Porter's Five Forces Model

In order to analyze more deeply the competition within the shampoo market, we will use Porter's Five Forces Model. This model is suitable since it helps to evaluate all of the factors affecting the shampoo market as a whole.

• Bargaining power of consumers

The number of shampoo consumers is huge because, without any exception, all of the people who follow a right personal hygiene use shampoo (except the adepts of the “no-poo” lifestyle). Shampoo – a cosmetic product that is on the same level with toothpaste – is a necessary element of everyday life. Therefore, we can assume that the majority of French people (66.5 million in 2014) is a target market. However, consumers are very selective and hard to please since they are constantly trying to find the best shampoo for themselves; they easily switch from one product to another. Consequently, retention of consumer is one of the challenges of this market because there are so many different categories of shampoos.

Parameter for estimation	Grade (1- low – 3-high)
·       Proportion of customers with a large volume of sales	1
Tendency to switch to substitutes goods	3
Sensitivity to the price (with the help of the elasticity of demand)	2
Satisfaction with quality of the goods	1
In total: 4- low 5-8 medium 9-12 high	7

• Bargaining power of suppliers

Power of suppliers is visible through four potential barriers.

1. The number of suppliers in the industry is not much, but enough to allow suppliers to work with manufacturers. Manufacturers can design their own packaging but need of suppliers to build them (raw materials). Shampoo companies usually work in parallel with several suppliers in order to avoid depending on only one supplier.

2. The volume of resources must be adequate, accessible and has to meet the needs of consumers.

3. The costs of switching to alternative suppliers must be low. Companies in this industry are working with several suppliers to minimize switching costs. Shampoo brands often develop alternative shampoo recipes from different suppliers in case of breach of contract in order to avoid losing time and depending on a single source.  However, in the case that the packaging equipment producer has to be switched, it would be very costly to buy a new line.

4. Branch is a priority for suppliers. Distributors usually specialize in working with a particular industry to provide the best products, such as suppliers of raw materials for shampoos. They need to spend a lot of time together to develop recipes and their certification.

Parameter for estimation	Grade (1- low – 3-high)
Number of suppliers	2
Limited resources	2
Switching costs	1
Priority areas for the provider	3
In total: 4- low 5-8 medium 9-12 high	8

• Threat of invasion by new entrants

In order to make your shampoo desired by consumers, it is necessary to focus on Research & Development as well as on advertising. Since the market is dominated by well-known brands of shampoos, new entrants will find hard to settle. Moreover, consumers are open to experiments if a product makes a good impression.

According to Porter, you can distinguish the six following barriers:

Economies of scale

At the beginning, new entrants will find hard to develop economies of scale because they will need to sell big amounts of shampoos to decrease their overall producing costs.

Product differentiation and the strength of existing brands

Differentiation within a brand is important and controlled. Usually, under one brand, there are various categories of shampoos for different types of hair and targets (sometimes separately for men and children). Since it is necessary to open a whole range of shampoos immediately, it is difficult to enter the shampoo market.

Capital demand

The volume of investment required is significant since it is necessary to open and set up production at a high level corresponding to the existing competition. Actually, competitors have a worldwide reputation. Moreover, continuous investment in Research & Development as well as advertising is required to ensure satisfaction of ever-changing tastes of consumers.

High fixed costs

Fixed costs are not as great as in other sectors. However, it is important to negotiate for best price and best ingredients with raw material suppliers.

Access to distribution channels

Since shampoos are Fast-Moving Consumer Goods, they must be sold through a network of supermarkets and shops. This is both an advantage and a disadvantage. On the one hand, it is necessary to pay a certain fee to put a new product on the shelf. On another hand, a chain of stores can take a huge amount of products at once and sell it in a short time, which allows increasing the sales volume (there is a question of price coordination with shops).

Government policy

On the government side, there are no limitations, which constitutes a perfect starting point for any new business. However, production rules must still be followed.

Parameter for estimation	Grade (1- low – 3-high)
Economies of scale	2
Product differentiation	3
Strong existed brands	3
Capital demand	2
High fixed costs	1
Access to distribution channels	1
Government policy	3
Willingness existing players to lower prices	2
Growth rate of the industry	2
In total: 8- low 9-16 medium 16-24high	19

•  Risk of goods - substitutes

In this market, probability of occurrence of substitute products is very high. Almost every month, a new shampoo is launched to answer consumers’ demand (they are constantly waiting for novelty from manufacturers). For consumers, switching from one product to another is worthless since they are always looking for the best product for them.

The most effective method of dealing with substitute products is to build a strong brand based on differentiation, additional benefits and technological improvements. Now and here, loyalty to the product tends to be created.

Parameter for estimation	Grade (1- low – 3-high)
Substitute goods "price-quality"	3
In total: 1- low 2 medium 3 high	3

·       Level of competition or intra-industry competition

Rivalry among existing competitors is reduced to a desired state in order to create a win-win market. Actually, intense competition leads to price competition, so, to an increase in cost of sales promotion. Sometimes, competition can improve product quality and increase investment in new developments. All of this can reduce the profitability of the industry.

The following factors determine the level of competition inside the shampoo market:

- If there are a large number of players, L'Oreal can be distinguished as the leader, since most of the brands in this market belong to it.

- This market does not have an expanding growth since it is quite saturated.

- The shampoo market is represented by a huge number of similar products that must respect certain standards, such as divisions by types of fullers (for oily, dry, painted, etc.)

Parameter for estimation	Grade (1- low – 3-high)
Number of players	3
Market growth rate	2
level of differentiation	3
Restrictions on price increases	3
In total: 4- low 5-8 medium 9-12 high	11