The next barrier is The Capital Cost of Entry. As the title suggest, this is the costs associated with setting up and entering a market. This is a very important barrier for potential threats to Marks and Spencer. Marks and Spencer have the finances to underwrite a credit card whereas the Joe Bloggs retailer may not. This is due to turnover and assets available to the firm.
Another barrier would be having Access to Distribution Channels. This is particular prevalent for companies selling goods where there may be restrictions on where you can sell your products. This would not be a barrier to the market as it is in a sense a “virtual market”.
The next barrier is Experience. It is difficult to break into a market where there is an experienced operator in the market who has good relationships with key buyers and suppliers. Again this would be very relevant for companies involved in producing goods however it is also relevant in the context of our report. The longer Marks and Spencer operate in the market by themselves, the bigger the advantage and more experience then will gain.
The final barrier that we will look at is Legislation or government actions. This is very important for potential entrants into the new card market.
The Consumer Credit Act 1974 requires most businesses that offer goods or services on credit or lend money to consumers to be licensed by The Office of Fair Trading (OFT). Trading without a licence is a criminal offence and can result in a fine and/or imprisonment. The Act also requires certain credit and hire agreements to be set out in a particular way and to contain certain information. This means that any potential new entry has to obtain a licence and make sure that their product, systems and guidelines meet the regulations set out in the Act.
Threat of Substitution
Marks & Spencer face another threat with their ‘&More’ card, namely, credit cards offered by other alternatives such as River Island, Dorothy Perkins, Burtons, and USC among others. To overcome this challenge, the ‘&More’ card must offer more benefits to the eyes of its customers, so they value it more than the other cards. This aspect of Porter’s Five Forces is the element of substitution, or threat of substitutes.
“Substitution reduces demand for a particular ‘class’ of products as customers switch to alternatives.”
Substitution, in this sense, can be in various forms:
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Substitution of Need - Where a good renders another product redundant. For example, digital cameras do not require the user to go to printing booths and photo agents to get their photographs developed. This saves money and time for the consumer.
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Generic Substitution – Where goods compete for disposable income, and the providers of that product or service are not necessarily within the same market. For example, a cinema competes for the customer’s leisure time and money, amongst a gym, a comedy club, and an amusement park to name a few.
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Product-for-Product Substitution – Where a good with higher perceived advantages takes over from another good aimed at the same market. This is the segment the ‘&more’ card is aimed at, and will try to outdo its competitors in.
In trying to compete in the current market, Marks & Spencer have launched their new ‘&More’ credit card in such a fashion as to try to obtain competitive advantage. The launch itself has been recorded to be the largest credit card launch in Europe ever. The question in the customer’s minds is why should they choose the ‘&More’ card over any other credit card aimed at the same market?
The major advantage that Marks & Spencer have is their image. A lot of customers choose to go to Marks & Spencer because the image is associated with product reliability, efficient service, and customer loyalty. To any customer holding the previous Marks & Spencer charge card, the balance is transferred over to the ‘&More’ card without any deductions. One aspect that the ‘&More’ card offers to attract older customers to transfer to the new card, and to obtain new customers, is that it offers one point for every pound spent in Marks & Spencer, and one point for every two pounds spent elsewhere using that card; reward vouchers are sent out at every 100 points gathered.
The store card Marks & Spencer previously offered was beginning to be seen as outdated, and despite any advantages it offered, the scale of customers it attracted was decreasing. Laurel Powers, the new director, brought ‘new blood’ into the organisation and launched the ‘&More’ card which incorporated a MasterCard / VISA credit card along with the store card, being managed by Marks & Spencer.
They are the only company aimed at the food/clothing market which offers a loyalty card in combination with a credit card, and in trying to outdo its competitors, they offer loyalty points for that card being used anywhere where VISA or MasterCard are accepted.
They still face a threat where customers are hesitant to have a credit card managed by a superstore and not by a recognised bank such as Halifax. Simply having a store card and a credit card, would mean less confusion for the younger market, whereas it is convenient for the older market to have the combination of the two as they are more confident in dealing with bank issues.
Power of Buyers and Suppliers
“Supplier power is the degree to which the suppliers to an industry have the power to dictate prices, quality standards, delivery lead times and other terms and conditions to the firms that they are supplying.” (Page 4, notes/handouts, Term 1, Week 3, 23.10.03).
This is contrasted to the power of buyers. “The extent to which an industry’s customers have the power to dictate prices, quality standards and other terms and conditions to the firms that they are supplying them.” (Page 3, notes/handouts, Term 1, Week 3, 23.10.03).
The power of suppliers is quite simply the weight of power that the supplier can put onto the buyer in order to gain a higher price for the product/service that they are selling. Alternatively the power of buyers is the weight of power held over the supplier in order to gain a lower price.
Supplier power could, arguably, be at its greatest when a monopoly is in place. This gives an extreme amount of power to the supplier as it “does not face any competition from any other firm” in its market. (p23, Pricing in Business, D.C. Hague). A monopoly is “characterised by the total absence of competition as supply is concentrated in the hands of a single seller, the monopolist” (p6, Business and Prices, Sonkodi). A monopoly entitles the company to sell their product/service at whatever price they deem to be appropriate (or more likely attainable). The firm knows that it has no competition and can therefore sell its product to the market at a high price, assuming that the consumer wants or needs the product.
One of the lowest points of supplier power is where there is a great amount of competition. The more competitors there are in a specific market the less the suppliers can pull their weight. This in turn gives the buyer a greater amount of power. Buyer power is at its highest where many suppliers exist. It allows the buyers to “shop around” to find the best buy and therefore best suited to what they want to purchase.
When relating these ideas to the Marks and Spencer ‘&More’ Card, we can see that the consumer should have a fairly high amount of power. This is due to there being a great deal of competitors that M&S have to deal with. Many other stores have similar store cards where the consumer can collect points over time by buying more products from their stores.
As shown previously in this report, there is a lot of competition for such rewards cards. This makes the Marks and Spencer's ‘&More’ Cards more difficult to sell. The buyer has a great deal of power and the supplier (M&S) has only a small amount.
Competitive Rivalry
“An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry”
(Michael Porter)
The ‘& More’ card introduced by Marks and Spencer last year entered the credit card market as a new entrant with intense competition from other stores such as John Lewis, Argos, Bhs and Habitat.
The above diagram represents the Product Life Cycle (PLC) that products go through as they progress through the market.
- The development stage is where there are few users and buyers of the product, and competition is low.
- The growth stage is where the product is tried within a small group of customers, and competition increases as more and more companies fight for a share within that market.
- The shakeout stage is where customers and buyers become more selective of their purchases, and competition becomes more intense as price-cutting usually occurs at this stage to increase volume and share of the market, and the weakest competitors are eliminated.
- In the maturity stage there is a saturation of users and the customers become more reliant upon a specific product or service. At this stage it is the hardest for new companies to enter the market, such as ‘&More’ card is doing as most companies are already at this stage.
- The final stage is where sales usually begin to decline, most competitors exit the market and there is a selective distribution of the products.
The ‘&More’ card is currently at the growth stage entering the shakeout stage. Most cards currently in the market are currently at the maturity stage, such as the USC and John Lewis cards. The ‘&More’ card is competing for an increased share in the market, but since it is transferring its customers from the previous store card to the ‘&More’ which offers an advantage over the competitors as it is combined with a MasterCard or VISA card, it manages to maintain the shares it had already acquired within the market and is trying to combat other competitors within the market.
One of the key issues of competitive rivalry is to assess what size rival companies are in relation to their own. The more equal in size, the greater the danger of intense competition. The Marks and Spencer store card can be used as a MasterCard / Visa card in over 32,000 outlets in the U.K. The majority of the other companies who offer store cards do not offer them as a Visa / MasterCard. This gives Marks a clear advantage and allows for less chance for intense competition.
The next step is to establish the opportunity for growth of the ‘&More’ card within the credit card market. Although rapidly expanding with many different cards to choose from in the market The ‘&More’ card has a distinct advantage as it is more diverse that any of the other organisations that offer store cards. As the ‘&More’ card is fresh to the market, potential to increase market share is high.
The fixed costs of the ‘& More’ card are fairly low. All enquiries or balance checks can either be done over the internet or by telephone. Marks & Spencer use call centres abroad for cheap labour reducing fixed costs further. High fixed costs can result in price wars; This is unlikely to happen with a credit card.
However rival companies such as John Lewis and River Island could introduce lower interest rates or offer more points for each pound spent in their stores. This could pose a threat to Marks although their card is also a MasterCard / Visa card and points can be gained outwith their stores.
As the market is fairly extensive with a wide range of cards on offer, consumer differentiation is likely to occur. Customers are likely to switch between competitors depending on who satisfies their needs at the time. Marks and Spencer ‘&More’ card is designed to lure consumers away from competitors by offering such a diverse store card, consumers don’t even need to spend money in Marks to receive goods from their outlets. When the ‘& More’ card user has gained enough points to obtain an item from Marks the likelihood of them buying other items is high. This will reduce customer differentiation to an extent.
Another factor of competitive rivalry is exit barriers. Has the market reached excess capacity? The credit card market is fast approaching it’s capacity leading to increased competition for Marks. It would be very difficult for M&S to withdraw the card because cardholders would be entitled to a return on what they had spent and this would be a financial burden to the company.
Barriers to entry are factors that need to be overcome by new entrants to compete successfully. Marks and Spencer would need to assess the market and work out the benefits and whether they would outweigh the constraints. To do this, they would need to work out what the interest rates would be and if it would be to their advantage.
Conclusion
There are many factors which Marks & Spencer need to take account of if they want the ‘& More’ card to be a success in the long term. The volatility of the market in which the card sits means that it is subject to new entrants superseding it and existing providers improving their services and stealing Marks and Spencer’s’ customers away.
Having used the Porters Five Forces Model to analyse the ‘& More’ card, we believe that card has been very successful since its launch and holds a strong position in the credit card market but still has a lot of potential for growth. We believe that due to the transparent nature of the clothing/food market segment, Marks and Spencer are in a strong position to identify threats and react accordingly.
We found that the Five Forces model was not ideal for the type of investigation which we were carrying out. The model would appear to be much more relevant when looking at a manufacturing type industry as factors such as economies of scale and access to distribution channels would have much more impact than they do here.
Bibliography
Books
Title Author
Exploring Corporate Strategy
6th Edition Johnson & Scholes
Prentice Hall, 2002.
Competitive Advantage – Creating and
Sustaining Superior Performance Michael E. Porter
Free P., 1985.
Pricing In Business D.C. Hague
Allen and Unwin, 1971.
Business and Prices Laszlo Sonkodi
Routledge, 1969.
Lecture Notes
Term 1 Week 3 P3,4 John Sanders
Websites
www.houseoffraser.co.uk House of Fraser
www.dorothyperkins.co.uk Dorothy Perkins
www.marksandspencer.com Marks and Spencer
www.riverisland.co.uk River Island
www.burtonmenswear.co.uk Burton
www.usc.co.uk USC
http://www.oft.gov.uk/Business/Legal+Powers/ Consumer Credit Act
Consumer+Credit+Act.htm
Appendixes
- Application form
- Terms & Conditions
- Marketing Leaflet
- Getting the Most out of The Card
This is a brief statement to clarify that this assignment is entirely the work of the named group members and all members are aware of the University’s policy/regulations on copying, plagiarism and collusion
Business Policy February 2004