Post on 08-Apr-2018
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External Analysis: TheExternal Analysis: TheIdentification of IndustryIdentification of Industry
Opportunities and ThreatsOpportunities and ThreatsThe Five Forces ModelThe Five Forces Model
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Analyzing Industry StructureAnalyzing Industry Structure
Opportunities and threats are competitiveOpportunities and threats are competitive
challenges arising for changes in industrychallenges arising for changes in industry
conditions.conditions.Analytic tools such as theAnalytic tools such as the
five forces modelfive forces modelhelphelp
managers formulatemanagers formulate
appropriate strategicappropriate strategic
responses.responses.
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The Five Forces ModelThe Five Forces Model
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The Threat of the entry of newThe Threat of the entry of new
competitorscompetitors Profitable markets that yield high returnsProfitable markets that yield high returns
will draw firms. This results in many newwill draw firms. This results in many new
entrants, which will effectively decreaseentrants, which will effectively decreaseprofitability. Unless the entry of new firmsprofitability. Unless the entry of new firms
can be blocked by incumbents, the profitcan be blocked by incumbents, the profit
rate will fall towards a competitive levelrate will fall towards a competitive level
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Potential CompetitorsPotential Competitors
New entrants into an industry threatenNew entrants into an industry threatenincumbent companies.incumbent companies.
Barriers to entry:Barriers to entry:
Brand loyaltyBrand loyalty Absolute cost advantagesAbsolute cost advantages
Economies of scaleEconomies of scale
Switching costsSwitching costs
Government regulationGovernment regulation Entry barriers reduce the threatEntry barriers reduce the threat
of new and additional competition.of new and additional competition.
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Threat of New Entrants
Expected RetaliationExpected Retaliation
Government PolicyGovernment Policy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages IndependentCost Disadvantages Independent
of Scaleof Scale
Barriers to
Entry
Barriers to
Entry
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Bargaining Power of Suppliers
Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms
Suppliers products have few substitutesSuppliers products have few substitutes
Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier
Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product
Suppliers products are differentiatedSuppliers products are differentiatedSuppliers products have highSuppliers products have highswitching costsswitching costs
Supplier poses credible threat ofSupplier poses credible threat of
forward integrationforward integration
Suppliers exert power
in the industry by:
Suppliers exert power
in the industry by:
* Threatening to raise* Threatening to raise
prices or to reduce qualityprices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
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The Bargaining Power ofThe Bargaining Power of
SuppliersSuppliers Suppliers have bargaining power when:Suppliers have bargaining power when:
Their products have few substitutes and are importantTheir products have few substitutes and are importantto buyers.to buyers.
The buyers industry is not an important customer toThe buyers industry is not an important customer tothe supplier.the supplier.
Differentiation makes it costly for buyers to switchDifferentiation makes it costly for buyers to switchsuppliers.suppliers.
Suppliers can vertically integrate forward to competeSuppliers can vertically integrate forward to compete
with buyers and buyers cant integrate backward towith buyers and buyers cant integrate backward tosupply their own needs.supply their own needs.
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Bargaining Power ofBuyers
Buyers are concentrated or purchasesBuyers are concentrated or purchasesare large relative to sellers salesare large relative to sellers sales
Purchase accounts for a significantPurchase accounts for a significantfraction of suppliers salesfraction of suppliers sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switching costsBuyers face few switching costs
Buyers industry earns low profitsBuyers industry earns low profits
Buyer presents a credible threat ofBuyer presents a credible threat ofbackward integrationbackward integration
Product unimportant to qualityProduct unimportant to quality
Buyer has full informationBuyer has full information
Buyers compete
with the supplying
industry by:
Buyers compete
with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcinghigherquality* Forcinghigherquality
* Playing firms off of* Playing firms off of
each othereach other
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The Bargaining Power ofThe Bargaining Power of
BuyersBuyers Buyers are most powerful when:Buyers are most powerful when:
There are many small sellers and few large buyers.There are many small sellers and few large buyers.
Buyers purchase in large quantities.Buyers purchase in large quantities.
A single buyer is a large customer to a firm.A single buyer is a large customer to a firm.
Buyers can switch suppliers at low cost.Buyers can switch suppliers at low cost.
Buyers purchase from multiple sellers at once.Buyers purchase from multiple sellers at once.
Buyers can easily vertically integrate to compete withBuyers can easily vertically integrate to compete with
suppliers.suppliers.
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Threat of Substitute Products
The existence of closeThe existence of close
substitute productssubstitute products
increases theincreases the
propensity ofpropensity of
customers to switch tocustomers to switch to
alternatives inalternatives in
response to priceresponse to priceincreasesincreases
Products
with similar
functionlimit the
prices firms
can charge
Products
with similar
functionlimit the
prices firms
can charge
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Rivalry Among EstablishedRivalry Among Established
CompaniesCompanies The intensity of competitive rivalry in anThe intensity of competitive rivalry in an
industry arises from:industry arises from:
Industrys competitive structure.Industrys competitive structure. Demand (growth or decline) conditions inDemand (growth or decline) conditions in
industry.industry.
Height of industry exit barriers.Height of industry exit barriers.
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Porters Five Forces
Model of Competition
Threat of
Substitute
Products
Threat of
Substitute
Products
Rivalry Among
Competing Firms
in Industry
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Threat ofThreat of
NewNew
EntrantsEntrants
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Political/
Legal
Political/
Legal
EconomicEconomic
T
echnologicalT
echnological
GlobalGlobal
DemographicDemographicSocioculturalSociocultural
CompetitiveCompetitive
EnvironmentEnvironment
IndustryEnvironmentIndustryEnvironment
Components of the General EnvironmentComponents of the General Environment
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The Role of the MacroenvironmentThe Role of the Macroenvironment
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Competitors AnalysisCompetitors AnalysisThe followThe follow--up to Industry Analysis isup to Industry Analysis is
effective analysis of a firmseffective analysis of a firms
CompetitorsCompetitors
CompetitiveCompetitive
EnvironmentEnvironment
Industry
Environment
Industry
Environment
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Competitive StructureCompetitive Structure
Continuum ofContinuum of
Industry StructuresIndustry Structures
FragmentedFragmented
Many firms,Many firms,
no dominantno dominant
firmfirm
Few firms,Few firms,
shared dominanceshared dominance
(oligopoly)(oligopoly)
ConsolidatedConsolidated
One firm or oneOne firm or one
dominant firmdominant firm
(monopoly)(monopoly)
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Pepsi Vs CokePepsi Vs Coke
Early 70s US soft drink market was on the verge ofEarly 70s US soft drink market was on the verge ofmaturity as the products were look alike.maturity as the products were look alike.
Intense strategic plan for gaining competitive advantage.Intense strategic plan for gaining competitive advantage.
Pepsis all time strategy to beat the leader.Pepsis all time strategy to beat the leader.
India a battle areaIndia a battle area pepsi had a upper edge & finallypepsi had a upper edge & finallycoke took over. It entered into a deal with parle.coke took over. It entered into a deal with parle.
Coke had a franchise driven mode, Pepsi took theCoke had a franchise driven mode, Pepsi took thecapitalcapital intensive route owning & running its bottlingintensive route owning & running its bottling
factories alongside the franchisees.factories alongside the franchisees.
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Pepsi Vs CokePepsi Vs Coke
Bottling became the biggest conflict area.Bottling became the biggest conflict area.
Pepsi entered north and tried to take up the bottlers ofPepsi entered north and tried to take up the bottlers ofcoke.coke.
Coke did move to the court to freeze the activity of pepsi.Coke did move to the court to freeze the activity of pepsi.
Coke & Pepsis promotion war. Pepsi emerged asCoke & Pepsis promotion war. Pepsi emerged asdefender.defender.
The diet pepsi was also launched much before the dietThe diet pepsi was also launched much before the dietcoke, but diet coke gained a better share.coke, but diet coke gained a better share.
Another turf was the interference of coke in operationalAnother turf was the interference of coke in operationalareasareas by poaching people.by poaching people.
The freebies war was another reason of tiff.The freebies war was another reason of tiff.