Michael E. Porter Five Competitive Forces that Shape Dollar Tree’s Strategy
Dollar Tree is one of the leading discount variety stores in the U.S listed at the New York Stock Exchange. Previously known as ‘Only $1.00’, the chain of discount stores stocks different items and each store has different departments selling a wide range of products. The departments include candy, toy, gift, electronics, books, pet supplies, beauty and health, and glassware among others. The chain has more than 14,000 stores across the U.S. and Canada with a market capitalization of $25.0 billion (Smith, 2019). The company’s competitors include Dollar Genera, PriceSmart Inc., Ollie’s Bargain Outlet Holdings Inc., JD.com, Walmart, SuperValu, and Target. Statistics indicate that Dollar Tree and its competitors compete in an industry that made $3.53 trillion in sales in 2017 (Anders, 2018).
Michael Porter publish an article in the Harvard Business Review in the late 70s that changed industry analysis. Known as the Five Forces that Shape Strategy, the model has become pivotal for both established companies and those that are planning entry into a particular market (Dalken, 2014; Porter, 2008). Porter’s model has become an industry standard in analyzing the external market and providing an overview of a company’s position in an industry. The model has five forces, which include threat of new entrants, threat from substitutes, bargaining strength of buyers, supplier power, and competitive rivalry (Porter, 2008). The forces are instrumental in understanding Dollar Tree’s position in the retail industry.
Threat of New Entrants
As Porter’s first force, the threat of new entrants refers to how easy it is for new companies to get into the industry. In the conventional business arrangement, companies had threats only from entrants into the same industry, sometimes selling the same products and with the same business proposition. In the era of the Internet and digital technologies, however, entrants are not only traditional industry competitors but also businesses from outside the industry (Evans, 2015). This is especially true for the retail industry that continues to attract more entrants.
Given that Dollar Tree operates a chain of discount stores, the difficulty in achieving economies of scale makes it costlier for new entrants into the market. Lower prices, new value proposition, and innovative products and services in the industry significantly lower the profit margins in the retail industry, thus lowering the attractiveness of the industry to new entrants (Deloitte, 2019). Moreover, Dollar Tree and its rivals, including e-commerce giant Amazon, have achieved higher economies of scale, which essentially buoy them even with the thin profit margins. Such factors make the threat of a new entrant very low, as most new entrants may not have effective economies of scale, supply chain networks, lower prices, and customer loyalty to upset the established players in the industry.
Threat from Substitutes
The threat from substitutes in the general retail industry is considerably high. Many products and retailers offer the same products at comparative prices. Buyers within the industry, therefore, have a wide range of variety to choose from for the satisfaction of their requirements. However, with the discount and variety stores segment within which Dollar Tree operates, the threat of substitutes is relatively low. There are only few of the company’s direct competitors who also produce and sell products and services at relatively low profit margins. The profit margins for Dollar Tree and its rivals are so low that the company’s shareholders have been pressurizing it to change its pricing strategy (Bursztynsky, 2019; Smith, 2019). However, while there are substitutes to Dollar Tree’s products and services, they are largely in more expensive regular stores. The price differentiation, in this case, makes it unlikely for Dollar Tree buyers to switch to the relatively expensive options with relatively similar quality.
Buyer Bargaining Strength
The bargaining power of buyers in the general retail industry is relatively high given the low cost of switching products from the myriad players in the industry. Moreover, Porter (2008) argues that powerful buyers have the power to reduce prices and get more value from companies by demanding more in quality from them. For discount stores, however, the number of suppliers is relatively high compared to the number of producers and sellers. The scenario greatly reduces buyers’ bargaining power.
Discount stores additionally have high product differentiation. This makes it relatively costly for buyers to switch to alternative products. Differentiation in product and price means that buyers have to stick to one seller. Moreover, the income of buyers within the discount segment is relatively low. Buyers at this segment, therefore, are price sensitive with constant pressure to buy at low prices. Essentially, this makes their bargaining power relatively low/weak within the industry.
Porter contends that big suppliers can get more value from their customers by charging premium prices and passing costs to industry players, who eventually pass the same to consumers (Porter, 2008). Additionally, the fewer the number of suppliers of a product, the more power such suppliers have over industry players. For Dollar Tree and the retail industry, the number of suppliers is relatively high, consequently reducing their control over prices and making them a weak force. Retail suppliers mostly have standardized products that have little to no differentiation, making it easier for their customers to switch suppliers.
While the general retail industry has many players, Dollar Tree’s discount segment has relatively few players (Deloitte, 2019). Most of the companies in the segment are huge and any moves they make are noticeable. The competitive rivalry in the industry is, therefore, a stronger force, given that few players have a huge market share, therefore, engaging in competitive action to gain position and become market leaders. Such actions are an advantage to consumers who continually enjoy lower prices (Karagiannopoulos, Georgopoulos & Nikolopoulos, 2005). The need to stay ahead of competitors lowers prices when demand slacken and the high exit barriers from the industry additionally make competitive rivalry within the industry very strong. Further, companies within the industry have to formulate and implement strategies as differentiation factors. Such demands from the industry makes competitive rivalry one of the strongest forces for players in the retail industry.
Dollar Tree operates in one of the most competitive industries in the world. As a discount retailer, the company is continually at pressure to maintain low prices while at the same time making profits. Economies of scale is one of the factors that continues to buoy the company and its competitors, while keeping away new entrants. The competitive rivalry and the high exit barriers additionally dissuade new entrants from going into the industry. With slacking sales, however, Dollar Tree is continually under pressure to revamp its pricing strategy or risk losing its business.
Porter’s Five Forces
Anders, M. (2018). Retail industry expects more sales growth in 2018. Forbes. Retrieved from https://www.forbes.com/sites/melissaanders/2018/02/08/retail-industry-poised-for-more-sales-growth-in-2018/#79aa719c4fa7.
Bursztynsky, J. (2019). Dollar Tree to close up to 390 Family Dollar stores, reports $2.3 billion loss. CNBC. Retrieved from https://www.cnbc.com/2019/03/06/dollar-tree-to-close-up-to-390-family-dollar-stores-this-year.html
Dalken, F. (2014). Are Porter’s Five Competitive Forces StillApplicable? A Critical Examination concerning theRelevance for Today’s Business. Enschede: University of Twente
Deloitte (2019). 2019 Retail Outlook: Transition Ahead. Deloitte
Evans, N., D. (2015). How digital business disrupts the five forces of industry competition. CIO. Retrieved from https://www.cio.com/article/2976572/emerging-technology/digital-disruption-from-the-perspective-of-porters-five-forces-framework.html.
Karagiannopoulos, G., D., Georgopoulos, N., & Nikolopoulos, K. (2005). Fathoming Porter’s five forces model in the internet era. Spoudai, 7(6), 66-76.
Porter, M., E. (2008). The five competitive forces that shape strategy. Harvard Business Review
Smith, J., C. (2019). Starboard Value Letter to DLTR CEO and Board. Starboard Value