strategic mgmt 3

Strategy Development Proposal Assessment 3

TMGT601

Executive Summary

This report looks at the firm SPS Commerce (a full-service EDI Provider) and Porters Five

Forces Model is applied to its current market position. This includes rivalry among

established firms, risk of threat of new entrants, bargaining power of buyers, threat of

substitute products and bargaining power of suppliers.

The suggestion of a differentiation strategy and justifications for this will be analysed and

the benefits of this will be given.

The internal factors of resources, financials and product design will also be incorporated into

the five forces as well as the external factors of competitors, regulatory environment and

consumption trends.

Current Market Status of the Firm

SPS Commerce is a full-service EDI Provider which allows retailers, suppliers and 3PL’s to

send documents such as purchase orders and invoices electronically without having to use

email or fax.

They have been pioneering retail automation since 2001 and have had over 70 consecutive

quarters of growth. The firm started in Minneapolis, USA and over the years have made their

presence known in Europe and APAC. In 2014, they acquired their biggest competition in

Australia, LeadTec, and since then have gone from strength to strength. They are

continuously acquiring companies within the USA, and occasionally within the APAC region,

and are one of the only full-service EDI providers in this industry (SPS Commerce, 2019).

Application of Porters Five Forces Model to the Firm

Porters Five Forces Model is a simple but powerful tool to understand the competitiveness

of the businesses environment and to identify the strategy’s potential profitability. Using

this model means that businesses can adjust their strategy according to the forces in their

environment or industry that can affect their profitability (Mindtools.com, 2019).

Rivalry Among Established Firms

The intensity of rivalry among competitors in an industry refers to the extent to which firms

within an industry put pressure on one another and limit each other’s profit potential

(Wilkinson, 2019).

SPS Commerce have competitors across the globe in the form of those that offer a managed

service rather than a full-service. Managed service providers are usually a lot cheaper than a

full-service provider as they only provide their customers with the tools to then set up a

platform to send the electronic documents and then run it themselves. A full-service

provider sets up the technology and provides support, all included in the initial costing. The

managed service providers try to limit SPS Commerce’s profit potential as they claim that

they are just as good and efficient, at half the price. This means that SPS Commerce must be

careful to not increase their prices too much without improving their product/service and

drive their customers to their competitors (Jim Frome, 2019).

Although this be a negative for SPS Commerce, they have shown time and time again that

they can acquire companies within the same industry and are not affected by competitors

within their industry.

Risk of Threat of New Entrants

The threat of new entrants refers to the ability of which new companies can enter an

industry. This exerts a significant influence on the ability of current companies to generate a

profit, especially when the new competitors are offering the same products or services

(Corporate Finance Institute, 2019).

The risk of new entrants is a worry to SPS Commerce as currently there is no one in the

market that offers a full-service EDI solution that has the experience, network and growth

rate that they do. SPS Commerce are continuously scanning the market to ensure that no

other company will come along and duplicate what they are currently doing and become a

great competition for them. By continuously scanning the market, they have a greater

chance of spotting any companies that are entering the industry and aiming to compete and

copy what SPS Commerce are currently doing.

SPS Commerce has a strong financial background with over 70 consecutive quarters of

growth and therefore it would be hard for a new company to compete and convince

customers to leave SPS Commerce and to move to the new entrant.

Bargaining Power of Buyers

This refers to the extent at which customers can put a company under pressure and affects

the customer’s sensitivity to price change. When customers have a lot of alternatives to buy

from, they have a lot of power. Companies can take measures to reduce the buyer power by

offering loyalty programs or differentiating their products and services from other

companies in the market (Business-to-you.com, 2019).

In March 2019, SPS Commerce had their sales kick off which saw them roll out a new way of

selling and improving their product and pricing. Their main aim was to make it easier for

customers to buy their service and easy to implement whilst being able to grow with the

customer’s business (Jim Frome, 2019). This has meant that SPS Commerce is taking control

of the bargaining power of their buyers and trying to ensure that their customers continue

to choose them over their competitors.

As mentioned previously, SPS Commerce is one of the only full-service providers in the

region which means that customers do not have a lot of alternatives to buy from. The

alternative is a managed service which does not offer support or the implementation of the

service like SPS Commerce does.

Threat of Substitute Products

The threat of substitute products is always greater in markets that have generic or

undifferentiated products than those that have a more unique product (Cleverism, 2019).

There are many factors that increase the risk of substitutes. These include: Product quality -

If the product of substitute products is of higher quality, then it is more likely that customers

will switch over. Product performance refers to a product functioning at the same level or a

better level which makes the consumer want to switch over. If the product price of the

substitute is priced more reasonably, then customers may choose to switch to the

substitute. If there are no switching costs for the consumer, then this also plays a part in the

customer possibly switching to the substitute. Lastly, all the above factors can only come

into play if there are substitutes available in the market.

SPS Commerce offers a unique product that only applies to retailers, suppliers and 3PL’s who

wish to exchange documents electronically rather than through email or fax. This means that

their threat of substitute products is low as they have a unique product which doesn’t

attract everyone. This means that due to their being low threat from substitutes, there will

be less competition among existing firms in the industry and there will be more potential to

earn higher profits (Cleverism, 2019).

Bargaining Power of Suppliers

The presence of powerful suppliers reduces the profit potential in an industry. Suppliers can

threaten to increase their prices or reduce the quality of their products which in turn

increases competition and reduces profitability in an industry where companies cannot

recover costs and therefore must increase their own prices (MaRS Startup Toolkit, 2019).

As SPS Commerce offers a service rather than a product, the bargaining power of suppliers is

not a major issue for them as they do not rely on suppliers to sell their service. As they are a

full-service EDI provider, they provide customers with everything themselves from the

platform to support. However, SPS Commerce does use companies such as website

specialists to help improve their website to attract and maintain their customers. If the

website specialists were to increase their prices dramatically, this may cause SPS Commerce

to rethink their pricing in order to ensure they maintained their percentage of profits each

quarter. Alternatively, if the costs for electricity were to increase, for example, this could

also have an impact on how SPS Commerce were to pass that price increase on to their

customers.

Proposed Strategy - Differentiation

The differentiation strategy is built on a belief that a firm needs a clear and unique

positioning. Differentiation leadership focuses on providing factors that add value for

customers. In order to build a strategy based on differentiation, a company must

continuously invest in and develop superior product quality. This includes, but is not limited

to, the features, benefits, durability and reliability. A company must have strong branding

including a strong brand recognition, desirability and loyalty. Marketing capabilities are also

essential in order to create a differentiation strategy which includes advertising and

sponsorship.

The differentiation strategy could also be divided further into purification, hybrid and

sophistication. Purification involves decreasing the price which in turn decreases the

perceived value. Hybrid means decreasing the price which leads to an increase in the

perceived value. Sophistication strategy is where there is an increase in price and an

increase in the perceived value (Consilue, 2019).

Quickmba.com (2019) explained the differentiation strategy as one in which a product or

service is developed in order to offer unique attributes that are valued by a customer and

that a customer sees as being superior to a competitor’s product or service. If the value of

the product is of great uniqueness, this may allow the product or service to be sold at a

premium price. This allows a firm to hopefully cover the extra costs incurred to produce the

unique product by passing on the extra costs to its consumers who cannot find a substitute

product as easily.

A few internal strengths of a company which have been successful at a differentiation

strategy are: access to leading scientific research, a highly skilled and creative product

development team, a strong sales team with the ability to successfully communicate the

perceived strengths of the product, and a corporate reputation for quality and innovation.

The proposed strategy for SPS Commerce would be differentiation as they already offer a

unique product so it would be best for them to build upon this product/service rather than

go for a cost leadership strategy of providing customers with lower prices and aiming to

boost their savings. SPS Commerce is not interested in lowering their prices as they see their

product/service as being the best in the industry and are able to back this up with customer

reference stories and the success they have had in the past 20 years.

Justifications for Choice of Strategy

The justification for a differentiation strategy for SPS Commerce is that in March 2019, they

started to role out a new strategy which improved their product/service making it easier to

sell and easier for customers to use as well as being a unique product that their competitors

do not offer. This new selling strategy is an ongoing procedure and 7 months on they are

continuing to roll out the strategy and continue to improve the uniqueness of their service.

SPS Commerce especially has strong branding recognition in the USA, where they first

started out, and are always looking for ways to increase their brand recognition in the APAC

region. A current project that SPS Commerce is working on is ensuring that their brand logo

is easily accessible on their partners website. This includes inventory management system

companies such as Unleashed. By increasing their brand recognition, this will help with the

differentiation strategy.

Previously, SPS Commerce only had a marketing division in the USA. Over the past couple of

years, they have been working hard to ensure that the APAC section of the company has a

marketing representative to work on getting the website up to date and ensuring that the

SPS Commerce brand is being advertised in the correct spaces to attract the greatest

number of customers possible.

Since the roll out, and the continuing roll out, of the newly formed way of selling and the

updated platform solution, SPS Commerce has tried to focus on a sophistication

differentiation strategy – increase in price and increase in perceived value. They can show

this by giving customers a demonstration of their new platform and show just how easy it is

to use and how many features it now includes compared to what it included previously.

SPS Commerce has a strong sales team who can communicate the perceived strengths of the

product. This is shown in their 70+ quarters of growth and with the APAC region securing

over $1million of annual revenue in quarter 3 of 2019 (this is their biggest ever quarter to

date). This is an advantage for them to be able to succeed in the differentiation strategy of

continuing to update their product/service to be highly unique so they can continue to

increase their price to show that they have a premium product/service that competitors

within the industry cannot compete with.

Conclusion

In conclusion, Porter’s Five Forces model is useful in helping a firm to plan their next strategy

and how they can deal with their buyers and suppliers. However, the model also has its

disadvantages as it does not take in to account any other factors other than those outlined

in the model. This includes factors that may have bearing on the environment in which the

company is currently operating in.

For SPS Commerce, this model can help the most when looking at rivalry among established

firms and risk of threat of new entrants. This is because at this time SPS Commerce is highly

successful within their industry however they must always remember to be vigilant when it

comes to new entrants entering the industry and competing with their current

product/services.

The differentiation strategy should help SPS Commerce to continue to produce a highly

unique product which is superior to anything else that is in the market. This will help

customers to perceive their product to be the best in the industry and therefore customers

will be less likely to start looking at competitors and comparing other products and services

to that of SPS Commerce.

References

B2U - Business-to-you.com. (2019). Porter's Five Forces EXPLAINED with EXAMPLES B2U.

Available from: https://www.business-to-you.com/porters-five-forces/. Accessed 11th

October 2019.

Consilue. (2019). Competitive strategies - cost strategy vs. differentiation strategy Consilue.

Available from: http://consilue.com/en/competitive-strategies-cost-strategy-vs-

differentiation-strategy/. Accessed 14th October 2019.

Corporate Finance Institute. (2019). Threat of New Entrants - Important Component of

Industry Analysis. Available from:

https://corporatefinanceinstitute.com/resources/knowledge/strategy/threat-of-new-

entrants/. Accessed 11th October 2019.

Cleverism. (2019). Threat Of Substitutes Porter’s Five Forces Model. Available from:

https://www.cleverism.com/threat-of-substitutes-porters-five-forces-model/. Accessed 11th

October 2019.

Frome, J. 2019. Evaluating your EDI Options – Seven Building Blocks of Full-Service EDI. SPS

Commerce: USA.

MaRS Startup Toolkit. (2019). Suppliers Bargaining Power Porter’s Five Forces Analysis.

Available from: https://learn.marsdd.com/article/bargaining-power-of-suppliers-porters-

five-forces/. Accessed 14th October 2019.

Mindtools.com. (2019). Porter's Five Forces: Understanding Competitive Forces to Maximize

Profitability. Available from: https://www.mindtools.com/pages/article/newTMC_08.htm.

Accessed 11th October 2019.

Quickmba.com. (2019). Porter's Generic Strategies. Available from:

http://www.quickmba.com/strategy/generic.shtml. Accessed 14th October 2019.

SPS Commerce. (2019). About SPS Commerce EDI Provider Vendor Onboarding Supply Chain.

Available from: https://www.spscommerce.com/au/about/. Accessed 11th October 2019.

Wilkinson, J. (2019). Intensity of Rivalry Porter's Intensity of Rivalry Analysis Factors. The

Strategic CFO. Available from: https://strategiccfo.com/intensity-of-rivalry-one-of-porters-

five-forces/. Accessed 11th October 2019.