W.W. Grainger Porter’s Five Forces Analysis
Porter’s Five Forces is a strategic analytical framework developed by Michael Porter (1979)[1]. The framework consists of five individual forces that shape an overall extent of competition in an industry. W.W. Grainger Porter’s Five Forces are illustrated in figure below:
Threat of new entrants in W.W. Grainger Porter’s Five Forces
Threat of new entrants into traditional B2B distribution is not significant. Inter-relationships of the following factors determine the extent of threat of new entrants into industrial distribution:
1. Economies of scale. Economies of scale is a critical success factor in B2B distribution. Grainger purchases more than 1,7 million types of products from approximately 5000 suppliers worldwide.[2] Accordingly, Grainger benefits from the economies of scale to a great extent with positive implications on the cost structure of the business. However, new market entrants are not able to benefit from the economies of scale to a similar extent and therefore, economies of scale emerges as an important entry barrier to the B2B distribution industry.
2. Capital requirements. Industrial distribution is a highly capital-intensive business. In order to be successful and challenge established market players, new entrants need to have wide range of products stored in warehouses and distribution centres. Substantial capital investments are needed to achieve all of these and unless new market entrants do not come up with innovative business models to disrupt the industry, capital requirements are likely to persist as an important entry barrier to the industry.
3. Expected retaliation from existing businesses. Current market players in B2B distribution are likely to retaliate against any new entrants that possess a considerable threat to their market share. This is a noteworthy entry barrier for potential new entrants to the industry. For example, once Amazon Business started to become a formidable player in the global market of industrial distribution, Grainger attempted to retaliate by changing its pricing strategy in 2017. Specifically, Grainger decreased prices of a wide range of its products so that the company can compete with Amazon, which is known to operate with a razor-thin profit margin.
Bargaining power of buyers in W.W. Grainger Porter’s Five Forces
Bargaining power of buyers in industrial distribution can be assessed as moderate. Buyer bargaining power in B2B distribution is formed from the following factors, among others:
1. Size and concentration of buyers. The greater the size and concentration of buyers, the greater their bargaining power. In 2019, Grainger sold its products to approximately one million customers in the US and no single customer accounted for more than 2% of total revenues[3]. Accordingly, the global industrial supply company does not depend on a single customer or customer group with positive implications on the bargaining power of the company.
2. Complexity of products. High level of complexity of industrial parts and services diminishes bargaining power for users of these products and services. In other words, user-companies are less likely to change suppliers for complex products and services because of associated risks. Grainger offers more than 1,7 million types of products[4] with varying levels of complexity, along with complex services such as inventory management and technical support. Customer bargaining power is immense for simple MRO products offered by Grainger and other B2B distributors, but the bargaining power is limited for complex products and services.
3. Price sensitivity. Price sensitivity is another factor that affects buyer bargaining power in industrial distribution. Price sensitivity can be explained as extent to which price of products affects consumer purchasing behaviour. In industrial distribution price sensitivity and buyer bargaining power varies according to complexity of products. Specifically, price sensitivity for simple MRO products such as tapes, fasteners and pumps is greater compared to more complex products such as motors, heating and thermostat. Accordingly, Grainger faces greater competition from Amazon business for simple products, whereas there is less price sensitivity and customer bargaining power for more complex products.
W.W. Grainger Report contains a full analysis of W.W. Grainger Porter’s Five Forces Analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on W.W. Grainger. Moreover, the report contains analyses of W.W. Grainger leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of W.W. Grainger marketing strategy, ecosystem and addresses issues of corporate social responsibility.
[1] Porter, M. (1979) “How Competitive Forces Shape Strategy” Harvard Business Review
[2] Fact Book 2019 (2020) W.W. Grainger
[3] Annual Report 2019 (2020) W.W. Grainger
[4] Fact Book 2019 (2020) W.W. Grainger