Industry Analysis - Porters Five Forces
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Transcript of 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
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.
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.
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.
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)
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
Threat of New Entrant
s
Porter’s Five Forces Porter’s Five Forces
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
Bargaining Power of Buyers
Bargaining Power of Buyers
Porter’s Five Forces Porter’s Five Forces
Threat of New Entrant
s
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
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
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
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
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
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
The Five Forces are Unique to the Industry
• Five-Forces Analysis is a framework for analyzing a particular industry.
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.
Example