Porter 5 force analysis

PORTER FIVE FORCE
ANALYSIS
ANIKET KULKARNI (MT14IND003)
& MAYANK AGRAWAL (MT14IND012)
INDUSTRIAL ENGINEERIG (2014 – 15)
DEPARTMENT OF MECHANICAL ENGG.
VNIT, NAGPUR
ANIKET KULKARNI & MAYANK AGRAWAL 1PORTER FIVE FORCE ANALYSIS

Introduction
Porter's Five Forces of Competitive Position Analysis
were developed in 1979 by Michael E Porter of
Harvard Business School as a simple framework for
assessing and evaluating the competitive strength and
position of a business organisation.
This theory is based on the concept that there are five
forces that determine the competitive intensity and
attractiveness of a market.

What is Porter 5 Force Analysis?
• Porter five forces analysis is a framework to analyse
level of competition within an industry and to
develop business strategy accordingly.
• The framework allows a business to identify and
analyse the important forces that determine the
profitability of an industry.

5 Forces
Porter identified five factors that act together to
determine the nature of competition within an industry.
These are the:
1. Threat of new entrants to a market
2. Bargaining power of suppliers
3. Bargaining power of customers (“buyers”)
4. Threat of substitute products
5. Degree of competitive rivalry

.

1.Threat of new entrants to an Industry
• The competitive threat to a company’s business may
not only be from existing players in the market but
also from potential new entrants into the market
place.
• If it costs little in time or money to enter your market,
then new competitors can quickly enter your market
and weaken your position and if your product is
strong enough then it will be threat for new entrants.

The following factors can have an effect on how
much of a threat new entrants may pose:
• When entrance barriers are high and exit are low.
• Regulatory and legal restrictions.
• Capital requirement.
• Customer loyalty to established brands.

• Industry profitability (the more profitable the industry
the more attractive it will be to new competitors).
• Access to suppliers and distribution channels.
• Retaliation by established products.

2. Bargaining power of suppliers
• The bargaining power of suppliers is also described
as the market of inputs.
• Suppliers of raw materials, components, labour, and
services to the firm.
• Supplier can have supreme power over the firm
when there are few substitutes.
• For ex: If you are making biscuits and there is only
one person who sells flour, you have no alternative
but to buy it from them.

Suppliers may refuse to work with the firm or charge
excessively high prices for unique resources.
If a firm’s suppliers have bargaining power they will:
• Exercise that power.
• Sell their products at a higher price.
• Squeeze industry profits

ANIKET KULKARNI & MAYANK AGRAWAL 11
Suppliers find themselves in a
powerful position when
PORTER FIVE FORCE ANALYSIS
• There are only a few large suppliers.
• The resource they supply is scarce.
• The cost of switching to an alternative supplier is
high.
• The supplier can threaten to integrate vertically.
• There are no or few substitute resources available.

3.Bargaining power of customers
• The bargaining power of customers is also described
as the market of outputs: the ability of customers to
put the firm under pressure, which also affects the
customer's sensitivity to price changes.
• Firms can take measures to reduce buyer power,
such as implementing a loyalty program. The buyer
power is high if the buyer has many alternatives.

Several factors determine the bargaining power of
customers, including:
• Number of buyers.
• The importance of each individual buyer to your
business.
• Buyer switching costs relative to firm switching
costs.
• Availability of existing substitute products.

4. Threat of substitution
• A substitute product can be regarded something that
meets the same need.
• Substitute products are produced in a different
industry but crucially satisfy the same customer
need.
• If there are many credible substitutes to a firm’s
product, they will limit the price that can be charged
and will reduce industry profits.

The extent of the threat depends upon:
• The extent to which the price and performance of the
substitute can match the industry’s product.
• The willingness of customers to switch.
• Customer loyalty and switching costs.

5. Rivalry
• What is important here is the number and capability
of your competitors. If you have many competitors,
and they offer equally attractive products and
services, then you'll most likely have little power in
the situation, because suppliers and buyers will go
elsewhere if they don't get a good deal from you.
• On the other hand, if no one else can do what you do,
then you can often have tremendous strength.

Several factors determine the degree of competitive
rivalry; the main ones are:
• Number of competitors in the market.
• Market size and growth prospects.
• Product differentiation and brand loyalty.
• The power of buyers and the availability of
substitutes.
• Exit barriers: If it is difficult or expensive to exit an
industry, firms will remain thus adding to the
intensity of competition.

ANIKET KULKARNI & MAYANK AGRAWAL 18
A Porter's 5 forces analysis on Nokia
PORTER FIVE FORCE ANALYSIS

• Nokia was founded over 140 years ago in Finland,
and since then has become a global organisation that
operates in over 120 countries worldwide.
• Nokia has also become a market leader in the mobile
telecommunications industry and is most known for
their mobile phones and Smartphone’s.
• Although recent competition has affected the market
share that Nokia has in the telecommunication
industry they still hold a strong 29%(2011) of the
market share in a forever changing industry.

1. Threat of new entrants to Nokia
• The Nokia mobile phone industry is already a well
established market and the threat of a new entrant is
quite low, as the technology needed to rival the
devices already available is quite advance if they
want to differentiate from them.
• The barriers to entry in the mobile phone industry is
high because any new entrants will need high
investments in R&D, technology and marketing in
order to compete with the Nokia mobile phone.

• Substantial: The market segments are large or profitable
enough to serve. A segment should be the largest possible
homogeneous group worth pursuing with a tailored marketing
program .Ex: automobile manufacturer to develop cars
especially for people whose height is greater than seven feet.
• Differentiable: The segments are conceptually
distinguishable and respond differently to different marketing
mix elements and programs. If men and women respond
similarly to marketing efforts for soft drinks, they do not
constitute separate segments.

Nokia currently(2011) hold a 26.8% of the entire
mobile phone market worldwide and for a new
competitor to obtain some of their market will take
either a very long term plan or something that is truly
innovative and unseen before. This is because
realistically the new entrant will need very high
investment for R&D and marketing.
The following are common effect by Nokia that
provide successful barriers to new entry :
i) High initial investment needed.

• Measurable: The size, purchasing power, and profiles of the
segments can be measured. there are 30.5 million left handed
people in the United States, Yet few products are targeted
toward this left-handed segment.
• Accessible: The market segments can be effectively reached
and served. Fragrance company finds that heavy users of its
brand are men.

2. Economies of scale available: Lower unit costs
make it difficult for smaller newcomers to break into
the market and compete effectively.
3. Patents and proprietary knowledge.
4. Product differentiation: Existing products with
strong USPs and/or brand increase customer loyalty
and make it difficult for newcomers to gain market
share.

5. Access to suppliers and distribution channels: A
lack of access will make it difficult for newcomers to
enter the market.
6. Retaliation by established products: E.g. the threat
of price war will act to discourage new entrants.
Say:- Price wars between Nokia & Samsung.
In conclusion, there is a low threat from the new
entrants to Nokia

2. Power of suppliers in case of Nokia
• Although Nokia rely on its suppliers to supply
equipment for their advanced mobile phones,
there are actually a number of large equipment
makers, which Nokia could switch to.
• Nokia’s main argument would be the fact that they
are a global organisation that has the highest
market share in the industry, so the suppliers
would not want to lose such an illustrious
organisation.

How much power the supplier have is determined
by factors such as:
1. Uniqueness of the input supplied:
If the resource is essential to the buying firm and no
close substitutes are available, suppliers are in a
powerful position.
e.g. Uniqueness of the software's provided by the
Microsoft to Nokia.

2. Cost of switching to alternative sources:
Nokia have large numbers of hardware suppliers so
cost of switching alternative sources is might be lesser
for it.
On the other hand, Nokia have recently created an
alliance with Microsoft for their software which
would be considered a major benefit for Nokia more
than Microsoft, so cost of loosing Microsoft would be
much higher for Nokia.

3. Number and size of firms supplying the resources:
Nokia are in the position where they can bargain and
negotiate with any mobile phone hardware maker
because there is a high number of equipment suppliers
that are readily available to them.
Microsoft will have a lot of power when negotiating a
price and share because the deal is more beneficial to
Nokia than Microsoft.

• In conclusion, there is a moderate threat from the
powers of suppliers to Nokia, because although the
hardware suppliers have a very low power,
Microsoft’s power over the software is very high
because they’re very few other organisations who
have the expertise and skills to rival Microsoft.

The power that customers have is rising because of the
increasing number of choices in the mobile
telecommunication industry.
Several factors determine the bargaining power of
customers, including
1. Increased price sensitivity: Price differentiation is
getting lower and lower as device manufacturers are
facing fast changes in designs, technical and data
capabilities leading the buyers to price sensitive in
their buying decision. With lot of Nokia’s competitors
offering similar packages, the buyers are seeking out
best value for their money.
3. Powers of buyers in case of Nokia

2. Low Product differentiation: In the cut-throat mobile
industry, the product differentiation factors are getting
lower. If when player comes up with a new feature or
technology improvement, it is taken by competitive
player very soon e.g. dual-core processors, wide-
screen, LTE, etc.
Nokia are especially very weak in hardware
components differentiation (except for camera)

3. Low threat of backward integration: Some mobile
operators have started building their own mobile
phones under their brand (e.g. Videocon in India) but
still have not been hugely popular. So the threat is still
low. Most of the mobile phone manufacturers have
their own stores to directly sell to consumers, Nokia is
still behind in this area too.
4. Increasing Buyer volume: Consumers (end buyers)
volume is continuously increasing globally despite
recession in recent years in some regions and
saturation in some.

• In conclusion, the buyers have a high amount of
power because of the other handsets they can
purchase instead of Nokia.

Nokia operate in an industry where the competition is
extremely fierce with high investment in R&D and
marketing to compete with some of the biggest
organisations in the world.
This year Nokia’s market share has dropped to 29%
and it is forecast to continue to fall because of the
rising popularity of the Apple IPhone.
4. Rivalry between competitors

Several factors determine the degree of competitive
rivalry; the main ones are:
1. Intense competition from large companies such as;
Apple, HTC, Blackberry, Sony Ericson and LG, to
Nokia.
2. There is also very little differentiation between the
competitors which means any new smart phones in
the market, like Nokia Lumia, will find it difficult
to tempt existing iPhone and HTC customers to
switch

3.Brand identity: Brand identity is vital for long term
success in mobile phones market. But there is still
growing competition e.g. from Chinese 'micro-brands'
and grey market (mainly in the emerging regions like
India)
4. High diversity of rivals: Over 2011 Nokia’s sales
were down 18% in China, 27% in Europe and 61% in
North America. Nokia has faced increased competition
from low-cost phone manufacturers such as ZTE and
Huawei (mostly in China and Europe).

5. High margins: The smartphone segment offers the
largest returns for many in the mobile value chain, and
it has therefore become the most competitive –
attracting all the major vendors competing across
various operating systems and price tiers.
Huawei has set an ambitious goal for itself: to ship 60
million smartphones in 2012, an increase of 200%
year-on-year. So that may that may proof dangerous
for Nokia.

• In conclusion, competitive rivalry is very high and
Nokia must be aware of the threat that competitors
have on their business especially with the growing
popularity of the Apple iPhone and RIM blackberry

1. Low Buyer inclination to substitute:
Mobile phones have become necessity for everyday lives
of people and its hard to replace with any substitute
products especially when they are away from home.
2. High switching costs:
There exist multiple substitute products e.g. for contacting
people, usage of social media, emails, digital cameras for
photography, TV/radio/iPod for listening music, tablets for
internet browsing, reading books, emailing etc. needless to
say each substitute product might cost more than the
mobile phone and need to be carried all the time.
5. Threat of substitute products to Nokia
mobile phones

3. High price-performance ration (value): No other
substitute product has the ability to make phone calls,
send messages, surf the web, reading a book,
listening to music, use GPS services, communicating
via social media and many more in one device. The
idea of being in constant communication with
someone at anytime and anywhere makes the mobile
phone a very important device to people and the
perceived value by user (price-performance) ratio is
very high).
In conclusion, Nokia mobile phones do not have a
threat of a substitute or have a very low threat of
substitute.

ATTITUDE :
ii. Benefit sought :
• NIVEA Sun recognised consumers with special skin types as a
separate segment, who require a more specialised product.
• Hence, NIVEA Sun has formulated sensitive skin products for
special segment.
• Continual segmentation is vital to fully understand consumer needs
and changing habits.

• http://www.slideshare.net/hooda_27/porters-5-
forces-analysis-nokia
• http://tfliu90.hubpages.com/hub/A-Porters-5-
forces-analysis-on-Nokia
• http://www.investopedia.com/terms/p/porter.asp
• http://www.quickmba.com/strategy/porter.shtml
References

Porter 5 force analysis

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