Threat of Entry - Porter’s Five Forces Model Importance of barriers to entry Economies of scale First mover cost advantages Capital required Government/legal barriers Control of distribution Product differentiation Higher the barriers, higher the profitability Example: Telecom industry
Buyer Power- Porter’s Five Forces Model Price sensitivity x Bargaining power Cost of purchase vs total costs Profitability of buyers Size & concentration of buyers relative to suppliers Buyers switching costs Buyer’s information Ability to integrate backwards Example: Auto parts industry Bargaining power of auto manufacturers reduces profitability of auto parts industry
Threat of Substitutes- Porter’s Five Forces Model Willingness to substitute Price-performance of substitutes Example: Frozen food industry Prices limited by prices of canned & fresh foods
Competitor Rivalry- Porter’s Five Forces Model Increase rivalry, lower profitability: Low industry concentration Slow demand growth High fixed costs Homogeneous goods Example: Chemicals industry
Case Study: XYZ Co. Background Privately owned grocery store 139 food stores in Oregon & California 1,431,770 shares of common stock outstanding 78,031 (5.45%) are offered for sale You are retained by John Smith, prospective minority shareholder Objective: Value 5.45% ownership interest
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