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Porter’s Five Forces Model

Porter is an effective tool used to analyze the attractiveness and value of an industry structure.the Five Forces model focuses on factors inside the industry (the microenvironment).which deals with factors outside the industry (the macro environment) . 2 .Porter’s Five Forces The Five Forces model of Harvard professor Michael E. In comparison with the PESTLE analysis . He advocates that a structural analysis of industries be made so that a firm is in a better position to identify its strengths and weaknesses.

The Role of the Macro and Micro environment 3 .

4 .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.

Porter’s Five Forces Model Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 5 .

which will effectively decrease profitability. This results in many new entrants. The Threat of the entry of new Entrants    Profitable markets that yield high returns will draw firms. Unless the entry of new firms can be blocked by incumbents.1. the profit rate will fall towards a competitive level New entrants into an industry threaten incumbent companies – They have to share the growing market pie with the competitors or part with some of their own market share. The threat of new entrants will depend on 2 factors – the entry barriers to the industry and the expected retaliation from the existing firms 6 .

proprietary products. Economies of Scale (example FMCG companies) Barriers to Entry Product Differentiation (example Mobile phones) Capital Requirements (automobile sector) Switching Costs (CNG) Access to Distribution Channels (Soft drinks) Cost Disadvantages Independent of Scale (favorable location. access to raw material etc) Government Policy (licensing) Expected Retaliation from incumbent firms – the existing firm may lower its price or alter the base of competition 7 .Threat of New Entrants .Entry barriers reduce the threat of new competition.

The Threat of new entrants   Despite the formidable hurdles posed by existing firms. The popular strategy for doing this to find market niches not served by existing firms and to gradually build up their presence in the industry . new firms do enter industries if they find them to be promising.

Example Tea and coffee can be considered as close substitutes for the market of stimulant drinks. Firms with products which have no close substitutes can charge a higher price and earn more profits 9 .Threat of Substitute Products  Products with similar function limit the prices firms can charge   The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases.

Suppliers if powerful can exert an influence of the manufacturing industry.Bargaining power of Suppliers    Any industry requires raw materials – components. Suppliers too have a level of bargaining power. such as selling the raw materials at a higher price which eats into the profits of the firms Powerful suppliers are a entry barrier to new firms. . labor and other supplies.

Bargaining Power of Suppliers Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Supplier industry is dominated by a few firms (drugs suppliers and Hospitals as in case of Tamiflu by Roche) Suppliers’ products have few substitutes – (Microprocessors) Buyer is not an important customer to supplier (Kirana shops to FMCG companies) Supplier’s product is an important input to buyers’ product (Steel to cars) Suppliers’ products are differentiated (Apple products to retailer) Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Suppliers’ products have high switching costs (Microsoft to computers) Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs (Movie producing companies have integrated forward to acquire theatres) 11 .

A higher buyer bargaining power constitutes a negative feature for the existing firms and the new entrants . individually or collectively to force reduction of prices of products.Bargaining power of Buyers   The bargaining power of Buyers constitute the ability of the buyers. demand a higher quality or seek more value for their purchases.

When the purchased product constitutes a high percentage of the buyers cost. Buyers purchase from multiple sellers at once. Buyers can easily vertically integrate to compete with suppliers (private labels in retail industry) 13 . Buyers can switch suppliers at low cost. Buyers purchase in large quantities.The Bargaining Power of Buyers  Buyers are most powerful when:        Buyers are few in number. A single buyer is a large customer to a firm.

Rivalry Among Established Companies  The intensity of competitive rivalry in an industry arises from:  1. 2. Fragmented – low entry barriers Consolidated structure – Oligopolistic or monopolistic. The intensity of competition may vary from guarded tolerance to fierce rivalry. 2.  1. 14 . Strategic or emotional). Demand (growth or decline) conditions in industry. High demand – moderate competition Stagnant demand – competitive strategies to snatch others business Height of industry exit barriers (Economic.  Industry’s competitive structure.

shared dominance (oligopoly) 15 . no dominant firm Consolidated One firm or one dominant firm (monopoly) Few firms.Competitive Structure Continuum of Industry Structures Fragmented Many small firms.

it then lands in a store. Which disempowered other stores where this was not possible. even sell books second-hand. store. The endresult was that the customer became empowered: he could review books. by becoming a distributor with a web-based store-front. if you include ebooks into the formula). it then gets distributed. . Publishers are still powerful of course. but this will change as soon as online publishing can be consumed comfortably. and customers (four. Amazon integrated three of these functions: distribution. essentially acting as a gatekeeper to writers. who were before able to simply push out best-sellers downstream. and then the customer buys it. and publishers. A book gets printed. who spotted an opportunity to surpass brick & mortar stores.Changing industry structures   Amazon. Traditionally. the book-industry was organised as follows.