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Porters Five Forces Model

Background
Understanding the dynamics of competitors within an industry is critical for several reasons. First, it can help to assess the potential opportunities for your venture, particularly important if you are entering this industry as a new player. It can also be a critical step to better differentiate yourself from others that offer similar products and services. One of the most respected models to assist with this analysis is Porters Five Forces Model. This model, created by Michael E. Porter and described in the book Competitive Strategy: Techniques for Analyzing Industries and Competitors, has proven to be a useful tool for both business and marketing-based planning.

Introduction
Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Porters Five Forces attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors within an industry. This model may be used as a tool to better develop a strategic advantage over competing firms within an industry in a competitive and healthy environment. It identifies five forces that determine the long-run profitability of a market or market segment.

1. 2. 3. 4.

Threat of substitute products Threat of new entrants Intense rivalry among existing players Bargaining power of suppliers 5. Bargaining power of Buyers

1. Threat of substitute products


Threat of substitute products means how easily your customers can switch to your competitors product. Threat of substitute is high when:

There are many substitute products available Customer can easily find the product or service that youre offering at the same or less price Quality of the competitors product is better Substitute product is by a company earning high profits so can reduce prices to the lowest level.

In the above mentioned situations, Customer can easily switch to substitute products. So substitutes are a threat to your company. When there are actual and potential substitute products available then segment is unattractive. Profits and prices are effected by substitutes so, there is need to closely monitor price trends.

Eg. In the telecommunication industry, firms are lowering their prices in order to increase their consumer call ratio by minimizing their per minute profit margin but this strategy is increasing the overall company revenue. Availability of greater substitutes creates additional competition forcing industry members to

drop prices. In case of Bangladesh mobile telecom industry, substitutes exist in the form of government land lines and some upcoming PSTN operators. Some additional substitutes include wireless Internet providers such as WiMax based companies, Bangla Lion and Augere, which has been desperately marketing its brand Qubee since its entry to the market.

2. Threat of new entrants


A new entry of a competitor into your market also weakens your power. Threat of new entry depends upon entry and exit barriers. Threat of new entry is high when:

Capital requirements to start the business are less Few economies of scale are in place Customers can easily switch (low switching cost) Your key technology is not hard to acquire or isnt protected well Your product is not differentiated

There is variation in attractiveness of segment depending upon entry and exit barriers. That segment is more attractive which has high entry barriers and low exit barriers. Some new firms enter into industry and low performing companies leave the market easily. When both entry and exit barriers are high then profit margin is also high but companies

face more risk because poor performance companies stay in and fight it out. When these barriers are low then firms easily enter and exit the industry, profit is low. The worst condition is when entry barriers are low and exit barriers are high then in good times firms enter and it become very difficult to exit in bad times.

In Bangladesh, recently companies are finding ways to penetrate the industry, that is, through merging with existing market members. Recently Airtel merged with Warid Telecom through acquisition of majority share in order to enter the Bangladesh market. Other potential entrants who may be interested to come to Bangladesh include Reliance Telecom and Tata Indicom.

3. Industry Rivalry
Industry rivalry mean the intensity of competition among the existing competitors in the market. Intensity of rivalry depends on the number of competitors and their capabilities. Industry rivalry is high when:

There are number of small or equal competitors and less when theres a clear market leader. Customers have low switching costs Industry is growing

Exit barriers are high and rivals stay and compete Fixed cost are high resulting huge production and reduction in prices

These situations make the reasons for advertising wars, price wars, modifications, ultimately costs increase and it is difficult to compete.
Eg. The major competitors of the mobile telecom industry include wireless Internet providers (Banglalion, Augere), PSTN and VoIP based operators. Although the Government has so far banned majority of VoIP operators, there are still some operating illegally in the country. Wireless Internet providers are also a threat as increased usage of smart phones and PDAs mean that communication can be made over the Internet using hand held devices rather than having to go over mobile phone networks

4. Bargaining power of suppliers


Bargaining Power of supplier means how strong is the position of a seller. How much your supplier have control over increasing the Price of supplies. Suppliers are more powerful when

Suppliers are concentrated and well organized a few substitutes available to supplies Their product is most effective or unique Switching cost, from one suppliers to another, is high You are not an important customer to Supplier

When suppliers have more control over supplies and its prices that segment is less attractive. It is best way to make win-win relation with suppliers. Its good idea to have multi-sources of supply.
Eg. The bargaining power of suppliers in the industry is strong in some cases if not in all. If the telecom operators had to design the products on the whims of the suppliers because their output is unique, then the suppliers would enjoy absolute advantage in terms of bargaining power. But here this is not the case. Again, since the number of the suppliers is very limited say NOKIA & Ericsson and a handful number of network administrators, they (the suppliers) have this power to leverage on this, because this is limiting the choice of the operators and making the switching cost very high for them.

5. Bargaining power of Buyers

Bargaining Power of Buyers means, How much control the buyers have to drive down your products price, Can they work together in ordering large volumes. Buyers have more bargaining power when:

Few buyers chasing too many goods Buyer purchases in bulk quantities Product is not differentiated Buyers cost of switching to a competitors product is low Shopping cost is low Buyers are price sensitive Credible Threat of integration

Eg. In Bangladesh, the customers have absolute bargaining power. Because there are a number of operators in the market, the cost for switching loyalty is very low. Customers may want to switch from one operator to another for a better deal. Nothing can restrict this trend. In fact they see is that every customer nowadays uses more than one mobile phone or at least owns more than one connection, and use them interchangeably. This trend is especially very dominant among the teenagers who constitute a major portion of the market share, and on the other hand are also very sensitive to price. This phenomenon of subscribing to more than one operator, needless to say, has sparked a boom for another kind of mobile hand set that enables customers to use dual SIMS in one handset. And mobile phone companies, such as Samsung and Spice, by understanding this need of the consumer have come up with phones with this feature. This shows how powerful consumers are in this industry as trendsetters and this applies to every aspect of the business ranging from the designing of the products to pricing them. ****