Industry Analysis - Porters Five Forces

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Industry Analysis - Porter's Five Forces By: Ijlal Ashraf 11-Arid-2932

description

to analyze the industry with porter five force analysis

Transcript of Industry Analysis - Porters Five Forces

Page 1: Industry Analysis - Porters Five Forces

Industry Analysis - Porter's Five Forces

Industry Analysis - Porter's Five Forces

By: Ijlal Ashraf11-Arid-2932

By: Ijlal Ashraf11-Arid-2932

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The purpose of Five-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

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HISTORY• Formed by Michael E. Porter of

Harvard Business School in 1979.• To determine the competitive

intensity and therefore attractiveness of a market.

• Three of Porter's five forces refer to competition from external sources. The remainder are internal threats.

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HISTORY• Porter's five forces include :

– Three forces from 'horizontal' competition:• the threat of substitute products or services• the threat of established rivals and • the threat of new entrants;

– Two forces from 'vertical' competition:• the bargaining power of suppliers and• the bargaining power of customers.

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Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Porter’s Five Forces

Bring new capacity, the desire to gain market share, and often substantial resources.

Companies diversifying through acquisition into the industry from other markets often leverage their resources to cause a shakeup

Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 1979 (pp. 32-41)

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Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

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 Cost Disadvantages Independent of ScaleIndependent of Scale

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Threat of New Entrant

s

Porter’s Five Forces Porter’s Five Forces

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Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:

Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Supplier industry is dominated by a few firmsSupplier industry is dominated by a few firms

Suppliers’ products have few substitutesSuppliers’ products have few substitutes

Buyer is not an important customer to supplierBuyer is not an important customer to supplier

Suppliers’ product is an important input to Suppliers’ product is an important input to buyers’ productbuyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high switching costsSuppliers’ products have high switching costs

Supplier poses credible threat of forward Supplier poses credible threat of forward integrationintegration

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Bargaining Power of Buyers

Bargaining Power of Buyers

Porter’s Five Forces Porter’s Five Forces

Threat of New Entrant

s

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Bargaining Power of BuyersBargaining Power of Buyers

Bargaining down prices Bargaining down prices

Forcing higher qualityForcing higher quality

Playing firms off ofPlaying firms off ofeach othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large Buyers are concentrated or purchases are large relative to seller’s salesrelative to seller’s sales

Purchase accounts for a significant fraction of Purchase accounts for a significant fraction of supplier’s salessupplier’s 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 of backward Buyer presents a credible threat of backward integrationintegration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

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Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Bargaining Power of Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

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Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

By placing a ceiling on prices it can charge, substitute products or services limit the potential of an industry. Unless it can upgrade the quality of the product or differentiate it somehow (as via marketing), the industry will suffer in earnings and possibly in growth

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Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

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

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

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Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but Advertising battles may increase total industry demand, but may be costly to smaller competitorsmay be costly to smaller competitors

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CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switching costsLack of differentiation or switching costs

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors

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The Five Forces are Unique to the Industry

• Five-Forces Analysis is a framework for analyzing a particular industry.

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Example: Buying a Farm

• Martin Johnson is deciding whether to switch career and become a farmer – he's always loved the countryside, and wants to switch to a career where he's his own boss.

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Example