Porter 5 Forces


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Porter 5 Forces

  2. 2. INTRODUCTION The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates
  3. 3. CONT’ A company operating in different market segments, markets and/or industries will be faced with the problem that each area of operation (market or segment) will have a different level of attractiveness for the company, which will result in different growth and profit potentials. Michael Porter developed his five forces model (also often called the industry structure model) in the early 1980s as a structural tool to assess the attractiveness of any industry.
  4. 4. CONT’ The same base forces apply whether the planner is considering an industry, a product/service category market or market segment, so the model can be used at any of these levels. Porter suggest that the attractiveness of, and therefore the ability of businesses to compete in, any industry or segment is influenced by the action and interaction of the five basic forces that make up any industry.
  5. 5. Diagram of Porters 5 Forces
  6. 6. Threat of new entrants Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary productsBargaining power of Bargaining power ofsuppliers buyers Intensity of rivalry between Bargaining leverageSupplier concentration existing competitors Buyer volumeImportance of volume to supplier Buyer informationDifferentiation of inputs -Exit barriers Brand identityImpact of inputs on cost or -Industry concentration Price sensitivitydifferentiation -Fixed costs/Value added Threat of backward integrationSwitching costs of firms in the -Industry growth Product differentiationindustry -Intermittent overcapacity Buyer concentration vs. industryPresence of substitute inputs -Product differences Substitutes availableThreat of forward integration -Switching costs Buyers incentivesCost relative to total purchases in -Brand identityindustry -Diversity of rivals -Corporate stakes Threat of substitutes -Switching costs -Buyer inclination to substitute. -Price-performance trade-off of substitutes
  7. 7. Where the 5 Forces ModelFits In Marketing Planning ? Analysis of the industry, market or market segment using the 5 forces model should form a major part of the current situation analysis. Help the business to identify its comparative competitive strength and weaknesses and help it identify or evaluate opportunities and threats.
  8. 8. Cont’ Analysis of the new market using this model will help evaluate the comparative attractiveness of the new market and identify key issue associated with entrance.
  9. 9. What makes an industry/market attractive? Some of the factors that will determine how a business rates a particular industry, market or market segment include:  How profitable is it likely to be in both the short t and long term?  How well do the industry factor match the businesses’ characteristics and resources, for instance size, financial requirement, technical requirement, geographic scope and so on?
  10. 10.  How easy will be for the businesses to capture and keep a significant and sufficient loyal customer base?  Is the business more or less dominant than its direct competitor? Therefore, analysis of any industry, market or market segment with a view to assessing current and ongoing attractiveness, need to be tailored to the specific objective and characteristic of the business
  11. 11. I. Rivalry The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. Economists measure rivalry by indicators of industry concentration - Concentration Ratio (CR) A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated
  12. 12.  A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. If rivalry among firms in an industry is low, the industry is considered to be disciplined.
  13. 13.  When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry - being cutthroat, intense, moderate, or weak, based on the firms aggressiveness in attempting to gain an advantage.
  14. 14. In pursuing an advantage over its rivals, a firm canchoose from several competitive moves: Changing prices - raising or lowering prices to gain a temporary advantage. Improving product differentiation - improving features, implementing innovations in the manufacturing process and in the product itself. Creatively using channels of distribution - using vertical integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market. Exploiting relationships with suppliers - for example, from the 1950s to the 1970s Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price.
  15. 15. The intensity of rivalry isinfluenced by the followingindustry characteristics: A larger number of firms • increase rivalry because more firms must compete for the same customers and resources. Slow market growth • causes firms to fight for market share. High fixed costs • result in an economy of scale effect that increases rivalry.
  16. 16.  High storage costs or highly perishable products • cause a producer to sell goods as soon as possible. Low switching costs • increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. Low levels of product differentiation • associated with higher levels of rivalry. Strategic stakes are high • when a firm is losing market position or has potential for great gains.
  17. 17.  High exit barriers • place a high cost on abandoning the product. A diversity of rivals • with different cultures, histories, and philosophies make an industry unstable. Industry Shakeout. • A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production.
  18. 18. II. Threat Of Substitutes Substitute products refer to products in other industries Exists when a products demand is affected by the price change of a substitute product A close substitute product constrains the ability of firms in an industry to raise prices. The competition engendered by a Threat of Substitute comes from products outside the industry.
  19. 19.  The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry.
  20. 20. III. Buyer Power The power of buyers is the impact that customers have on a producing industry When buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers.
  21. 21. Factors that determines thebuyer power
  22. 22. IV. Supplier Power A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industrys profits.
  23. 23. Factors that determine supplierpower
  24. 24. V. Barriers to Entry / Threat ofEntry It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market.
  25. 25. Barriers to entry
  26. 26. ABC cheese case question Using porter’s five forces model, analyze and compare the cheese industry or the segments that the ABC cheese factory targets for the ABC cheese factory both before and after the strategic alliances were entered into.
  27. 27. ABC cheese factory beforethe strategic alliances ABC Cheese Factory established in 1891 The first cheese co-op in NSW It starts with small business in manufacturing cheese as the core business in Tilba. It employs four people as a quaint tourist attraction. Even though peter storey is a pretty good business, but could never have achieved all on his own. Although peter had been running it for 4 years, the factory just a source of employment for a few residents of this little country town. Peter rented a disused factory to expand a little bit of his business. As he developed the business, he came to understand that cheese was an upcoming product, attractive not only to tourists but also to wider market nationally. Peter forged his alliances with various distributors who eventually gave him first class advice, leading to big win for both parties.
  28. 28. ABC cheese after thestrategic alliances How does a small country-based business forge such an alliance? It wasn’t through any personal contacts, introduction or short cut. But, he simply knocked on the front door, by ringing up the supermarket as and asking them who they would recommend as the best distributors. Peter then rang those distributors, travelled to their premises and interviewed them. One of ABC cheese factory alliance is Menora Gourmet Products, because of this alliance a lot of advice, expertise and ideas exchange between them for example change in portion size either big and small, product differentiation through different wax colours and labels and develop a vintage cheese. ABC cheese won Woolworths listing because of its distributor. Woolworths wanted ABC to continue stock Tilba cheese but the problem is they wanted it to be presented in vacuum packed portions of random weight.
  29. 29.  Peter Storey originally never intended to supply at supermarket but because of Woolworth request and demand, a huge market opportunity are ready to be tapped. He bought a vacuum packing machine, learned how to use it and taught his staff and began to look at his market as being potentially much bigger than just the tourists who stopped to look at this quaint little town. There are now 18-20 people on the ABC factory payroll, more than half a part – time all casual. The factory has the equivalent of 10 full-time workers. Since 1987, annual growth has been 30-50 percent which it’s very hard to control.
  30. 30.  Although the output was 160 tons in 1997 ABC Cheese Factory is still a small business compared to the main player. Through strategic alliances (business collaboration);  they maximizing their internal cost efficiency with others expertise such as Menora Goumet product and Woolworths.  Improving overall operation efficiency to reduce operational complexity and cost of shifting the sales and delivery effort to distributer and world worth.  Outsourcing the non essential activities such as marketing, sales and promotion effort to distributor and supermarket.  Offering better value for money due to their differentiation strategy in compliment with appealing sales strategy, distribution as well as marketing.
  31. 31. Conclusion From the Porter’s Five Forces Model, the supplier power may be reduce by forming strategic alliance to create buying groups. Buyer power also can be reduce by forming strategic group alliances to create economic of scale in marketing and selling cross.