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Porter's Five Forces
 

Porter's Five Forces

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Developed by Michael Porter, Porter?s Five Forces is a classic business framework for evaluating the attractiveness of a particular industry by analyzing 5 forces. It is useful to utilize Porter?s Five Forces in conjunction with a SWOT analysis of the industry.

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    Porter's Five Forces Porter's Five Forces Presentation Transcript

    • Business Framework Porter’s Five Forces Developed by Michael Porter, Porter’s Five Forces is a classic business framework for evaluating the attractiveness of a particular industry by analyzing 5 forces. It is useful to utilize Porter’s Five Forces in conjunction with a SWOT analysis of the industry. 4. Suppliers Suppliers negotiation power 2. Competitors in the industry Rivalry among existing companies 1. Potential new competitors Threat by new competitors 3. Substitution products Threat by substitution products 5. Customers Buyers’ negotiation power Find our other documents at http://flevy.com/seller/learnppt
    • 3 Porter’s Five Forces – Framework Diagram 4. Suppliers Suppliers negotiation power 2. Competitors in the industry Rivalry among existing companies 1. Potential new competitors Threat by new competitors 3. Substitution products Threat by substitution products 5. Customers Buyers’ negotiation power
    • 5 Total U.S. printed media revenues, 1989-1999 Includes both consumer and advertising spending The publishing industry has seen only modest increases in sales in recent years Source: Veronis, Suhler & Associates; S&P Industry Survey Note: Magazine and newspaper spending includes both advertising and consumer spending The internet provides an innovative new distribution medium that magazines and newspapers can use to recover readers and lure advertisers. 0 20 40 60 80 100 120 140 99E98E97E96E $ Billions 95E949392919089 EXAMPLE Total revenues CAGR Newspapers Books Magazines • Newspaper and magazine revenue growth has been driven by price increases, as circulation has been flat to falling • Newspapers and magazines share of total advertisers’ spending has also fallen from 32% to 28% over the last five years • Book publishers have seen growth in book unit volumes, with stable prices: – Books remain a popular source for access to fiction and non-fiction despite a growing number of substitutes – Recent growth of discount stores has helped increase sales 1989-1994 4.6% 1994-1999E 5.7%
    • 7 Leaders in the PC business have changed as quickly as the need for computing power New entrants and industry consolidation are forcing competitors to continually redefine their business strategies. U.S. Unit Market Share of top 10 competitors (quarterly changes in market share) 40% 30% 20% 10% 0% U.S. Unit Market Share 70% 60% 50% 2Q 1994 4Q 19944Q 1993 CompanyX 1Q 19943Q 19932Q 19931Q 1993 3Q 1994 EXAMPLE CompanyX CompanyX CompanyX CompanyX CompanyX CompanyX CompanyX CompanyX CompanyX
    • 9 Several factors determine the bargaining power of buyers A buyer group is powerful when: • It is concentrated or purchases large volumes relative to seller sales • Its purchases from the industry represent a significant fraction of the buyers’ costs or purchases • It purchases standard or undifferentiated products • Brand identification is low • Its switching costs are low • Its profits are low • It poses a credible threat of backward integration • Its purchases from the industry is unimportant for the quality of its products or services • It possesses full information These factors may change over time and alter buyer power.
    • 11 Business Distinct distribution channels serve the two major different end-user segments Massive increase of home PC usage has increased the strength of the mainstream channel, especially retailers. Source: IDC and Merrin Information Services, Inc. Channels Direct Sales System Integrators (SI) Value-Added Resellers (VAR) Dealers Computer Superstores Mass Merchants Consumer Electronic Stores Office Stores Mail Order Direct Response Value-added channels Mainstream channels Definitions Those sales made by a manufacturers’ sales force, agent, or representative Provide customized value-added solutions for clients Offer unique, tangible solutions “off-the-shelf” to targeted customers The “traditional” computer dealer channel. Do not add unique value to the system but do offer some value in the form of support, training, or other services Large, well-merchandized store fronts , with most revenue generated by computer-related sales Typically offer a wide range of products, including computer-related equipment Offer a wide range of electronic merchandise, including computer- related items Retailers and resellers focusing on office supplies Third-party computer sales that use telephone to perform all levels of sale Direct telephone sales from manufacturers not using third parties Typical buyer Home users EXAMPLE
    • 13 Supply Chain pressures have encouraged publishers to explore non-print opportunities Print publishers are rushing into these substitutes to pre-empt a push from niche players. New innovation As a substitute for … EXAMPLE Books Magazines Newspapers Telephone Info. Services   Fax Services  Books on cassette  CD-ROM   Online / internet  
    • 15 Paper companies’ strong leverage is pushing publishers to explore non- print options Many newspapers and magazines are already on the web, piloting the feasibility of an online presence. Many publishers and printers have seen the price of paper double in the first half of 1995 alone: A world paper shortage has resulted from increased demand for paper-based information North American paper producers have the option to sell to more lucrative foreign markets, leading to a sharp rise in North American exports Foreign producers also prefer to sell to more lucrative markets Even partial movement towards non-print media affords publishers greater bargaining power with conventional suppliers Independent Printers OtherInk Suppliers Paper Companies North American Market Share, 1994 Top 5 Top 10 Books 51.2% 74.7% Magazines 56.7% 86.5% Newspapers 41.1% 64.4% Publishers Source: Publishers Weekly EXAMPLE
    • 17 Porter’s Five Forces – Top Tips Hints and Pitfalls Data Sources Related Analytics  Industry reports  Analysts’ reports  Database searches  See also related analytics sources  Do: – Define precisely the industry before conducting analysis. – Quantify your findings where possible.  Don't: – Just use as a static tool – show trends in each of the areas.  PEST  SWOT  Segment attractiveness  Product life cycle  Product substitution  Competitors comparison
    • 19 Porter’s Five Forces – Metrics & Scoring (1 of 6) Economies of scale Product differentiation Brand identity Conversion costs Access to sales channels Capital needs Access to state-of-the-art technology Access to raw materials Protection by government Experience effect Specialized assets One-time exit costs Strategic linkages Emotional restraints Legal and social restrictions Number of comparable competitors Industry growth Fixed or storage costs Product characteristics Capacity increases Diversification of competitors Strategic assignments EntrybarriersExitbarriers Rivalryamong competitors little poor poor low broad low broad broad not available unimportant many high many many many many slow high consumables large steps high many Highly unattrac- tive Un- attractive Neutral Attrac- tive Highly attractive high pronounced high high limited high limited limited strong very important few low few few few few fast low specialised prod. continuous low few
    • 21 Availability of closely related substitution products Users’ conversion costs Profitability and aggressiveness of the substitution product manufacturers Value for money of substitution products Industry protection Industry regulations Availabilityof substitution products Authoritymeasures high low high high disadvantageous disadvantageous low high low low advantageous advantageous Political continuity International capital transfer low limited high unlimited Customs Foreign exchange operations high limited low unlimited Foreign ownership Help for competitors limited substantial unlimited no Highly unattrac- tive Un- attractive Neutral Attrac- tive Highly attractive Porter’s Five Forces – Metrics & Scoring (3 of 6)
    • 23 Competitive Dimensions Suppliers Factors Influencing the Relevant Competitive Dimensions  Factors increasing the suppliers’ negotiation power : – Large competitive advantages of the delivered product – Low number of potential suppliers – Great importance of the product for the quality of the client’s product – High conversion costs when switching the supplier – Low significance of the client for the supplier – Credible interest in a forward integration Short Characterization of the Industry Customers  Factors increasing the buyers’ negotiation power: – High market power at buyer side – Large number of alternative providers for the buyer (standardised exchangeable products) – Cost and market transparency for the buyers (ex. marketplaces) – Few buyers emerge in a concentrated fashion – Low conversion costs and risks for the buyer when switching the supplier – High industry products’ share of total costs at buyer side (strategic purchasing policy) – Revenue problems at buyer side, who want to pass them on to their suppliers – Credible threat with backward integration in the value chain Porter’s Five Forces – Metrics & Scoring (5 of 6)
    • 25 Porter’s Five Forces – Metrics & Scoring Template Industry Attractiveness Currently Future low middle high low middle high … … … … … … … Overall assessment
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