PORTER’SFIVE FORCESMODEL

PORTER’S FIVE FORCES MODEL

Determine the intensity of competition and hence the profitability and attractiveness of an industry.

Outside-in business unit strategy

An important tool for analyzing an organization industry structure in strategic processes

PORTER’S

FIVE FORCES

MODEL

THREAT OF NEW ENTRANTS

The threat of New Entries will depend on the extent to which there are barriers to entry.They are,

Supply-side economies of scale

Demand-side benefits of sale Customer

switching costs

Capital requirements

Incumbency advantages

Unequal access to distribution channels Restrictive

government policy

REDUCE THE THREATS OF NEW ENTRANTS

BARGAINING POWER OF SUPPLIERS

The term ‘Suppliers’ comprises all sources for inputs that are needed in order to provide goods or services.

Supplier bargaining power is likely to be high when:

More concentrated than the industry

Does not depend heavily on industries

Face switching costs

Offer products that are differentiated

No substitute

Credibly threaten to integrate forward

BARGAINING POWER OF SUPPLIERS

Supplier bargaining power is likely to be ‘LOW’ when:

Many competitive suppliers

Purchase commodity products

Concentrated suppliers

Backward integration threat by purchasers

Reducing the Bargaining Power of Suppliers

Partnering Supply chain management Supply chain training Increase dependency Build knowledge of supplier costs and

methods Take over a supplier

BARGAINING POWER OF CUSTOMERS

Determines how much Customers can impose pressure on margins and volumes.

Customer bargaining power is likely to be high when:

Limited Customers

Can credibly threaten to integrate backward

Face Switching Costs

Large Volume Buyer

Customer bargaining power is likely to be ‘low’ when:

BARGAINING POWER OF CUSTOMERS

Producers threaten forward integration

Significant buyer switching cost

Buyers are fragmented

Producers supply critical portion of buyers input

Reducing the Bargaining Power of Customers Partnering Supply chain management Increase loyalty Increase incentives and value added Move purchase decision away from price Cut put powerful intermediaries (go

directly to customer)

• A substitute is the product which performs the same or a similar function as an industry’s product by a different means

Eg. E-mail is a substitute for express mail, Plastic for aluminium.

• Substitutes are easy to overlook.• reduce the bonanza an industry can reap in

good times.

THREAT OF SUBSTITUTES

THREAT OF SUBSTITUTES

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same product.

The threat of substitutes is determined by following factors:

Brand loyalty of customers.

better the relative value of the substitute

technological changes.

Eg: plasticAttractive price performance trade off to product eg.skype

Switching costs to substitutes is less eg.generic drug

THREAT OF SUBSTITUTES

Reducing the Threat of Substitutes Legal actions Increase switching costs Alliances Customer surveys to learn about their

preferences Enter substitute market and influence from

within Accentuate differences (real or perceived)

Rivalry exists in form of including • price discounting, • new product introductions, • advertising campaigns, and • service improvements.

Degree of rivalry depends on intensity with which they compete & basis on which they compete

COMPETETIVE RIVALRY BETWEEN EXISTING

PLAYERS

.

Competition between existing players is likely to be high when:

Competitors are numerous

Industry growth is slow

Commitment and aspirations.

Firms cannot read each others signals.

Exit barriers are high.

THE INTENSITY OF RIVALRY

• Dimensions:on which they compete. whether rivals converge on same dimension or different.

PRICE DIMENSION: Destructive to profitability of industry and transfer profit to customers. Diverts attention of customers towards product features and service.

Price competition is most liable to occur if:• Products identical & few switching costs for buyers.• Fixed costs are high and marginal costs are low.• Large capacity expansion.• Product is perishable

Rivalry also affects basis of competition

OTHER DIMENSION(NON-PRICE RIVALRY ): On product features, support services, delivery time, or brand image,

Features: • no erosion of profitability.• Improves customer value.• Justifies higher prices.• Improve value over substitute or raise barrier for new entrant.• Positive sum competition.• Higher average profitability• Expand industry. Thus nature of competition is towards positive direction.

Rivalry also affects basis of competition

Reducing the Competitive Rivalry between Existing Players

Avoid price competition

Differentiate your product

Buy out competition

Reduce industry over-capacity

Focus on different segments

Communicate with competitors

Limitations

1.All the strategies may not be effective 2.More on defensive side3.Synergy among even competitors4.Alliances, M&A5.Changing the rules of the game, Rather than

playing by existing rules(blue ocean strategy)6.It should be used as a tool.

Porter’s Five Force Modelin Pharma Industries

Conclusion• Industry is not static in nature, it's dynamic.

• Larger players in the industry will survive with their proprietary products and strong franchisee.

• In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players.

• Change in the patent regime, will see new proprietary products coming up, making imitation difficult.

• Government too will have bigger role to play.

He that knows nothing doubts nothing.

He that knows nothing doubts nothing.