Environmental Scanning

Porter’s Six Force Analysis

 Porter’s Six Force Analysis

• The Porter Six Forces model is used to examine

specific industry or marketplace.
• The model is used to assess the attractiveness of a
market.
• A market will be attractive if it has the potential of
earning high profits.
• Evaluating the potential for profitability
 Porter’s Six Force Analysis
Attractive markets: High level of profits
1. High barriers to enter.
2. Low levels of competition.
3. Few substitute products/
services.
4. Weak supplier bargaining
power.
5. Weak buyer bargaining power.
Unattractive markets : low level of
profits
1. Low barriers to entry.
2. High levels of competition
3. Many substitute products/
services.
4. Strong supplier bargaining
power.
5. Strong buyer bargaining
power.
 Threat of new
competitors

Impact of
Current
complementary
competitors
products

Porter’s
model:
Identifying
opportunities
and/or threats
Threat of
Power of buyers substitute
products

Power of
suppliers
 Threat of new entrants to market
• Evaluates how easy or difficult is it for new competitors to enter the
market.
• Few barriers can result in high level of rival arising in marketplace.
• This could cause a threat to the business and results in low level of profits.
• It is important to remember that when there are many competitors in the market
place and they are all competing for the same market share, profits will
decline/decrease
• It is thus vital that existing businesses look at ways to create high entry-level
barriers to the market to limit possible new entrants to the market.
• Profitable markets attract new entrants, which erodes profitability. Unless existing
businesses have strong and durable barriers to entry, for example, patents,
economies of scale, capital requirements or government policies, then profitability
will decline to a competitive rate.
 Threat of new entrants to market
Factors that could limit entry include:
 High costs (capital)
i.e. expensive research, development, pricey equipment, ect.
 Strict government legislation
Such as licensing requirement. In SA one must have a liquor license to run an establishment that sells alcohol.
 High level of customer loyalty
when a customer is loyal to a company or product, they aren’t easily swayed by price or availability.
 Customer-switching costs

One-time costs the buyer must incur for making the switch to a different product. Procedural switching cost or financial switching
cost.
 Economies of scale
Achieved when there’s a decline in cost of operation due to higher production
 Existing businesses have strong trade marks , and patents protecting their products/ services.
Increase company brand recognition and influence individual purchasing decisions.
 Current competitors
• Existing competitors in the market
• In a competitive market, a business would have to compete
aggressively to gain and maintain its market share
• The larger the number of competitors, along with the number of
equivalent products and services they offer, the lesser the power of a
company
• Buyers seek out a company’s competition, that are able to offer lower
prices.
• However if rivalry is low a company has a greater power of charging
higher prices
 Current competitors
• Rivalry amongst competitors is high when:
oThere are many competitors
oCompetitors are equal in size
oExit barriers are high expensive to stop selling a particular product,
because a large capital investment was made.
oLimited potential for the market to grow due to the large number of
competitors that compete for the same market share.
oGoods can easily be replaced for another product.
oThere is low level of customer loyalty.
Current competitors
 The threat of substitute products
• A business may feel threatened when a buyer is easily able to find a
substitute product at a better price or better quality.
• A substitute product uses a different technology to try to solve the
same need. E.g. landlines vs cell phones, coffee vs red bull , trains vs
automobile.
• Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price
increases. This reduces both the power of suppliers and the
attractiveness of the market.
VS
Complementary products
 Buyer power.
• An assessment of how easy it is for buyers to drive prices down. This
is driven by the: number of buyers in the market; importance of each
individual buyer to the organisation; and cost to the buyer of
switching from one supplier to another. If a business has just a few
powerful buyers, they are often able to dictate terms.
 Supplier power.
• An assessment of how easy it is for suppliers to drive up prices. This
is driven by the: number of suppliers of each essential input;
uniqueness of their product or service; relative size and strength of
the supplier; and cost of switching from one supplier to another.