Image Source: FreeImages
Introduction
Welcome to the second part of our analysis of the logistics industry! After having dealt in detail with the external influencing factors through a PEST analysis in the previous article, we now turn our focus to the internal forces that significantly shape the competitive dynamics in the logistics industry. We use Michael E. Porter's tried and tested tool - the Five Forces Framework. [2]
While the PEST analysis provided an insight into the political, economic, social and technological forces, the internal influencing factors within the logistics industry will now be examined more closely.
Understanding Porter's Five Forces Framework
Porter's Five Forces is an analytical framework designed to evaluate the competitive intensity and attractiveness of an industry. It consists of five forces: the threat of new entrants, the bargaining power of suppliers, the bargaining power of customers, the threat potential of substitute products, and the degree of competition within the industry. [2] By applying this framework, companies can better understand the dynamics of their industry and develop strategies accordingly.
Overview of the five forces in the logistics industry
1. Power of suppliers in logistics
The bargaining power of suppliers in the logistics industry can be considered high. This is based on various factors that affect the relationship between logistics companies and their suppliers. [1] Some reasons for the high power of suppliers are:
Specialized services: In logistics, certain services are highly specialized, such as the transportation of sensitive goods, temperature-controlled goods, or dangerous goods.
Limited number of suppliers: In some specialized segments of logistics, there may be only a few suppliers that can provide the required services.
Dependence on infrastructure: Some suppliers in the logistics industry may own important infrastructure such as port facilities, warehouses, or aircraft.
Commodity prices: For logistics companies that operate transportation such as trucks, ships, or aircraft, fluctuations in commodity prices (e.g., fuel costs) can significantly affect operating costs.
To manage supplier power, logistics companies often need to form strategic partnerships, negotiate long-term contracts and consider alternative sources of supply. Effective supplier relationships and supplier diversification can help mitigate the impact of high supplier bargaining power.
2. Customer Influence in Logistics
The bargaining power of customers in the logistics industry can also be considered high. [1] Several factors contribute to this high level of customer power:
High level of competition: In the logistics industry, there are often a large number of suppliers offering similar services. This leads to high levels of competition, giving customers a wide choice of logistics partners.
Low switching costs: Switching costs between logistics service providers are often relatively low. Customers can easily switch between different suppliers, which increases their bargaining power.
Standardized services: Some logistics services can be considered standardized, especially in the area of freight transportation. This means that customers often expect similar services from different suppliers and can easily compare them.
Dependence on large customers: Logistics companies may be heavily dependent on a few large customers. In cases where a customer accounts for a significant share of the business, that customer is given higher bargaining power.
To manage customer bargaining power, logistics companies often need to implement customer satisfaction and retention strategies. This may include providing differentiated services, flexible contract terms and effective communication with customers. Companies may also try to diversify their services and offer innovative solutions to increase customer loyalty and mitigate the effects of high bargaining power.
3. Threat of new entrants
The threat of new entrants in the logistics industry varies, with several factors influencing barriers to entry. [1] In general, however, the threat can be assessed as moderate to high.
Moderate threat:
Capital requirements: The logistics sector often requires significant investments in fleets, warehouses and technology. This poses a hurdle for potential new entrants, especially smaller companies.
Complex infrastructure requirements: The logistics industry relies on a well-developed infrastructure. Building an efficient transportation and delivery network requires extensive resources and expertise.
High threat:
Technological disruption: Advances in technologies could serve as a catalyst for new entrants. Startups that use innovative technologies such as autonomous driving or advanced analytics could compete with traditional companies.
Flexibility and niche markets: Smaller, specialized companies can gain a foothold in niche markets and compete with larger players. Their flexibility allows them to focus on specific services that may be neglected by established companies.
It is important to stress that the assessment of the threat posed by new market entrants is dynamic and can change with technological developments, regulatory changes and economic conditions. Companies in the logistics industry must therefore be agile and continuously review their competitive position in order to be able to respond to potential threats from new market entrants.
4. Threat of substitutes
The threat of substitutes in the logistics industry can be classified as moderate. This refers to the potential danger that alternative products or services could affect the position of the existing logistics companies. [1] Some factors that affect this threat are:
Diversity of transportation modes: In logistics, there are various transportation modes such as road, rail, air and water. This diversity makes it more difficult for substitute products to cover the full range of logistics services.
Specialized services: Some logistics companies offer specialized services that are difficult to replace with substitutes. For example, the transportation of dangerous goods or sensitive medical products requires specific know-how and equipment.
Customer loyalty: Existing business relationships and contracts can lead to a certain level of customer loyalty. Companies in the logistics industry that offer high-quality services can build customer loyalty and reduce the likelihood of customers switching to substitute offerings.
Despite this moderate threat, it is important that logistics companies remain vigilant and prepare for possible substitutes. Developments in technology, efficiency and environmental friendliness could give rise to new substitutes. Therefore, continuously monitoring industry trends and adapting service offerings is crucial to minimize the threat of substitute products.
5. Internal rivalry and competition
Internal rivalry and competition in the logistics industry can also be classified as high. [1] Several factors contribute to this intense competitive situation:
High number of suppliers: The logistics industry is often characterized by a large number of suppliers offering similar services. This leads to intense competition for customers and market share.
Standardized services: Some logistics services can be considered standardized, especially in the field of freight transportation. This increases competitive pressure as customers tend to compare services and choose the supplier with the best value for money.
Low switching costs for customers: Customers often have the option to switch between different logistics companies as switching costs are relatively low. This increases competitive pressure and forces companies to constantly improve.
High intensity of competition for large customers: In many cases, logistics companies compete intensely for large customers who account for a significant share of the business. This leads to increased competition for contracts and customer loyalty.
Conclusion
To succeed in this competitive environment, logistics companies often need to employ differentiated strategies. This can include developing specialized services, optimizing operational efficiency, increasing customer loyalty, and entering new markets. Continuous innovation and adaptation to changing market conditions are critical to successfully competing in the logistics industry.
Do you have any questions about this topic or need support in determining your individual five forces? I am happy to help you via the contact form or by email olga.brumnik@beecon.digital.
References
Cichosz, M. (2018). Digitalization and Competitiveness in the Logistics Service Industry. e-mentor, 5(77), 73-82.: https://www.researchgate.net/publication/332173179_Digitalization_and_Competitiveness_in_the_Logistics_Service_Industry#pf6
Porter, M.E. (2008), On competition. Boston: Harvard Business School Press
Comments