Porter's Model E- MBA, Final

8/9/2019 Porter's Model E- MBA, Final

1/25

Porter's FiveForces Analysis


2/25

Components of BusinessEnvironment/ Factors affecting

Business EnvironmentCOMPONENTS OF BUSINESS ENVIRONMENT

Internal Environment External Environment

Micro EnvironmentMacro Environment

Financial resourcesPhysical & human resources

Objectives of business

Managerial policies

Human resources

Work environment

Brand & Corporate image

Labor management relations

Suppliers

Customers

Market intermediaries

Competitors

Public

Economic

Political

Socio-cultural

Technological

Natural

Demographic

International


3/25

Porter's five forces analysis:Meaning A framework for industry analysis and business

strategy development developed by Michael E. Porterof Harvard Business School in 1979

Five forces which determine the competitive intensity

and therefore attractiveness of a market Attractiveness in this context refers to the overallindustry profitability

An "unattractive" industry is one where thecombination of forces acts to drive down overall

profitability A very unattractive industry would be one approaching

"pure competition.


4/25

Porter's five forcesanalysis.

Porter referred to these forces as the microenvironment, to contrast it with macro environment Forces close to a company that affect its ability to

serve its customers and make a profit A change in any of the forces requires a company to

re-assess the market The overall industry attractiveness does not imply

that every firm in the industry will have sameprofitability

Example :airline industry. As an industry, profitabilityis low and yet individual companies, get return inexcess of the industry average


5/25

Porter's five forcesanalysis.

Porter's five forces include three forces from'horizontal' competition:

threat of substitute products

the threat of established rivals threat of new entrants

Two forces from 'vertical' competition:

bargaining power of suppliers bargaining power of customers


6/25

Porter's five forcesanalysis. Five forces model should be used at the

industry level Industry is defined as one in which similar or

closely related products and/or services aresold to buyers

Firms that compete in a single industryshould develop, at a minimum, one five

forces analysis for its industry


7/25

The Five Forces: The threat ofsubstitute products

The existence of close substitute products increases the propensity ofcustomers to switch to alternatives in response to price increases (high

elasticity of demand) buyer propensity to substitute

relative price performance of substitutes

buyer switching costs

perceived level of product differentiation

The ability of customers to find a different way of getting what you offer

If substitution is easy and substitution is viable, then this weakens your

power


8/25

The Five Forces: The threat of theentry of new competitors

Profitable markets that yield high returns will

draw firms This results in many new entrants, which will

effectively decrease profitability

Unless the entry of new firms can be blocked by

incumbents, profit rate will fall towards acompetitive level (perfect competition)


9/25

The Five Forces: The threat

of the entry of newcompetitors. Existence of barriers to entry (patents rights, etc.) Economies of scale Brand equity ( the marketing effects or outcomes that accrue to a

product with its brand name compared with those thatwould

accrue if the same product did not have the brand name) Switching costs or sunk costs ( that cannot be recovered once

they have been incurred ) Capital requirements Access to distribution Learning curve advantages Expected retaliation by incumbents Government policies


10/25

Threat of New Entry.

New competitors can quickly enter your marketand weaken your position

If:

it costs little in time or money to enter yourmarket and compete effectively,

there are few economies of scale in place, you have little protection for your key

technologies, If you have strong and durable barriers to entry,

then you can preserve a favorable position


11/25

The Five Forces: The intensity ofcompetitive rivalry/ the threat of

established rivals

The major determinant of the competitiveness ofthe industry.

Rivals compete: by price and in non-price dimensions such as innovation,

marketing, etc.


12/25

The Five Forces: The intensity ofcompetitive rivalry/ the threat of

established rivals. Number of competitors Rate of industry growth Industry overcapacity

Diversity of competitors Fixed cost allocation per value added Advertising expense Economies of scale

Sustainable competitive advantage throughimprovisation


13/25

Competitive Rivalry / the threat ofestablished rivals..

Number and capability of your competitors if you

have many competitors, and they offer equally

attractive products and services

If suppliers and buyers dont get a good deal from

you,

But if no-one can do what you do, then you can

have strength


14/25

The Five Forces: Thebargaining power of

customers Also described as the market of outputs

The ability of customers to put the firm under pressure

buyer volume

buyer switching costs

buyer information availability

availability of existing substitute products: elasticity of

demand

buyer price sensitivity

differential advantage (uniqueness) of industry products


15/25

Buyer Power.

How easy it is for buyers to drive prices down

Driven by number of buyers, importance of

each buyer to your business, cost to them ofswitching from your products and services to

those of someone else,

If you deal with few, powerful buyers, they

are often able to dictate terms to you


16/25


suppliers

Also described as market of inputs Suppliers of raw materials, components, labor,

and services (such as expertise) to the firm canbe a source of power over the firm. Suppliers may refuse to work with the firm, or

e.g. charge excessively high prices


17/25


suppliers. Supplier switching costs relative to firm switching

costs Degree of differentiation of inputs Presence of substitute inputs Cost of inputs relative to selling price of the

product


18/25

Supplier Power.

Here you assess how easy it is for suppliers todrive up prices

This is driven by the number of suppliers of each

key input, the uniqueness of their product orservice, their strength and control over you, thecost of switching from one to another, and so on.

The fewer the supplier choices you have, and themore you need suppliers' help, the more powerfulyour suppliers are


19/25

Industry competitors

Porter's Five Forces ModelPorter's Five Forces Model

Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)


20/25


Rivalry among

existing firms



P ' Fi F M d l


21/25

Potential

entrants


Rivalry among

existing firms

Threat of

new entrants



P t ' Fi F M d l


22/25

Substitute

products

Potential

entrants


Rivalry among

existing firms

Threat of

new entrants

Threat of

substitutes



P t ' Fi F M d lP t ' Fi F M d l


23/25

Suppliers

Substitute

products

Potential

entrants


Rivalry among

existing firms

Threat of

new entrants

Bargaining power

of suppliers

Threat of

substitutes



P t ' Fi F M d lP t ' Fi F M d l


24/25

BuyersSuppliers

Substitute

products

Potential

entrants


Rivalry among

existing firms

Threat of

new entrants

Bargaining power

of suppliers Bargaining powerof buyers

Threat of

substitutes




25/25

Usefulness

Simple but powerful tool for understanding where power

lies in a business situation

It helps you understand both the strength of your current

competitive position, and the strength of a position you're

looking to move into

An important part of your planning toolkit

Conventionally, the tool is used to identify whether new

products, services or businesses have potential to be

profitable

Can be used to understand the balance of power

Documents

Porter's Model E- MBA, Final