Porter’s Five Forces of Competitive Analysis

Porter’s Five Forces of Competitive Analysis

Introduction Porter’s Five Forces Chart Porter’s Five Forces Porter's Five Forces Evaluation Importance of Porter’s Five Forces Using The Tools Navigating The Model Development: Before, During and After Limitations How it will be useful from exam point of view Group Members

Introduction

• The Five Forces Model was developed by Michael E. Porter to help companies assess the nature of an industry’s competitiveness and develop corporate strategies accordingly.

• The strength of the five forces will determine the level of profit within an industry that a competitor can expect to make

• Through his model, Porter classifies five main competitive forces that affect any market and all industries. It is these forces that determine how much competition will exist in a market and consequently the profitability and attractiveness of this market for a company. Through sound corporate strategies, a company will aim to shape these forces to its advantage to strengthen the organizations position in the industry.

• Cont…

Introduction• This model aimed to provide a new way to use effective strategy to identify, analyze

and manage external factors in an organization’s environment.

• Porter’s five forces model is an analysis tool that uses five industry forces to determine the intensity of competition in an industry and its profitability level.

• An attractive market place does not mean that all companies will enjoy similar success levels. Rather, the unique selling propositions, strategies and processes will put one company over the other.

• The Five Forces were Porter’s conclusions on the reasons for differing levels of competition, and hence profitability, in differing industries. They are empirically derived, i.e. by observation of real companies in real markets, rather than the result of economic analysis.

Bargaining Power of Suppliers

Bargaining Power of

Customers

Threat of New

Entrants

Threat of Substitutes

Competitive Rivalry

within an Industry

Threat of New Entry- Time and cost of entry- Specialist knowledge- Economics of Scale- Cost advantage- Technology protection- Barriers to entry

Competitive Rivalry- Number of competitors- Quality difference- Other difference- Switching costs- Customer loyalty

Buyer Power- Number of customers- Size of each orders- Differences between

competitors- Price sensitivity- Ability to substitute- Cost of changing

Supplier Power- Number of suppliers- Size of suppliers- Uniqueness of service- Your ability to substitute- Cost of changing

Threat of Substitute- Substitute performance- Cost of change

Competitive Rivalry within an Industry• This force is the major determinant on how competitive and profitable

an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:

- There are many competitors- Exit barriers are high- Industry growth is slow or negative- Products are not differentiated and can be easily substituted- Competitors are of equal size- Low customer loyalty

Competitive Rivalry within an Industry - Example

McDonald’s faces tough competition because the fast food restaurant market is already saturated. This element of the Five Forces analysis tackles the effect of competing firms in the industry environment. In McDonald’s case, the strong force of competitive rivalry is based on the following external factors:

High number of firms (strong force)High aggressiveness of firms (strong force)Low switching costs (strong force)

The fast food restaurant industry has many firms of various sizes, such as global chains like McDonald’s, KFC and local fast food restaurants and road side stops (vada pav) . Also, most medium and large firms aggressively market their products. In addition, McDonald’s customers experience low switching costs, which means that they can easily transfer to other restaurants. Thus, this element of the Five Forces analysis of McDonald’s shows that competition is among the most significant external forces on the business.

Bargaining Power of Suppliers

• Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when:

- There are few suppliers but many buyers- Suppliers are large and threaten to forward integrate- Few substitute raw materials exist- Suppliers hold scarce resources- Cost of switching raw materials is especially high.

Example of Suppliers also influence the competiveness of an industry

• The bargaining power of Toyota’s supplier is Weak

• Toyota has many suppliers in its automotive manufacturing sector. Resources like metal, raw materials, leather, plastic, computers, cooling system, electrical system, breaking system and fuel supply system are all bought from hundreds of different suppliers and different bargaining prices distributed across the globe.

• One of the competitive advantages of Toyota is its strong relationship with the suppliers and its efficient manner of monitoring supply chain places low bargaining power on the suppliers.

• In addition most vehicle manufactures own many interchangeable suppliers, and also have the ability to produce the components by their own in the short time. Thus, the suppliers do not own the power to change the price.

Bargaining Power of Buyer• Customers have the power to demand lower price or

higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Customers exert strong bargaining power when:

- Buying in large quantities or control many access points to the final customer

- Only few customers exist- Switching costs to other supplier are low- They threaten to backward integrate- There are many substitutes- Customers are price sensitive

Example of Bargaining power of Buyer

Depends on the marketing channel used for Coca-Cola

1. Super Markets2. Convenience Stores3. Soda Shop4. Vending Machine5. Restaurant and Food stores

Bargaining power of buyer is high for fountain supermarkets and mass merchandising because of the low profitability and strong negotiation power of retail channels but for vending machine bargaining power is non-existing caused by high profitability.

Threat of New Entrants

• This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when:

- Low amount of capital is required to enter a market- Existing companies can do little to retaliate- Existing firms do not possess patents, trademarks or do not have

established brand reputation- There is no government regulation- There is low customer loyalty- Products are nearly identical- Economies of scale can be easily achieved

Example of Threat of New Entrant – Entry of Reliance JIO Telecommunications

1. Jio has grown at a scorching pace:-the network, which has been adding 1-1.2 million subscribers a day, will likely have 25 million 4G customers.

2. Jio has set off a fierce mobile tariff war in the country:3. Jio is hurting the balance sheets of other telecom companies: Airtel saw a

4.9% decline in its Q2 profit following the operator slashing data tariffs.4. Jio is forcing the other players to join forces:-Vodafone and Idea Merger5. Jio could impact the online content market in India:-The Jio suite offers

more than 300 live streaming TV channels and hundreds of music albums and movies. This forces other incumbents to up their game in the online video streaming space.

• This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.

• Determining Factors :- First, if the consumer’s switching costs are low Second, if the substitute product is cheaper than the industry’s product Third, if the substitute product is of equal or superior quality compared to the

industry’s product, the threat of substitutes is high Fourth, if the functions, attributes, or performance of the substitute product are

equal or superior to the industry’s product

Threat of Substitutes

• EXAMPLE – THE AIRLINE INDUSTRY• From the point of view of airlines themselves, the flying business is very competitive.

There are hundreds of airlines all trying to get a bigger piece of the pie. Global recessions have also meant cost cutting exercises for most airlines in the industry and often less travel in the part of consumers.

• Depending on the nature of the airline’s business, the threat of substitutes can range from lower on the scale to mid-range.

• For domestic or regional airlines or routes, there is always the option of taking a car, bus or train. It may take longer but often this consideration is outweighed by the cost advantages of substitute methods

• There is also no switching cost to deal with.• In the case of international airlines, the threat of substitutes is almost non-existent• On longer routes, a traveler needs to take a flight with no possible alternates• Threat here is from competitors who may offer better rewards, better prices or a better

flying experience• There is also somewhat of a switching cost

Example of Threat of substitutes

Porters Five Force Analysis for Auto Industry

Competitive Rivalry (High)

Bargaining Power of

Customers (High

Bargaining Power of Suppliers

(Low)

Threat of New

Entrants (Low)

Substitute Products

(Low)

Porter's Five Forces Of Auto Industry

Competitive Rivalry - (High)

Competitive rivalry has increased post liberalization to a great extent The automotive industry is majorly commanded by domestic player, with an

immense market share in the country during FY 15-16

• The competition has turned more intense after the entry of foreign players like Volkswagen and Ford in low- priced hatchback segment

• Foreign firms have aggravated the competition by changing their traditional designs and substituting it to cater Indian needs

Porter's Five Forces Of Auto Industry – Passenger Car

Threat of New Entrants - (Medium - High) Economies of Scale and Capital requirement Brand identity, Product Differentiation and Customer

Switching Costs Other factors like access to raw material, technology and

distribution channel Government policies and protection for the sector

– 100 % FDI in the automotive industry

Porter's Five Forces Of Auto Industry

Substitute Products - (High) Scenario of Indian Travel Industry

– Rail & Air Travel – 10%– Road Travel -90%– Two Wheleer – 72%– Passenger Vehicle (Cars, Jeeps & Taxi’s) – 14%– Public Transport Buses & Non Passenger Vehicle – 14%

Availability of close subsititue Switching Cost Substitute price and value

Porter's Five Forces Of Auto Industry

Bargaining Power of Suppliers - (Low) • Number of Supplier: – More than 500 auto component manufacturers in the organized

sector represented by ACMA (Automotive Components Manufacturer's Association of India)

– 5000 manufacturers in the unorganized sector • Import from Nations with Free Trade Agreement & Low

Import Duties– Japan, South Korea, Thailand, China, Malaysia & South Africa

Porter's Five Forces Of Auto Industry

Bargaining Power of Buyer- (High) Number of Potential Buyer – Huge Changing Preferences, Income Graph Low switching Cost

– Very Few Established Players– Brand Loyalty is low – Launch of New Models every Year

Porter's Five Forces Of Auto Industry

Industry Attractiveness of Auto Industry – Low Force Threat to Profit

(Present)Future

Internal Rivalry High High. Will rise

Threat to Entry Low Moderate

Substitutes High High

Bargaining Power of Buyer High High, Will rise

Bargaining Power of Supplier Low Moderate

Strategies Adopted by the Auto Industry based on the Analysis

• Capacity addition Considering low cost of production, prominent auto companies are increasing their production

capacity in order to capture a dominant share in Indian automobile industry. Most of the automobile companies are eyeing India as an outsourcing hub. With the total investment of around USD163.7 million, Honda Motorcycle & Scooter India expanded

its production of Activa in 3 variants at Ahmedabad plant.

Launch of new models In 2015-16, few of the newly launched cars were Volkswagen Ameo, Mahindra e-Verito, Toyota Land

Cruiser 200, Maruti Baleno, Honda BR-V, Tata Tiago, Toyota Innova Crysta & Maruti Ciaz & under premium range Audi Q7, Audi S5 Sportback, Ford Mustang, Rolls-Royce Dawn & Porsche 911.

Honda is planning to introduce bigger & premium car models in 2017 to uplift its sales & share in the market

In December 2016, Bajaj Auto launched its most powerful bike in the segment, ‘Bajaj Dominar 400’ Fiat Chrysler Automobiles India, is planning to launch its new Jeep brand Compass by February

2017, which is going to be produced indigenously in Ranjangaon,, Maharashtra. India will be the 4th manufacturing hub, globally, for the brand.

• Marketing & advertisement Each & every firm is now focusing on shelling out a chunk of their profits on

advertisement The idea is to make the customers more brand conscious & increasing

brand positioning This is giving the firms differential advantage. Success today lies in

structuring & restructuring strategies Catering Indian needs India boasts a large population of middle class Most of the firms including Ford & Volkswagen have adapted themselves to

cater to this class by dropping their traditional structure and designs This allows them to compete directly with domestic firms making the

sector highly competitive

Strategies Adopted by the Auto Industry based on the Analysis

Importance of The Porter’s Five Forces

What Strategy to

Use ?

Basic Knowledge of Business Strategy & that influence the

design making

Industry Analysis- Industry relevance- Industry players- Industry structure- Future changes

Strategies- Competitive advantage- Cost advantage- Marketing dominance- New product

development- Contraction /

Diversification- Price leadership- Global- Re-engineering- Downsizing- Restructuring

Measure and Monitor strategy

effectiveness

How to Deal with Competition

Using The Tools

• We now understand that Porter’s five forces framework is used to analyze industry’s competitive forces and to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have identified the following steps:

• Step 1. Gather the information on each of the five forces• Step 2. Analyze the results and display them on a diagram• Step 3. Formulate strategies based on the conclusions

Navigating the Model Development: Before, During and AfterIt is beneficial for a company working on a Porter’s five forces analysis to maintain an analytical frame of mind before the process begins, during the process and after everything has been completed. Some aspects to keep in mind are:

Before

Understand the goals of the analysis and expectations from it

Understand the scope of the analysis and who are the potential beneficiaries

Allow open and honest brainstorming session regarding these questions.

During

Keep a focus on the future

Do not focus on what could’ve been done better in the past, but focus on future improvements

Analyze positives and negatives

Be open to new ideas and possibilities

After

Identify lessons learnt and how they can be used in the future

Document positives and negatives. Identify best practices

Understand whether the analysis had the required impact

Follow up on implementation plans

Record information from the analysis to be used in future decisions

Limitations

How it will be useful from exam point of viewYear Questions Marks

2009Michael Porter’s five forces model of Industry attractiveness enables any company to outperform their competitors. Illustrate your answer by analyzing any Industry of your choice

20

2010 Explain how Michael Porter’s five forces model is helpful in forth coming SWOT – Analysis carried out in formulation of Business strategy 20

2011 How Porter’s Five forces Model is useful in identifying opportunities and threats for a business organization for formulation of various strategies 10

2012In business level strategies, Porter’s generic theory is very important. Discuss the differences in strategic approach in cost leadership, Differentiation, and Focus strategy. How does Hybrid strategy fit into this structure and can it be successful

20

2013

2014Porter’s five force model of industry attractiveness enable any company to output from their competitors. How is this possible? Illustrate with examples 10

2015 “The low-cost leadership strategy at times enables the firm to define itself against each of five competitive forces” explain 5

2015 Explain Porter’s Diamond model of National Competitive Advantage 5

2016Porter’s five force model of industry attractiveness enable any company to outperform their competitive. How is this possible? Illustrate with examples 5

Group Members

S/N Name Roll No1 Madhuri Avhad 052 Delzad Edibam 213 Savleram Kharmale 434 Naveen Krishna 455 Mansi Mestry 496 Hitaksha Puthran 627 Jiten Saraf 698 Sandesh Sawant 709 Rupali Deshmukh 96

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