they can influence each other. Similarly, clients can learn about substitute products through online platforms and share the same information with their peers thus creating awareness of competitive products. The internet has also resulted in the reduction of switching costs due to the availability of digital channels. Access to alternatives has also increased and become more convenient to the buyer than before due to the availability of e-commerce options among many businesses.

Threat of Substitutes

Besides the threat of new entrants, bargaining powers of suppliers and buyers, the threat of substitutes is another force that greatly affects business profitability. In an industry where the threat of new entrants is high, and the bargaining powers of suppliers and buyers are low, there is a high probability that the threat of substitutes would be high. The threat of substitutes is fostered by lack of brand loyalty among customers, poor customer relationships, high switching costs for customers and changes in customer purchase habits (McGinn 2010). The internet fosters the development of close customer relationships through a variety of communication channels and also increases customer loyalty as a result of stronger customer families. In this way, the internet can reduce rather than increase the threat of substitutes for existing firms. On the other hand, the internet also helps organizations create awareness of their products hence increasing the risk of substitutes.

Entry barriers in Small Scale Entrepreneurship in Kuwait

Entry Regulations    

The presence of entry barriers in industry results in a reduction of the threat of new entrants into the market. For the small-scale entrepreneurship market, many barriers to market entry exist, and the situation results in difficulty to enter or sustain operations in businesses. One of such barriers is entry regulations. According to (McGinn 2010), bureaucratic regulations in an industry can impact the entry capacity of a business to a significant extent. The most profound impact is experienced in less corrupt countries where regulations have to be adhered to closely. Since the corruption index in Kuwait is relatively low, the impacts of regulations on market entry are expected to be high.

High Initial Investment Costs

Another barrier is high investment costs businesses (Stiftung 2018). Depending on the nature of the business that one intends to focus on, the initial investment costs can be high or low. Access to finances also limits the extent to which small-scale entrepreneurs consider financial challenges as a barrier to market entry within the Kuwait small-scale business environment (Alhajeri 2012).

Marketing Issues

Marketing problems can be a challenge in a highly competitive industry, where suppliers rely on the economics of scale to advance profitability. Small-scale entrepreneurs are affected by the business environment within which they operate because of the lack of resources. Alhajeri (2012) reported that most of the small-scale projects in Kuwait failed due to challenges in marketing and managerial issues in the businesses. Alhajeri opined that lack of awareness of industry trends, challenges and limited access to potential customer information are some of the factors that are resulting in poor marketing and subsequent failure of new entrants into the small-scale entrepreneurship industry in Kuwait. Most of the market entrants also had limited projects of the market characteristics hence the tendency to be barred from growth by inefficient marketing.

Legislative Issues

Legislative issues, on the contrary, inhibit initial business operations through restriction of access to resources, financial demands, and structural demands. Most businesses that start up as small-scale entrepreneurs work with limited funds, and legislative factors only put pressure on the already scarce resources. The lack of experience among small-scale entrepreneurs also prolongs the duration of achieving the requirements of the regulations. As a result, stringent regulations on public health and the environment, as well as various industry-related permits, result in the failure of small-scale entrepreneurs in Kuwait and other industries. Atsan (2016) suggests that before an entrepreneur engages in the process of learning, recognition of new opportunities and benefiting from interpersonal relationships, they may experience a lot of regulation challenges to business entry.

Conclusion

The small scale entrepreneurship market environment is Kuwait is characterized by a lot of challenges from financing through to legislative and marketing issues. Any proprietor that intends to operate within such a business environment requires a consideration of the entry barriers and preparedness for the same. Where the level of preparation is low, failure is most likely to be an unexpected outcome.

 

 

 

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