Industry situation

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Theoretical framework

An external auditing process creates the information and analysis necessary for an organisation to begin to identify the key issues it will have to address in order to formulate a successful strategy (Drummond, Ensor & Ashford, 2001). A well-known tool for evaluating the external environment is Porter’s five forces model. Porter’s framework is an industry tool which is used to analyse the competitive state for firms in the industry environment. Consequently the model can also help companies formulate competitive strategies (Porter, 1980), which helps to identify a successful strategy for a firm to create a sustainable competitive advantage (Boone, Kurtz, MacKenzie & Snow, 2010). This theory allows companies to understand the different industry forces and adopt a strategy to defend its position and become less vulnerable (Porter, 2008b). All these external forces need to be considered when a firm wants to achieve a competitive advantage to help them to be positioned in front (Lumpkin, Droege & Dess, 2002).
Stair and Reynolds (2010) declare that Porters five forces model can help firms to reach competitive advantage through an identification of the five key factors. These forces can also relate to loyalty, whereby Shaw and Merrick (2005) mention that loyalty itself creates a large barrier to entry, which forces market entrants to spend heavily to acquire them. This model also regards the formulation of competitive strategies for established or newly entering companies within the respective industry. When conducting strategy formulation, it is important to look at what the strongest competitive force or forces are in order to determine the profitability of an industry (Porter, 1979). The authors of this study wish to focus on loyalty as part of strategy formulation and this theory will help not to evaluate the profitability of the industry, but identify the forces that are most prominent within the industry and what forces influence customer loyalty creation within the DMP industry.
Porter’s model will be use used as an analysis tool to get a comprehensive view of the DMP industry, due to the lack of prior research on it. This gives the authors the ability to determine the most prominent industry forces within the industry and the nature of it. Using all five forces enables firms to reach competitive advantage (Stair & Reynolds, 2010) and the authors of this study wish to look at customer loyalty creation factors which contribute to competitive advantage.
Furthermore, the authors of this study have included a frame of reference on loyalty, whereby value-creation (Reichheld & Teal, 1996) and trust (Warrington, Abgrab & Caldwell, 2000; Reichheld & Schhefter, 2000) lead to customer loyalty. These theories are related to the online platform and provide a reference to the factors that are most relevant regarding loyalty. Verona and Prandelli (2002) argue that loyalty leads to competitive advantage, by which the theories enable to identify how customer loyalty is created to contribute to competitive advantage.

 Porter’s five forces model

Porter (1980) founded an evaluative tool that assesses industry structure, which reveals the attractiveness of an industry (Porter, 2008b) and assesses a company’s environment. This regards the formulation of competitive strategies for established or newly entering companies within the respective industry, whereby an industry is described as a group of companies with products or services that are near substitutes. This tool is predicated on five forces, which in turn examines the potential and possible profitability in an industry for a firm (Porter, 1980). Porter (2008a) also states that this can only be understood when focusing on a specific industry or an individual company. When conducting strategy formulation, it is important to look at what the strongest competitive force or forces are in order to determine the profitability of an industry (Porter, 1979). Porter also recently revised the model and included Internet strategic impacts (Boone et al., 2010).
Porter (2008) states there are two primary aspects of dimensions of an industry: the product or service scope and the geographic scope. The five forces model enable determination of these dimensions. Equivalent industry structures indicate that two similar products or services are most likely to act in the same industry while distinct structure differences signify that the products are presumably acting in distinguished industries. If the industry structure is comparable to other countries worldwide, then competition can be seen as global, and the average profitability can be analysed from a global point of view. Industries having fairly differentiated structures geographically indicate separate industries and large force distinctions signify a presence of individual industries (Porter, 2008b).
The figure depicts the five forces model of competition, which collectively can discover the intensity of industry competition and profitability. The four external forces influence the rivalry among existing firms.
Figure 2.1 Forces driving industry competition (Porter, 1980, p.4), own illustration.
Porter’s five forces model is extensive and covers many different areas under each force. The five forces are further explained, in which specifically chosen factors are presented under each force that is regarded as applicable to the DMP industry. Therefore several factors have been omitted and will not be included below as this theory contains many other factors which are not applicable to this study. This discussion is supported by Porter (1980), who states that all industries are different and when analysing a specific industry, one will find that the importance of the five forces will vary, based on this industry’s own structure.
Although the model is popular, it has also received critique. The model can restrict a firm if they do not recognise the essence of how the forces work in the industry and how they can control their firm in a particular situation. This model can also be difficult to look at when analysing the industry, as the study can lose focus (Drummond et al., 2001). Recklies (2001) points out that the major limitation is that the model was developed and based on the current situation at that time; in the 1980’s. At that point, the industry growth was quite predictable and stable, which is not the case today where new business models emerge and changes in the barriers of entry are adjusted. Khalifa (2008) agrees on that Porter has focused on a static environment and that the philosophy is not likely to result in success within environments that are dynamic. The model can although be used for analysing the new conditions and let managers look at the present industry state in a simple and structured way (Recklies, 2001).

Threat of new entrants

Threat of new entrants looks at the barriers of entry there are for new firms to penetrate the industry together with the existing firms responses (Porter, 1980). Barriers to entry is explained by Bain (1956) as the advantage existing selling companies have in comparison to potential new entrants, and high barriers to entry are apparent when the established firms can raise prices above competitive levels without new entrants coming in to the industry. For existing firms to uphold high profits within the industry, high barriers are usually necessary (Dobson, Starkey & Richards, 2004), which result in a low threat of new entrants (Porter, 1980). The Internet market has lowered the entry barriers for several industries; it is not so costly or complex to enter the online market (Boone et al., 2010). New businesses can more easily enter a prospective large market (Guthrie & Austin, 1996). The following factors help determine the threat of new entrants (Porter, 1980):

Product differentiation

This term stems from businesses that already have acquired a base of loyal customers and brand identification from previous marketing activities amongst other business actions. New companies often have to risk spending heavily to counter customer loyalties and build brand image (Porter, 1980).

Capital requirements

The capital needed to enter and compete within an industry can hinder new entrants. A large barrier to entry means that businesses need heavy investment to be able to viably compete in the new industry (Porter, 1980).

Switching costs

The cost for switching from one supplier’s product to another should be considered. This poses as an evident barrier to entry for new entrants as suppliers need to offer customers a better choice in either price or performance, which can incur high costs, thus a high barrier to entry (Porter, 1980). For firms to stay competitive, they must work at attracting customers and increase the product’s benefits so they do not switch (Chang & Chen, 2008).

Access to distribution channels

This has the possibility to be an entry barrier where newcomers have to secure their product distribution. New firms have to convince distribution channels to take in their
product. Some industries have limited distribution channels, which makes entry barriers even higher (Porter, 1980).

 Threat of substitute products or services

A substitute product is a product that can fulfil the same function as another product in the industry. A plethora of substitutes will lessen potential returns of an industry and limit competitors’ profitability (Porter, 1980). Reasons for why customers change to a substitute include better performance of competing products or a lower price (Campbell, Stonehouse & Houston, 2002). To reduce the risk for substitutes, firms should differentiate their products so customers cannot perceive the same product value when choosing a substitute. Differentiation techniques that can be used are making a higher quality product and become a recognised brand (Campbell & Craig, 2005).
The Internet has increased the level of competition and where many substitutes exist, companies can be forced out of the business since customers can easily switch to products or services from rival firms (Boone et al., 2010). There are many firms that provide product information online which customers can view, as well as competitors and potential entrants (Guthrie & Austin, 1996).

Bargaining power of suppliers

This looks at the supplier’s perspective and how suppliers have potential power in an industry. It considers the ease of which a buyer can switch from one supplier to another. If an industry has few suppliers then they are able to raise prices, as they are not forced to compete with substitute products (Porter, 1980). Firms and suppliers experience a power struggle where the suppliers’ desire is to charge as high prices as possible (Mintzberg, Ahlstrand & Lampel, 1998). The Internet has resulted in a power decrease in supplier power online as buyers can reach suppliers globally which can result in a more intense supplier competition (Guthrie & Austin, 1996). Supplier power is high if the following are true (Porter, 1980):
The supplier group’s products are differentiated or it has built up switching costs When the buyer faces switching costs or differentiation they are not able to play suppliers against each other. There will be an opposite outcome if there are switching costs for the supplier (Porter, 1980).
The industry is not an important customer of the supplier group
When a supplier has customers across several industries whereby a specific industry is not a large part of the supplier’s income, then suppliers are more likely to exercise their power. However, if an industry is important to that supplier, they will look to protect it using for example reasonable pricing (Porter, 1980).
It is dominated by a few companies and is more concentrated than the industry it sells to Suppliers with a fragmented customer base are able to influence price, quality and terms (Porter, 1980).
It is not obliged to contend with other substitute products for sale to the industry If a supplier sells products that do not have substitutes to buyers, their supplier power is enhanced (Porter, 1980).
The suppliers’ product is an important input to the buyer’s business
When an input is significant for the success of the buyers business, it raises supplier’s power (Porter, 1980).

 Bargaining power of buyers

This is the power or influence buyers have in driving down prices, demanding better quality for products and services and forcing the industry to be more competitive. On the online market, buyers can access suppliers’ worldwide (Guthrie & Austin, 1996). Information is easily accessed and customers can compare prices and suppliers easily, which can result in an increase of buying power (Boone et al., 2010). Buyers can be a powerful group when the following situations are true (Porter, 1980):

The buyer has full information

When buyers have full information regarding aspects such as market prices it helps them in a greater position in terms of ensuring the most favourable prices (Porter, 1980).
The products it purchases from the industry are standard or undifferentiated Buyers can always find alternative products when they are undifferentiated and standardised and may compare competitors against each other (Porter, 1980).

It faces few switching costs

This can result in that customers are sometimes locked in to specific companies. On the other hand, when switching costs for the customer appear, the buyer power will be improved (Porter, 1980).

It earns low profits

When low profits are in place strong incentives to lower purchasing cost appear. Profitable companies are less likely to pressure their supplier for lower costs (Porter, 1980).

 Rivalry among existing firms

Competitive rivalry arises when competitors feel under pressure from competition or see an opportunity to exploit. This force evaluates the structural analysis of an industry and can be affected by factors such as the growth in and the number of competitors in the market (Porter, 1980). Companies strive for high positions on the market and use different strategies to succeed, such as attacking their competitors or even use the tactic of coexisting (Mintzberg et al., 1998). Rivalry increases when Internet makes it easy to access customer databases. Companies acting online are not only showing their product information to customers, but also to rivals. The outcome is that companies are more cautious when deciding upon what information they will provide on the World Wide Web (Guthrie & Austin, 1996). Rivalry is high if the following is true (Porter, 1980):
Numerous or equally balanced competitors
When there are numerous or equally balanced firms in the industry it can create instability. However when the industry is highly concentrated and only dominated by one or a few firms it is deemed less of a competing factor (Porter, 1980).
Lack of differentiation or switching costs
This condition shows a competitive battle where nothing really differentiates the firms’ products, and price turn into the main tool to compete with (Dobson et al., 2004). Customers choose their products mainly based on price and service and this create an intense competition therein. The buyers make purchases supported by preferences and reliability to particular companies (Porter, 1980).

Diverse competitors

Company strategies differ and they all have their own ways for how to compete. No specific rules exist in the industry and strategies will be adopted based on what is best for the certain firm (Porter, 1980).

High strategic stakes

Industry rivalry is unstable when a lot of the companies strive to achieve success (Porter, 1980).
Slow industry growth
Industry rivalry is strong when industry growth is slow. This triggers competitors to struggle for market share (Porter, 2008b).

 Competitive advantage

The concept of competitive advantage has, during the years, been described in several ways. Porter (1985) simply argues that it arises when a company does something better than their competitors. He continues by pointing out that it is something that creates value; a buyer value that is higher than the production cost. A company can create benefits that are comparable or exclusive from competitors (Porter, 1985). Petaraf and Barney (2003) go further and state that to determine whether a firm has a competitive advantage, it has to create more economic value in comparison to the marginal competitor in the market. Klein (2001) adds that competitive advantage is merely a tautology to success and is without any clear definition. However, several theories and methods are founded to analyse competitive advantage. Barney (1991) expresses that resources are the key when ascertaining whether a firm has a sustainable competitive advantage, which is named the resource-based view. Core competences are another way of looking at how a firm can create competitive advantage. Core competences are defined by Prahalad and Hamel (1990) as the shared learning in a firm, which specifically focus on how to harmonise the various production abilities with different streams of technologies. In addition to resources and core competences as a source for competitive advantage, Verona and Prandelli (2002) argue that competitive advantage can be created by combining customer loyalty-creating techniques affiliation and lock-in. The creation of customer loyalty which helps reach competitive advantage will be explored in this study.

 Customer loyalty

Customer loyalty is a subject that has been researched extensively with several authors vastly contributing to the subject. Söderlund (2001) defines customer loyalty as an individual consistent relationship to a specific object over time. Reichheld (2001), a guru within the field, claim not only customer loyalty exists, but also employee and investor loyalty do too, as well as signifying the importance of having high-calibre employees for achieving customer loyalty. This is due to the traditional notion of customers often interacting with employees in the physical setting. Since DMPs operate in a digital setting where customers and staff rarely interact, employee loyalty will not be discussed in this paper. Instead focus is put on the creation of customer loyalty. Rowley (2005) presents three main benefits of achieving customer loyalty: improved profitability, reduced customer
acquisition cost; and lower customer price sensitivity which illustrate that it is much better to hold onto your customers.
E-loyalty
Loyalty online is referred to as e-loyalty which is when customers repeat purchases are lead from positive attitudes towards an electronic business (Srinivasan et al., 2002). According to Reichheld (2001) the relationships established with customers can lead to competitive advantage that can become sustainable over time. However customers who stay on the long-term, is not always a result from customer loyalty. Reichheld (2001) adds that they may be unaware of relevant alternatives and are stuck in long-term contracts. Srinivasan et al. (2002) add that understanding antecedents of e-loyalty assists companies in achieving a competitive advantage. Consumer interaction over virtual markets aid in enhancing transaction frequency and create loyalty (Amit & Zott, 2001). Reichheld and Schefter (2000) further state superior customer loyalty is necessary for achieving long-term profits in an e-business setting.
A model for reaching e-business customer loyalty is presented by Verona and Prandelli (2002). Affiliation and lock-in strategies are combined to reach customer loyalty, leading to a sustainable competitive advantage. Online firms must nurture their customer relationships and affiliation relates to consumers preference and belief of a product or brand as superior over others. The trust generated towards the product or brand will improve e-business performance (Verona & Prandelli, 2002). Lock-in relates to customers being constrained by choices made in the past. If they are to switch from a brand or product, website or technology to another they will incur switching costs. By increasing the lock-in effect, customer loyalty and customer stickiness towards a company is increased (Verona & Prandelli, 2002).

1 Introduction
1.1 Background
1.2 Previous research
1.3 Problem statement
1.4 Purpose
1.5 Research questions
1.6 Definitions
2 Theoretical framework
2.1 Porter’s five forces model
2.2 Competitive advantage
3 Research design and method
3.1* Research strategy
3.2 Research approach
3.3 Qualitative data analysis
3.4 esearch delimitations
3.5 Trustworthiness
4 Empirical data
4.1 Industry situation
4.2 Customer loyalty
4.3 Creativity and innovation
4.4 Flexibility
5 Analysis
5.1 The DMP industry
5.2 Customer loyalty creation in the DMP industry
6 Conclusions
7 Discussion
7.1 Further research
Appendices
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