Discusses how to analyse the external environment of a business using Porter’s 5 Forces using examples of situations each force becomes high. Explains the following terms - Economies of Scale - Difference between Commodity Products and Homogenous Products

1. Michael Porter’s Five Forces
UpekhaVandebona
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3.  Suppliers have the most power when:
 The inputs you require are available only from a small
number of suppliers.
 It is difficult for you to switch to another supplier.
 The inputs you require are unique, making it costly to
switch suppliers.
 Your input purchases don’t represent a significant
portion of the supplier’s business.
 Suppliers can sell directly to your customers, bypassing
the need for your business.
 You do not have a full understanding of your supplier’s
market.

4.  Suppliers can impact the price of products and
limit the production quantities as well
 In an industry where there are limited or
powerful suppliers of raw materials, a
company can face major problems not being
able to produce the products on time or to the
expected quality and quantity.
 The suppliers can also monopolies on the
prices for raw material thereby effecting the
pricing strategies of the manufacturer.

5.  Buyers have the most power over you when:
 They are large and purchase much of your output.
 Many small customers acting as a group creates force.**
 Your industry has many small companies supplying the
product and buyers are few and large.
 The products represent a relatively large expense for your
customers
 Customers are able to evaluate market information.**
 Your product is not unique and can be purchased from other
suppliers.
 Customers could possibly make your product
themselves.**
 Customers can easily, and with little cost, switch to another
product.

6.  The customers are very powerful in the online
economy as there are so much of information
for comparison.
 One of the most important dynamics driving
the expansion of the global online
environment is the shift or power in the
business relationship from seller to buyer.
 the buyer is becoming more and more
powerful making the seller’s job more and
more difficult to survive in the competitive
business world.

7.  In some instances, the buyers or customers
are getting together in ordering in bulk to get
products for the minimum prices.
 With the Internet, the services offered have
impacted the buyer more than ever
demanding convenience, 24/7 service, best
bargains, best discounts, services with no
geographical boundaries and more than ever,
excellentCustomer Relationship Management
(CRM).

8.  The threat of new entrants is greatest when:
 Processes are not protected by regulations or patents.
 Customers have little brand loyalty.
 Start-up costs are low for new businesses entering the industry.
 The products provided are not unique.
 Can easily liquidate their inventory & assets if the venture fails.
 Switching costs are low.
 The production process is easily learned.
 Access to inputs is easy.
 Access to customers is easy.
 Minimal entry barriers.
 Economies of scale are minimal.
Attractiveness

9.  Economies of Scale –
A proportionate saving in
costs gained by an increased
level of production.
 When more units of a good
or a service can be produced
on a larger scale, yet with
less input average costs,
economies of scale (ES) are
said to be achieved.

10. Rs 5,000 for 500
brochures
Rs 10,000 for
2500 brochures
Rs 10 per brochure Rs 4 per brochure

11.  Substitutes are a greater threat when:
 Your product doesn’t offer any real benefit
compared to other products.
 It is easy for customers to switch.
 Customers have little loyalty.
This threat is often ignored or neglected till it becomes too bigger
threat to handle.
Substitutes generally place a limit on prices and profits, making the
industry unattractive and unprofitable to work in.

12. The plastic bag manufacturers face the
substitute force coming from the paper bag
manufacturers.
And promoters such as the environmental
groups may stand with that.

13.  The most intense rivalries occur when:
 One firm or a small number of firms have incentive
to try and become the market leader.
 The market is growing slowly or shrinking.
 There are high fixed costs of production
 Products are perishable and need to be sold
quickly.
 Customers can easily switch between products.
 There are high costs for exiting the business
 Products are not unique (homogenous).
 Undifferentiated products (commodities)

14. Commodity Products
Raw products usually produced
and/or sold by many different
companies to satisfy consumer
needs, and mainly agricultural
or eatable products. Their price
is determined as a function of its
market as a whole.
Homogenous Products –
Products that compete with each
other in a market but which (from
the consumer's viewpoint) have
little or no differentiation in terms
of features, benefits, or quality and
are, therefore, forced to compete
on price or availability.

15.  Deals with strength and aggressiveness of
the competitors.
 An industry is considered to be
unattractive if there are many aggressive
competitors.
 It will results price wars, advertising
battles, new and competitive product
introductions, etc.

16.  When there is a very high (perfect)
competition in the industry, customers are
given a wide choice of companies to select
the service/product from.
 With the Internet, the customers can
compare prices/products/services,
company’s profiles, other
products/services offered, after sales
services, etc. very easily and conveniently.

17. 2014, 2013, 2012, 2011 , 2009 –
1 (a) Using the given case study, carry out Porter’s
forces analysis in order to understand the issues and
concerns faced by them.
Justify your answer as to why certain forces are
high and certain forces are low.
What are the minimizing strategies.
(30 Marks)