michael porter analysis
(five forces model)
INTRODUCTION
An industry consists of a group of companies
offering products or services, which are similar and
substitutes for each other. Strategists analyze
competitive forces within an industry to identify
opportunities and threats facing a firm. A model for
analyzing the industry environment is developed by
Michael E. Porter, strategy. This model is known as
an authority on competitive strategy. This model is
known as five forces model and it helps managers
to identify and analyze the competitive forces in an
industry environment.
Threat of New
Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Firms
Porters Five
Forces Model
Threat of
Substitute
s
Bargaining
Power of
Buyers
(1) Threat of New Entrants
Entry of potential competitors to an industry
is a threat to the possibility of established
players. in any industry, new entrants bring
in new capacity, substantial resources and
aggressiveness to gain market share. it
includes following :
(a)Economies of scale :
Firms realize economies of scale as the
output of manufacturing units increases.
They manufacture goods at a lower average
cost compared to other manufacturers with
lower levels of output. These economies of
scale act as a barrier against firms which
consider entering an industry with a smaller
manufacturing capacity.
(b) Product differentiation :
Firms differentiate their products by
establishing
brand
identification
and
customer loyalty. Brand identification and
customer loyalty can be built through
advertising, customer service, product
differences, or first mover advantage.
(c) Capital requirements :
A firm need capital not only for advertising
and R&D and but also for customer credit,
inventories, and to absorb start-up losses.
Huge capital requirements limit the number
of players in industries such as computer
manufacturing and mineral extraction.
(d) Cost advantages :
existing firms in an industry sometime enjoy
advantages that are not new entrants. these
advantages
similarly,
proprietary
technology, access to the best sources of
raw materials, assets purchased at lower
prices, government subsidies and favorable
locations etc.
(e) Access to distribution channel :
Small firm often find it difficult to acquire
shelf space for distribution of their products
because large retailers
often give
preference to established firms. The
established firms are prepared to pay for
advertisement needed to create customer
demand.
(f) Government policy :
The government can limit entry into an
industry through licensing requirements, air
and water pollution standards and safety
regulations. The mandatory requirement of
effluent treatment plant in sugar mill, soft
drink unit, milk processing units and plastic
manufacturing units has escalated the cost
of production in India. This has restricted the
entry of potential competitors.
(2) Bargaining Power of Suppliers
The
bargaining
power
of
suppliers
determines the companys profitability when
the suppliers are able to force the price that
the buyer must pay. Suppliers are powerful
under the following circumstances :
When the product that they sell has few
substitutes and is important to the
purchasing company or buyer.
when no single industry is a major
customer for the suppliers.
when products in the industry are
differentiated to such an extent that they
are not easily substitutable and it is costly
for a buyer to switch from one supplier to
another.
A purchasing firm buys a small quantity of
a supplier's goods and services it is
unimportant to the supplier.
(3) The Bargaining Power of Buyers
Buyers viewed as a threat when they force
the
companies to charge low prices or
demand higher quality and better service
with their bargaining power. Buyers can be
viewed as a weak, if they give the company
the opportunity to raise price and make
more profits. According to porter the buyers
are powerful in the following circumstances.
The suppliers are more in number but the buyers
are few.
The buyers buy in large quantity.
More number of alternative suppliers and their
products are not standardized and undifferentiated.
The cost of changing suppliers is not much.
The suppliers depend on the buyer for a large
percentage of their total orders.
The purchase item is not important to the final
quality or price of buyers product.
(4) threat of substitute :
Substitutes are those products, which satisfy
similar needs though appear to be different.
Coffee, tea an Soft drinks, all serves the
consumers need for refreshment. Due to
the existence of substitutes such as tea and
soft drinks, the prices charged by companies
in the coffee industry are restricted. If coffee
prices are hiked, consumers have option of
switching over to tea or soft drinks, which
are its substitutes.
A substitute is a potential threat to the
companys product. The existence of a
substitute limits the price which can be
charged for a product and therefore the
profitability of the company.
(5) Rivalry among Existing Firms
When the intensity of rivalry is weak among
established players within an industry,
companies can raise prices and earn greater
profits. If the rivalry is strong among other
players, price competition and price war may
result and it will reduce the profit margin.
The intensity of rivalry among established
players is mainly due to three reasons:
Industry competitive structure
Demand conditions
The height of exit barriers in the industry.
Thank
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