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BUSINESS ENVIRONMENT ICA PAPER

SEMESTER IV
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“An Analysis of the E-commerce Industry”

Submitted to,

Prof. Bhupendra Kesaria

Submitted by,

Riya Raut F051

Sanchi Jain F047

Mehar Kaur F050

Samyak Jain F036

Rani Sindra F016

Muskan Agarwal F034

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Power of Buyer in E-commerce ___________________________________________ 3
Findings ________________________________________________________________ 5
Threat of substitution in E-COMMERCE ___________________________________ 5
Causes of Higher Threat of Substitutes ______________________________________ 5
How to Reduce the Threat of Substitutes _____________________________________ 6
Barriers to entry ______________________________________________________ 7
Payment Collection___________________________________________________ 8
Logistics ____________________________________________________________ 8
Vendor Management _________________________________________________ 8
Taxation ____________________________________________________________ 8
Infrastructure _______________________________________________________ 8
Internet Penetration __________________________________________________ 8
Economies of scale ___________________________________________________ 8
Product differentiation________________________________________________ 8
Capital requirements _________________________________________________ 8
Switching costs ______________________________________________________ 8
Cost disadvantages independent of scale _________________________________ 8
Government policy ___________________________________________________ 9
Power of Supplier in E-commerce _________________________________________ 9
The number of suppliers relative to buyers _______________________________ 9
Dependence of a supplier’s sale on a particular buyer ______________________ 9
Switching costs _____________________________________________________ 10
Forward Integration_________________________________________________ 10
Substitutes are available _____________________________________________ 10
Rivalry in E-commerce ________________________________________________ 10
FDI and Taxation in E-commerce Industry _________________________________ 13
FDI Policy For Manufacturing Entities Selling on E-commerce _________________ 13
FDI Policy For E-commerce Wholesale Trading Entities ______________________ 13
FDI Policy For E-commerce Single-Brand Retail Trading Entities ______________ 14
FDI Policy For E-commerce Multi-Brand Retail Trading Entities _______________ 14
Taxation for E-commerce industry _______________________________________ 14
Implications____________________________________________________________ 15
Suggestions ____________________________________________________________ 15
References __________________________________________________________ 15

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 Power of Buyer in E-commerce:
The E-commerce marketplace or the online e-commerce marketing is a place or a
website where one can find different brands of products coming from multiple
vendors, shops or person showcased on the same platform. The marketplace owner is
responsible for attracting customers and the processed transactions, while the third
party vendors deal with the manufacturing and shipping. Online Marketplace
streamlines the production process through one simple portal, where the
manufacturers sell their products directly to the consumers, therefore avoiding the
stagnant process of stocks holding. This kind of supply chain management is usually
referred to as the “Drop shipping” method. Companies like Amazon, eBay, and
Flipkart (India) have experienced massive success in the eCommerce marketplace
business model. This OmniChannel model has so far proven to be the most profitable
business in web eCommerce. The entire marketplace runs on one software
infrastructure, allowing all the vendors to sell their goods under the umbrella of one
website. In terms of revenue, these companies take a percentage of the sales on any
product sold across the platforms. The bargaining power of buyers determines the
pressure that industry competitors feel to enhance their value proposition so that
potential buyers accept their offer. This depends on:

• Concentration of buyers relative to concentration of industry. If there are few

buyers relative to the number of firms in the industry, then buyer power is
high.
• Importance of buyer as a customer. If a large proportion of sales are purchased
by a given buyer, then this buyer experiences enhanced bargaining power.
• Buyer switching costs. If the buyer’s switching costs are low then the buyer
benefits from negotiating leverage vis–à–vis the seller.
• Possibilities for backward integration by buyer. If it is feasible for the buyer to
backward integrate into the industry’s space, the buyer’s negotiating position
is also enhanced.
• Product differences. If the industry’s products are undifferentiated, buyers can
play one firm against the other.

The Ecommerce industry has flourished during the last few years. An increase in
world economics and an increase in the growth of technology have been major

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contributors. Both of these factors influence the growth of the e-commerce retail
industry. Within the e-commerce industry several small and big brands have cropped
up. As a result, there is not much switching cost for the customers. In today’s society,
customers are well informed. Consumers have access to high quality information
regarding the services of online retailers and the products they sell. As a result, it
affects the ability of e-commerce brands’ customers to find alternatives to the
company’s online retail service. Furthermore, many brick- and- mortar retailers have
also entered the e-commerce market. This has created additional pressure with the
addition of physical retail markets. An example of this can be seen with the Wal-Mart
and it’s attempt to enter the ecommerce market in efforts to keep up with the likes of
Amazon. As a result, the bargaining power of the buyers is strong in the ecommerce
industry. There are factors such as brand image, quality of products/ service, and
prices that can moderate brand bargaining power. The ability of customers to drive
prices down or their level of bargaining power is one of the five forces. Customers
have a lot of power when there aren’t many of them and they have a multitude of
choices to buy from. Moreover, switching from one company to another should be
easy for them.

However, buying power is low when customers purchase products in small amounts,
act independently and when the seller’s product is very different from its competitors.
For example, the Bargaining power of customers is very high as there are many
players in the market with similar products and there is no switching cost. Buyers
prefer the brand that offers the best price among other factors such as product quality
and delivery time. Understanding the power of buyers relative to industry players is a
critical component of every industry analysis, whether you’re an investor, operator,
lender, employee, or entrepreneur. A thorough examination of the two high-level
drivers, bargaining leverage and price sensitivity, facilitate a more granular
understanding of buyer power that ultimately helps explain long-term industry
performance, growth opportunities, traits that separate winner from losers, shifts
in pricing, incentives for product differentiation, and the “rules” governing customer
relationships.

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Since buyer power is dynamic, it behoves businesses to maintain a strong sense for
their own industry’s buyer power evolution especially as they consider new
product/fixed asset investments or business model innovation.

Findings:
The ecommerce industry has a High – Bargaining power of customers as
there are many players in the market with similar products and there is no switching
cost. Buyers prefer the company that offers the best price among other factors. E-
commerce companies are gradually expanding to different cities, regions and even
countries with E-Commerce industry in full expansion mode, there are a lot of
campaigns, policies and processes to gain and retain customers. Customers have
access to pricing information across different E-Commerce players. With no product
differentiation there is no switching cost. Cash on delivery, Easy returns, Cheap price,
Exchange offers and Same day delivery etc. – all these are initiatives towards gaining
more and more customers. With more intense completion in this E-Commerce
industry, Customers have good bargaining power.

Threat of substitution in E-COMMERCE

The threat of substitutes is the availability of other products that a customer could
purchase from outside an industry. The competitive structure of an industry is
threatened when there are substitute products available that offer a reasonably close
benefits match at a competitive price. In this case, price points are limited by the
prices at which substitutes are available, thereby limiting the amount of profitability
that can be generated within an industry. When there is a strong threat of substitutes,
industry players must pay more attention to operating in the most efficient manner
possible; otherwise, their high-cost structures will interfere with profitability and may
drive some firms out of business. When there is a reduced threat of substitutes,
industry players tend to be laxer with their cost controls, resulting in higher prices
charged to customers. Because there is little prospect of competition from outside the
industry, there is a higher potential for profits within the industry. Thus, firms tend to
generate higher profits at the expense of their customers.

Causes of Higher Threat of Substitutes: The following factors cause a higher threat
of substitutes for an industry:

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 ▪ Customers can easily switch between products.

▪ Substitute products are readily available to customers.

▪ Substitute products have better features than comparable products within the
industry.

▪ Substitute products have higher quality/reliability than comparable products

within the industry.

▪ Substitute products have lower costs than comparable products within the
industry.

How to Reduce the Threat of Substitutes:

There are a number of ways in which a company can mitigate the threat of substitutes.
For example, it can inspire brand loyalty through its marketing efforts, product
quality, and support services. Or, it can focus intently on specific market niches, so
that the value it offers to customers within those niches exceeds the value that
customers can obtain from substitutes. Another possibility is to identify those
customers who are most likely to shift to substitutes, and target them for enhanced
service and marketing efforts, so that they are aware of the particular value that the
organization brings to them.

Threat of substitution: E-Commerce- The Ecommerce industry has flourished at an

impressive rate during the last few years. The reasons include growing economic
activity around the world and the growth of technology. Both these factors have an
important influence on the growth of the e-retail industry. Particularly, it is in the US
and Asia Pacific where the rate of growth is expected to remain the highest in the near
future. Some of the major players in the industry include Amazon, Ali-Baba, E-bay
and Flipkart. Apart from it Walmart and Costco have also made their foray into e-
retail. Moreover, the growing use of mobile technology has also proved favorable for
the industry and led to an increase in revenue and profits. With new local and global
players entering the industry, the level of competition has also grown. The major
global players like Amazon and E-bay have made significant investments in
technology to provide their customers with a personalized shopping experience.

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There two main threats in terms of substitutes for the Ecommerce brands. The first
are the competing e-retail businesses and the second are the physical retailers. Brands
try to earn a competitive advantage through low prices, better quality of products or
through a better overall customer experience. For the customers there are no
switching costs and they can easily switch from one e-retailer to another or from
ecommerce to physical retail.

The threat of substitute products refers to the alternatives to which customers can turn
to satisfy the same basic needs. The existence of alternatives reduces industry
attractiveness. This depends on:

• Relative quality/price ratio of alternatives. An industry is less attractive if a

credible substitute is available.

• Switching costs. When customers need to make large investments to switch to

a substitute, the threat of this substitute is reduced.

• Buyer’s willingness to switch. Customers may be reluctant to buy a substitute

product because they are attached to the image of their current provider.

The low switching costs of consumers is why they can easily transfer between
companies. For example, consumers can easily decide to buy from Walmart stores or
other retail establishments instead of buying from Amazon.com. The high availability
of substitutes and the low product costs increase the influence of substitutes against
the company. Whether it’s a physical or e-commerce retailer, they both can easily
become substitutes preferred by consumers. As a result, brands try to gain a
competitive advantage by offering low prices, better quality of products or through a
better overall customer experience.

Barriers to entry
The Internet is all about democratization; it's a place where the little guy can
successfully compete with the big guys and expect to win. Examples include Google,
Facebook, Twitter, Amazon, and eBay, among others. And, because two of the names
on that list of five are e-commerce players, there is a widespread belief that e-
commerce as an industry has low entry barriers.

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• Payment Collection: When get paid by net banking one has to end up giving
a significant share of revenue (4% or more) even with a business of thin
margin.
• Logistics: You have to deliver the product, safe and secure, in the hands of the
right guy in right time frame. Regular post doesn't offer an acceptable service
level; couriers have high charges and limited reach. Initially, you might have
to take insurance for high value shipped articles increasing the cost.
• Vendor Management: However advanced system may be, vendor will have
to come down and deal in an inefficient system for inventory management.
This will slow down drastically. Most of them won't carry any digital data for
their products. No nice-looking photographs, no digital data sheet, no
mechanism to check for daily prices, availability to keep your site updated.
• Taxation: Entry tax, VAT and lots of state specific forms which accompany
them. This can be confusing at times with lots of exceptions and special rules.
• Infrastructure: Strong emergence of e-commerce has placed enormous
pressure on logistics. With the customers being an impatient lot, this pressure
is not just on reliability of delivery but also on shortening the delivery time,
timeliness and predictability of delivery.
• Internet Penetration: Fixed broadband never really took off in India. At an
abysmal 1.1 per cent penetration, India ranks 122 in the world for Fixed
Broadband Penetration. Add to that the fact that most of India does not own a
computer at home and this becomes one of the most formidable barriers to
break through.

• Economies of scale: the decline in the cost of operations due to higher

production volume

• Product differentiation: the brand strength of the product as a result of

effective communication of its benefits to the target market

• Capital requirements: financial resources required for operating the business

• Switching costs: one-time costs the buyer must incur for making the switch to
a different product

• Cost disadvantages independent of scale: when a company has advantages

that cannot be replicated by the competition, such as proprietary technology

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 • Government policy: controls the government has placed on the market, such
as licensing requirements

Power of Supplier in E-commerce:

The Bargaining Power of Suppliers, one of the forces in Porter’s Five Forces Industry
Analysis Framework. This force examines how much power and control a brand’s
supplier has over the ability to raise prices or lower the quality of purchased goods or
services, which in turn would lower an industry’s profitability potential. The
important factors that determine supplier power are: the availability of substitute
suppliers and the concentration of suppliers. When a company has a large number of
suppliers, it is in a better position. When doing an analysis of supplier power in a
particular industry, low supplier power creates a more attractive industry and
increases profit potential, as buyers are not constrained by suppliers. High supplier
power creates a less attractive industry and decreases profit potential, as buyers rely
more heavily on suppliers. The buyers are the companies and the suppliers are those
who supply the companies.

In case of E-commerce, the bargaining of power of supplier will be low as there are
many suppliers in the market, and therefore the e-commerce brands have the power to
choose their suppliers. The reason is that the rules are set by the brand and the
suppliers have to follow the code of conduct set by them. Most of the ecommerce
brands are highly cautious regarding their supplier relationships and set a code of
conduct related to quality, labor and wages as well as sustainability. Despite the
number of players in the industry having grown, the suppliers do not have too many
options and therefore are bound by the rules that the brands have set. That is why the
E-Commerce brands have the upper hand and the bargaining power of the suppliers is
low. Some of the suppliers may have some bargaining power because of their size and
quality. In order to determine how E-Commerce industry has low bargaining power
from suppliers, certain points are analysed:

▪ The number of suppliers relative to buyers: In comparison to purchasers,

there are a lot many suppliers. As a result, supply power is limited.
▪ Dependence of a supplier’s sale on a particular buyer: If case suppliers
have few customers (e.g., a small/medium-sized firm), they are likely to give
in to the demands of buyers. On the other hand, if suppliers have several

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 customers, they have more power over buyers. In E-Commerce industry, there
is a High dependence of a supplier’s sale on a particular buyer it means that
the bargaining power of supplier would be low.
▪ Switching costs: Since there are a significant amount of suppliers in the E-
commerce industry, switching costs are low for buyers and switching costs
for suppliers are high and due to this Supplier power is low.
▪ Forward Integration: There is low forward integration in the E-commerce
industry.

▪ Substitutes are available: In E-commerce industry lots of substitutes are

available to buyers and they do not need to rely heavily just on a particular
supplier.

Rivalry in E-commerce:
E-commerce retail firms tend to be aggressive having a strong competitive rivalry
among each other. The level of rivalry in the industry is high because of the large
number of players. The number of local and global brands in the ecommerce market
have grown and led to higher competition. This can be seen in Amazon competing
against giants like Walmart, who is continuously improving their e-commerce
presence. The frequent threat of substitutes exists because of their high availability.
This can be seen with Walmart and other brick-and-mortar store efforts to match
Amazon’s online retail services. Furthermore, the low switching costs create low
barriers for consumers to transfer between retailers. As such, the threat for new
competitors and rivals is high.

Currently, the situation for e-commerce business finds itself under dense
competitiveness, given the high number of different stores that offer similar products.
Right before this huge rivalry stands the consumers, who tend to decide where to buy
primary looking after the price of a product. There may be other factors that influence
their decision, but the price is definitely one of the most critical aspects. Given this
situation, perhaps it seems complicated for the e-commerce business to find ways to
get a competitive advantage over its rivals. Nonetheless, it turns out to be
indispensable to watch competitors’ movements in order to get more competitive.
Besides, there are automating tools with which e-commerce can:

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Have a much broader and continuously updated insight into the current market status,
monitoring competition prices. Identify what the pricing strategies that competitors
are employing are. Optimize its products’ prices. When you better understand the
market, you can make better pricing decisions. It is essential to understand how the
market you are working in functions and changes. That will be useful when
anticipating future competition’s movements and adapting products’ prices to the
same competitive level of the market.

If you receive updated information of the state of the market, your store is going to
not only earn competitiveness but is also going to identify possible prices trends
inside your vertical. By using this data, you can overtake movements and find more
sales opportunities. Taking as a reference Porter’s five forces theory, by using
monitoring tools you can control both competitiveness rivalry (as you can get
continuously updated the info of their movements) and the bargaining power of
suppliers as well.

Porter’s five forces theory analyses the level of competitiveness inside an industry by
identifying five primary aspects or forces: bargaining power of suppliers, bargaining
power of buyers, competitiveness rivalry, the threat of new entries and the threat of
product substitution. When you study the evolution of your competitors’ prices, you
can detect if they get cheaper acquisition costs. Imagine a competitor has in its catalog
the same product as you do. If they can lower their price way more than you do,
perhaps they have cheaper costs. That means you can renegotiate your prices with
suppliers in order to save money and optimize them. If you have clearly identified
who your rivals are, by monitoring the evolution of their prices, you will be able to
understand what the pricing strategy they are employing is. This, as well as providing
you with key information about possible future movements, will also give you more
competitiveness and anticipation opportunities when it comes to making decisions.

We explained that by making a competitive price comparison, you could improve

your competitiveness level in the market, but how is that? It is easy. If you understand
how the market you work in behaves, you can adjust much better prices for your
products and stand out among the great existing competitive rivalry. These are the
three main features that price monitoring tools can offer. Even though you could make
these processes manually, it turns out to be way more effective and economical if you

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use automated solutions. Having someone manually monitoring all the products of all
your rivals would be a significant and costly amount of time and money. Besides, the
quality and optimization level of the results would not be as good as the ones obtained
using automated tools.

Reliance Industries, the Indian conglomerate controlled by Mukesh Ambani, Asia’s

richest man, launched an e-commerce platform called JioMart at the beginning of this
year and the move is expected to provide a direct challenge to Amazon and Walmart-
owned Flipkart. Operated by Reliance Retail, JioMart is currently in a soft launch
phase and available only in a few regions around Mumbai, yet the platform is already
slated to offer more than 50,000 grocery products to shoppers and is likely to be rolled
out more widely across India if the pilot proves successful. “Whether it’ll be
successful, whether it’ll be rolled out on a national level, remains to be seen,” said
Arvind Singhal, chairman of consultancy Technopak, in comments reported by the
Financial Times. “But if they’re able to crack this … they’ll be the only guys in
town.” JioMart’s entry into India’s lucrative online grocery market spurred Amazon
to announce last week that it was entering a partnership with Future Retail, which
operates 1,500 stores in more than 400 cities in India. The deal will make Amazon the
official online channel for Future Retail's stores, while Amazon will add Future
Retail's grocery products to its two-hour Prime Now delivery service, CNN reported.
Yet a key question for the Financial Times is whether this would be enough to fend
off the emergent threat from Reliance’s JioMart, which will offer free delivery and
returns as well as discounts of up to Rs 3,000 ($42) for early customers.

In addition, JioMart is looking to sign up India’s small army of kiranas, or family-

owned shops that specialise in groceries, pharmaceuticals and other household goods.
These shopkeepers will be able to use a handheld Jio device to order new stock from
Reliance’s network of wholesalers and, according to a Financial Times source,
Reliance intends to benefit from the loyalty consumers have for the kiranas. It also
will save the company from having to build up a network of couriers from scratch.
According to the report, Ambani’s latest JioMart venture is just part of a broader
strategy of his to build an Indian digital giant that incorporates the 350 million people
who use Jio’s mobile network – the idea being that consumers use its apps for
everything from online shopping to streaming music and films.

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In conclusion, when it comes to competitive rivalry within the e-commerce retail
industry-competition must be a strategic priority to ensure my company’s long-term
competence. Retailers must consider the strong bargaining power of buyers as a major
factor in addressing business challenges in the online retail industry environment. Due
to the high level and threat of competitors and substitutes, prioritizing the strategies
for long-term success in the online retail industry environment is imperative.

FDI and Taxation in E-commerce Industry:

India’s e-commerce market has grown significantly in recent years and is still
flourishing. E-commerce start-ups have been incorporated in the recent past. E-
commerce start-ups are companies incorporated under the Companies Act, 2013,
conducting the e-commerce business or having an e-commerce marketplace. E-
commerce business means selling and buying of services and goods, including digital
products, over a digital and electronic network. The Foreign Direct Investment (FDI)
in the e-commerce start-up ecosystem can lead to an influx of capital and enhance its
growth potential in India. E-commerce businesses utilising the marketplace model
have registered significant growth in the recent past. However, the e-commerce
businesses utilising the inventory-based model have not received favourable benefits
from the FDI Policy changes in India.

FDI Policy For Manufacturing Entities Selling on E-commerce- The FDI Policy
permits manufacturers to sell their manufactured products in India through retail
and/or wholesale, including e-commerce, without government approval, i.e., under
automatic route. However, the manufacturing entities can sell their food products
produced or manufactured in India for retail trading through e-commerce under 100%
FDI under the government approval route.

FDI Policy For E-commerce Wholesale Trading Entities- The FDI Policy permits
businesses engaged in B2B e-commerce trading, either in cash and carry wholesale
trading/wholesale trading through a 100% automatic approval route. Wholesale
trading means selling goods or merchandise to retailers, commercial, industry,
institutional and professional business users and related subordinated service

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providers. It implies sales for the purpose of business, trade or profession and not for
personal consumption.

FDI Policy For E-commerce Single-Brand Retail Trading Entities- The FDI
Policy permits 100% FDI through automatic route for entities engaged in single-brand
retail trading. Single-brand retail trading entities operating through brick-and-mortar
stores can undertake retail trading through e-commerce. Single-brand retail trading
means selling goods of the same brand.

FDI Policy For E-commerce Multi-Brand Retail Trading Entities- The FDI Policy
prohibits retail trading in any form through e-commerce for the companies with FDI
engaging in the activities of multi-brand retail trading. Multi-brand retail trading
means selling different products of various brands through one platform.

Taxation for E-commerce industry:

The recent developments in India concerning International Taxation, could be seen as
an albatross around the neck for the non-resident e-commerce players. With an
increase in compliance burden and potential increase of costs, many of the e-
commerce players consider unilateral measures taken by India as a deterrent to an
effective business model.

Under the 2016 levy, equalisation levy of 6% is required to be deducted by service

recipient in India on certain services availed from a non-resident service provider of
value above INR.1 lakh. The services covered within its ambit are online advertisement,
any provision for digital advertising space, or any other facility, or service for the
purpose of online advertisement. This levy was not intended to tap the B2C segments,
rather only the B2B transactions. Under the 2020 levy, implemented from 01 April
2020, a levy of 2% has been imposed on the e-commerce operator who receives any
consideration for online sale of goods or services, owned or facilitated by it (greater
than INR 2 Cr in aggregate) from:

i. An Indian Resident

ii. A person using Indian IP Address for buying such supplies or services

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iii. Non-resident - only in the following cases: Sale of advertisement - targeting an
Indian Resident or Indian IP User and sale of data - collected from an Indian Resident
or Indian IP User

Implications:
1. Availability of tax credits
2. Significant Economic Presence
3. Profit Attribution related measures
4. Tax Deduction at Source - Introduction of Section 1940

Suggestions:

As can be seen, India has taken all the possible measures to tax non-resident e-
commerce companies and is expected to take more measures in future. The intent of
the Taxman seems to be clear. With the modernisation of businesses, they also want to
modernise the taxing provisions, so that tax is paid where value is created.

▪ The new equalization levy is imposed on non-resident e-commerce operators.

▪ These amendments were made to the Finance Act, 2020 by the Finance Act
2016.

References:
Pratyush(2021).Ans Commerce. How Porter’s Five Forces Help in E-commerce Business Analysis.
https://www.anscommerce.com/blog/how-porters-five-forces-help-in-e-commerce-business-analysis/

Alexander V and Simon F. (2011). FIRST MONDAY. The impact of industry structure on e commerce
initiative in the developing world https://firstmonday.org/ojs/index.php/fm/article/view/3377/3046

Jacob D.(2018).finance. Industry Analysis and Porter’s Five Forces: A Deeper Look at Buyer Power
https://www.toptal.com/finance/market-research-analysts/porters-five-forces-buyer-power
("FDI Regulations That E-commerce Startups Must Know - Guidelines & Policy", 2022)

("Taxation in E-Commerce", n.d.)

(Nandi, 2021)

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