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Porters’s five forces
2. Porter’s five forces

2.1 Intensity of rivalry

In November 2009 there were more than 13 million .de-domains registered in Germany. In addition to that Germans also use .com- and .net-domains for their web pages. (Denic, 2009) All of these web pages are created by web designers who often have private intentions to put a profile of them in the internet but the majority have commercial intentions. There is an uncountable amount of agencies, self-employed or part-time web designers who all offer the same product for privates, small companies or whole enterprises just in Germany. There is still a growth of about 10 percent each year, so there is a constant entry of new competition into the market to cover the high demand of web pages. (Statista, 2009)

Figure 1: Registered .de-domains

Porters Five Forces Denic

Source: Denic, 2009

Potential customers have a transparent market where they can choose the company they want. They can compare prices and services very easily through the internet. Furthermore customers do not make decisions due to barriers they have in a market outside the internet. There are neither infrastructural obstacles nor problems to get information for them, so web designers work in an almost perfect competition. They have very low entry barriers because the threshold resources are only a computer and informatics knowledge. The exit barriers are low as well, because an agency does not have many employees or expensive goods. So they have neither social responsibility nor materialistic factors to lose. They have no core competences to distinguish them from others in their industry. (Lipsay and Crystal, 2007, p.138; Fischer, 2009, p.207)

Web designers do not have the choice to compete on price, each of them possess a very low market share. In an atomic competition a seller would immediately lose all buyers, if he changes the price. They cannot compete on the product, either. Although there are differences in the quality and the way of programming a web page, the result is always the same. Every web page uses the same standard and has almost the same buttons to standardize it for the users. (W3C, 2009) There is no space for experimental programming. Those who try to launch an innovative web page lose users to other pages which maintain the standards. They have to compete in other ways. A principle of the web design industry is that you have to have a well optimized web page for the search engines like Google, Yahoo or MSN. In this environment the most important competence is that people find your business in the search engines and that your own web page presents a good overview of your work.

Besides they have to fight for every new customer. A lot of time is not needed to create web pages but is needed to optimize their own one. (Fischer, 2008, p.14) It often takes half a working day to optimise a web page for the Google results, because of the extremely high competition. More than 80 percent of the web designers do Benchmarking observing key competences like the corporate design, the success or the strategy. (see Appendix 1) An intensive discussion of established operators suggests the possibility of efficient electronic processes to identify as a template for your own e-shop. (Kollmann, 2007, p.246)

Although there are many competitors with very few market shares, the intensity of rivalry is a weak force. The market is still growing and the financial risks are low.

2.2 Bargaining power of buyers

There are three groups of customers. The buyers of a web page could be private or business customers. But within the group of business customers you also have to differentiate between those who only want a company presentation on the internet and those who want a complete online shop with thousands of products. (Fischer, 2009, p.691)

Non-commercial customers who want to use a web page for personal reasons like their own biography or their wedding do not have the power to negotiate with the agencies. Normally they have a lack of the right understanding of important technical aspects of a web page. They often do not compare different market players and their services or prices. (Hauser et al., 2008, p.988) Nevertheless agencies cannot charge a high price because in comparison to other online services a private web page is a low involvement product. It is not vital for the buyers to have this product so they can cancel the project easily, if the price rises too high. Most of the agencies say that customers can negotiate the price, but in fact there is only a small range. (see Appendix 2) Instead of a professional wedding page they could create their own page in one of the social media portals like Facebook for uploading their stories and photos. (Facebook, 2009) Another solution for them is to use a home page construction set software which often costs less than 40 € (Amazon, 2009).

The second group contains companies which only want a portal for presenting themselves like small factories, retailers, lawyers or associations. The product they want is more complex than the previous. The amount of separate pages is higher, they have higher demands on the design and the textures and their pages need regular updates. These business customers have a greater awareness of what they want, so they compare competitors and their prices. But their bargaining power is limited as well, because one third of the web designers have fixed prices for their services and those who let you negotiate only give only small discounts. Business customers negotiate on service. They ask for different designs or technical support. In the service sector there are slight differences and agencies have more scope than self-employed web designers. (see Appendices 1 and 2)

Companies who wish to have an online shop or other complicated internet applications where the user interacts with the system have bargaining power. This is the high price segment and requires a lot of informatics knowledge and experience from the agency. The involvement is high because the customers have to have a good knowledge of what they want and need, as well as the agency’s needs to convince the customer with their competences. A failure in this area means a loss of money. Agencies not only need informatics knowledge, but also marketing knowledge to sell the products to their customers online.

In general it is said that the more complex the web page is, the more bargaining power the customer has. There is a transparent market without switching costs and brand identity for the customers and furthermore there is a buyer concentration in the same amount like a firm concentration. The higher the price of the web page and the higher the internet knowledge of the customers, the stronger is this force. (Fischer, 2009, p.13 – 15; Appendix 2)

2.3 Bargaining power of suppliers

Web designers sell virtual products, so the suppliers of them do not play a big role. (Fischer, 2009, p.40-41) In a classical business there are needs of raw materials and supplies, but in an online business you only have costs for office supplies, hard- and software, rent, office furniture, running costs and advertising. None of these costs are directly related to the product, so the production of a web page only has fixed costs (except personal costs). Most of these costs are insignificant in comparison with the benefits of the product. Suppliers do not have any power or influence on these costs because the ordered quantity of furniture, electricity or office supplies is as high as in private households. The rent neither is an important factor. A web design agency is not dependent on a certain location of its office like advertising agencies which need to be centrally located in a city in order to be findable since the acquisition of customers mostly works online.

There are two types of important costs: On the one hand hard- and software like computers or new programs. Prices have decreased during the last ten years and there are many different sellers of computers. In addition to that agencies buy these things normally once every few years. The power of suppliers is limited because the different computers are substitutes of their selves and prices are transparent. (see Appendix 1)

On the other hand there are advertisement costs. These are the most significant costs in this sector. Web designers have to make a great effort to spend money for advertising in order to sell their products. The most common form of advertising for them is Google Adwords. Google is the most important tool for companies selling online, so they set the price and it has to be accepted. There are other possibilities to place adverts on the internet, but the whole market adopts Google’s prices. (Digital Media Trends, 2009)

Suppliers are not able to bargain with the web designers, because they do not spend enough money on them and normally it is easy to switch. Only Google advertisements represent a strong force. All the other suppliers are extremely weak.

2.4 Threat of entry

A newcomer has the same costs in producing a web site as those who are established in this sector. As you can only decrease costs per piece slightly by using already existing templates, economies of scale do not play a role for a web designer. The cost advantage of experienced market players is only reflected in the existing soft- and hardware they have. The main resources for a web page are time and knowledge and the fix costs are low, therefore the possibility to cut costs is only given on a limited scale. For building up a new web design company there is only little tangible capital required. Most of the required capital is intangible for instance knowledge and experience. The knowledge is easily available in blogs and books, but the experience is needed to put it into practice. (McKay and Marshall, 2004, p.74)

Another entry barrier is the brand identity which is an important factor. Customers do not have the same brand awareness like in other businesses, but if in the e-commerce business there is a need of a good online reputation, so you have to present references as well as evidence that you are able to optimize a customers’ web site in search engines. It is also a noteworthy obstacle that web designers who stay in the business for years already have good positions in the search engines and new entrants have to make a great effort to drive them out of these positions. The existing companies continue improving their positions as well, so the entrants are obliged to work much harder than the existing competition when they start up. Established firms have an advantage in the experience they gained. They already made the mistakes which new entrants still have to make. They have to contemplate a lot of small matters which can improve a customer’s web page. (Chaffey et al., 2009, p.506-510)

An advantage for new market player is that they do not have to expect retaliations from existing agencies. In a perfect competition the market share of each participant is so small that it is not worth fighting for. (Lipsay and Christal, 2007, p.153) On the contrary. In the e-commerce you can only survive if everyone creates links to each other, thus a community was created on the internet where web designers help each other and give hints to new ones. The more you help for free, the more clients you can acquire, because you are demonstrating competence and trust. (Fischer, 2009, p.333)

It has become more difficult in the last five years to enter the web design industry, but nowadays it is still possible building up your own business without great capital efforts but with a great time and knowledge investment. (see Appendix 1)

2.5 Threat of substitutes

A substitute is a product with similar features to the initial product. In this context replacements for commercial web sites are other shops where you could buy the same product, books and magazines as well as institutions where you can spend leisure time. (McKay and Marshall, 2004, p.75) In figure 2 you see an outline about the other possible substitutes. Actually, the model of the diversification steps is to amplify own product portfolio, but it is also useful to identify substitutes.

Figure 2: Substitutes of a web site

Porters Five Forces Substitutes Website

Source: Self created (data by Appendix 1 and Schnettler and Wendt, 2003, p.49)

But a web site is a relatively young product which lately has started to be a substitute for those products. The buyer propensity of the classical shops is decreasing and even inexperienced people have started to buy online. The turnover of e-commerce is not only increasing, but also the possibilities of online leisure time activities. Mostly everything from everyday life can be done online, and as a result a countermovement is emerging where people wish to have again a haptic experience. But this is just a niche movement which really cannot compete with a modern online shop. (Schäfer-Mehdi, 2006, p.47)

Another substitute of a web page is the mobile internet. Technology goes on and web designers have to keep their informatics knowledge up to date, because customers start demanding that a web page has to be accessible with their mobile or blackberry. In November 2009 the mobile internet already had a market share of 1.7% with a rising tendency, so future online shopping will take place on the way. At the moment is not a real danger given that the mobile net drives the internet out of business. It has to be seen as a complement. (Team23 GbR, 2009)

The last substitute worth mentioning is the social platforms where companies and privates can present themselves without having their own web page. In the huge portals like Facebook or Twitter they can install an interactive page with communication features. Web designers have to convince their potential clients purchasing their own web page to meet their marketing objectives. The social platforms are only interesting for those who go without an online shop, hence for those who do not want to spend much money anyway. The switching costs are enormously high because they have to change from a free product to a paid product and the advantages are not apparent right now. Before entrepreneurs think about contracting an agency they also have the choice to buy home page software where they can build up their own web site according to the modularity. (see Appendix 1)

Recapitulating there are various substitute goods for a web site which could be threads for web designers, but the more professional a web site is, the less power they have.

 

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