Five Forces Model for External Analysis

8/7/2019 Five Forces Model for External Analysis

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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.

Five Forces Model for External Analysis

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