3. Reliable suppliers

Online retailers must have suppliers they can count on to deliver supplies within 24 hours. Given the nature of the products, the suppliers must provide adequate protective package for shipping.

4. Internet redundancy

In online retailing, if there are Internet problems, the store is closed. Redundancy provides protection from outages and increases capacity.

5. Reliable shipping suppliers

Shipping suppliers need to provide careful packaging, insurance against theft, lost and damage, on time pickup and delivery and the ability to track packages anywhere in the delivery system.

6. Low operating costs

Low operating costs and SG&A are necessary for competitive pricing and good profit margins.

7. Low inventories

Low inventories reduce costs and eliminate the need to reduce prices to clear out inventory.

8. Competitive pricing

When buying on the Internet, consumers have easy access to competitor site and to price comparison site such as mysimon.com. This will raise the consumer's price sensitivities.

9. Brand reputation

The seller's brand reputation is very important in jewelry sales. Fake diamond and gems are often marketed as real; therefore an online seller must be able to eliminate any doubt about the quality of its products. Additionally, there must be a fair return policy incase the item is misrepresented in the online photo or the size is incorrect.

Porter's Five Forces Analysis: Threats of new entrants

While the threat of new entrants is high, Blue Nile has one competitive advantage which will be difficult to replicate: Exclusive and highly favorable arrangements with a number of diamond and gemstone suppliers. This allows Blue Nile to over a wide range of products without having to maintain an inventory. Additionally, and most importantly, Blue Nile's supplier agreements have 45-60 day payment periods. This allows Blue Nile to hold on to revenues for 40-55 days. This cash can provide additional income via interest and it allows Blue Nile to self-fund its' operations.

Competitive Strength Assessment

Blue Nile has two categories of competitors: online retails and bricks and mortar retailers.

Online JamesAllen.com matches and exceeds Blue Nile's features, with the exception of pricing which is unknown without further research.

Online competitors

Feature

Blue Nile

James Allen Long

A decreasing quick ratio of 1.37 for 2006, which meets the banker's desire for at least 1 or higher. This ratio has dropped from 2.17 in 2005 and should be monitored.
The performance ratios have shown a positive trend. The return on assets, ROA, has increased from 9.3% in 2005 to 10.70% in 2006. During the same time period, the return on stockholder's equity, ROE, has also increase to 16.62% in 2005 to 27.62% in 2006. The Net Profit Margin has decreased from 2005 to 2006, 6.47% and 5.19% respectively.

Problems

Blue Nile's executives believe that the company's market position was highly defensible. This analysis shows a different assessment:

The total diamond and fine jewelry industry is still dominated by brick and mortar stores. Blue Nile and other online retailers still have a small amount of the market.

Currently, Blue Nile spends most of their advertising budget for online, they may need to shift its advertising to offline in order to create greater awareness for their site.

Blue Nile has a strong online competitor JamesAllen.com who has addition features to their offer including present diamonds, which are available overnight instead of five days later. Another site is offering an upgrade policy, which applies the value of a trade-in diamond to the purchase of a larger or more expensive diamond.

Blue Nile has low cost operations, however, they are easily replicated. The one advantage Blue Nile has is its long-term favorable contracts with exclusivity on designated diamonds with their suppliers. While this is not completely replicable, competitors could have similar contracts with other suppliers.

Brick and mortar companies are now selling online which will increase competition. These competitors already have strong brands and customer bases.