Description
PROJECT ON INDUSTRY ANALYSIS
INDUSTRY ANALYSIS Porter’s Five Industry Forces
Industry Environment
?
?
A set of factors that directly influences a company and its competitive actions and responses. Interaction among these factors determine an industry’s profit potential.
?
Threat of new entrants ? Power of suppliers ? Power of buyers ? Product substitutes ? Intensity of rivalry
Five Forces Model of Competition
?
? ?
?
Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors.
PORTER’S FIVE FORCES
Threat of new entrants
Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Threat of Potential Entrants
?
?
?
New Entrants bring new capacity, desire to gain market share & Substantial resources Prices down; Incumbents cost inflation & reducing Profitability Two Important Factors:
? ?
Barriers to Entry Expected Retaliation from Existing Competitors
Threat of Potential Entrants
?
Entry Barriers
? ? ? ?
?
?
Economies of scale Product Differentiation Capital requirements Switching costs Access to distribution channels Absolute cost advantages
?
i.e., access to necessary inputs
?
Government policy
?
Expected retaliation
Barriers to Entry
?
Economies of Scale:
?
?
? ? ? ?
Decline in unit cost of a product as the absolute volume per period increases Deter entry by forcing the entrant to come in at large scale or small scale with cost disadvantage Maruti 800 Reliance mobile phone Entire Functional Area or Particular Operations Diversification into the related area
Product Differentiation
? ?
?
? ?
Brand Identification and Customer Loyalties Basis of Past Advertising, Customer Service, Product Differences or being first into Industry Entrants to spend heavily to overcome existing customer Loyalties Pepsi & Coke in India Mineral Water vis-à-vis Bisleri
Capital Requirements
? ?
?
Large Financial Resources requirement Capital in terms of Production Facilities, Customer credit, Inventories, or covering startup losses Xerox – Renting copiers rather selling outright
Switching Costs
?
?
One time costs facing the buyer of switching from one supplier’s product to another Switching costs may include Employee retraining costs, cost of new ancillary equipment, cost & time in testing or qualifying new source, need for technical help, product redesign
Access to Distribution Channels
?
?
?
Acceptance of the product by established firms Price Breaks, Cooperative advertising allowance, or like reducing profitability More Limited wholesale or retail channels, tougher entry into that industry
Cost Disadvantages Independent of Scale
? ? ?
?
?
Proprietary product knowledge Favorable Access to Raw Materials Favorable Locations Government Subsidies Learning or Experience Curve
Expected Retaliation
?
?
Reaction of Existing Competitors Likelihood:
? ?
? ?
A history of vigorous retaliation Established firms with substantial resources to fight back Firms with great commitment to industry Slow Industry Growth
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Intensity of Rivalry Among Existing Competitors
?
?
?
Rivalry Occurs because one or more competitors either feels the pressure or sees the opportunity to improve position Price Competition are highly unstable & leave industry worse off from profitability standpoint Advertising Battles well expand the demand or enhance levels of product differentiation for betterment
?
Numerous or Equally Balanced Competitors
? ? ?
Numerous Firms Relatively Few firms & Relatively balanced Domination by one or very few firms
?
Slow Industry Growth
? ?
High competition for Firms seeking expansion More Volatile than rapid growth markets
?
High Fixed or Storage Costs
? ?
?
Strong pressures for firms to fill capacity Rapid Price Cutting Product once produced is very difficult or costly to store
?
Lack of Differentiation or Switching Costs
?
?
Commodity based implies buyer is largely based on price and service Result is Intense Price & Service Competition
?
Diverse Competitors:
?
?
Diversity in goals lead to different strategies for competing No set of Rules of the Game High Stakes in achieving success leads to greater Rivalry MNC’s Foray into new countries & markets Corporate Strategy Fit
?
High Strategic Stakes:
?
? ?
High Exit Barriers
? ? ? ?
?
Specialized Assets Fixed Costs of Exit Strategic Interrelationships Emotional Barriers Government & Social Restrictions
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Pressure from Substitute Products
? ?
?
Limit the Profit Potential Products that can perform the same FUNCTION Substitute Products:
?
?
Are Subject to trends improving the Price Performance Trade Off with Industry’s Product Are produced by Industries earning high Profits
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers
THE INDUSTRY Current competitors
Bargaining power of customers
Threat of substitute products or services
Bargaining Power of Buyers
? ?
? ? ? ? ?
?
Purchases large volumes relative to seller sales Product represents significant fraction of buyer’s cost Product are standard or undifferentiated Few switching costs Earns Low Profits Buyers pose threat of backward integration Industry’s product is unimportant to quality of buyer’s products or services Buyer has full Information
PORTER’S FIVE FORCES
Threat of new entrants
Bargaining power of suppliers
THE INDUSTRY Current competitors
Bargaining power of customers
Threat of substitute products or services
Bargaining Power of Suppliers
? ? ? ?
?
?
Dominated by few players No substitute products available Industry not important customer of supplier group Supplier’s product is an important input to buyer’s business Supplier’s group’s products are differentiated or high switching costs Credible threat of Forward Integration
Threat of New Entrants
?
Barriers to entry
?
? ? ?
?
? ? ?
Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation
Bargaining Power of Suppliers
?
A supplier group is powerful when:
?
?
?
? ?
?
it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry
Bargaining Power of Buyers
?
Buyers (customers) are powerful when:
? ?
? ?
they purchase a large portion of an industry’s total output the sales of the product being purchased account for a significant portion of the seller’s annual revenues they could easily switch to another product the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry
Threat of Substitute Products
?
Product substitutes are strong threat when:
? ? ?
customers face few switching costs substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product
Intensity of Rivalry
?
Intensity of rivalry is stronger when competitors:
?
? ? ?
?
?
are numerous or equally balanced experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers
Effective Competitive Strategy
?
?
?
Positioning the firm so that its capabilities provide the best defense against existing array of competitive forces Influencing the balance of forces through strategic moves Anticipating change in factors underlying forces & responding to them
Internal Environmental Analysis
?
Resources – Capabilities – Core Competencies – Discovering Core Competencies – Competitive Advantage Strategic Competitiveness
doc_301871401.ppt
PROJECT ON INDUSTRY ANALYSIS
INDUSTRY ANALYSIS Porter’s Five Industry Forces
Industry Environment
?
?
A set of factors that directly influences a company and its competitive actions and responses. Interaction among these factors determine an industry’s profit potential.
?
Threat of new entrants ? Power of suppliers ? Power of buyers ? Product substitutes ? Intensity of rivalry
Five Forces Model of Competition
?
? ?
?
Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors.
PORTER’S FIVE FORCES
Threat of new entrants
Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Threat of Potential Entrants
?
?
?
New Entrants bring new capacity, desire to gain market share & Substantial resources Prices down; Incumbents cost inflation & reducing Profitability Two Important Factors:
? ?
Barriers to Entry Expected Retaliation from Existing Competitors
Threat of Potential Entrants
?
Entry Barriers
? ? ? ?
?
?
Economies of scale Product Differentiation Capital requirements Switching costs Access to distribution channels Absolute cost advantages
?
i.e., access to necessary inputs
?
Government policy
?
Expected retaliation
Barriers to Entry
?
Economies of Scale:
?
?
? ? ? ?
Decline in unit cost of a product as the absolute volume per period increases Deter entry by forcing the entrant to come in at large scale or small scale with cost disadvantage Maruti 800 Reliance mobile phone Entire Functional Area or Particular Operations Diversification into the related area
Product Differentiation
? ?
?
? ?
Brand Identification and Customer Loyalties Basis of Past Advertising, Customer Service, Product Differences or being first into Industry Entrants to spend heavily to overcome existing customer Loyalties Pepsi & Coke in India Mineral Water vis-à-vis Bisleri
Capital Requirements
? ?
?
Large Financial Resources requirement Capital in terms of Production Facilities, Customer credit, Inventories, or covering startup losses Xerox – Renting copiers rather selling outright
Switching Costs
?
?
One time costs facing the buyer of switching from one supplier’s product to another Switching costs may include Employee retraining costs, cost of new ancillary equipment, cost & time in testing or qualifying new source, need for technical help, product redesign
Access to Distribution Channels
?
?
?
Acceptance of the product by established firms Price Breaks, Cooperative advertising allowance, or like reducing profitability More Limited wholesale or retail channels, tougher entry into that industry
Cost Disadvantages Independent of Scale
? ? ?
?
?
Proprietary product knowledge Favorable Access to Raw Materials Favorable Locations Government Subsidies Learning or Experience Curve
Expected Retaliation
?
?
Reaction of Existing Competitors Likelihood:
? ?
? ?
A history of vigorous retaliation Established firms with substantial resources to fight back Firms with great commitment to industry Slow Industry Growth
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Intensity of Rivalry Among Existing Competitors
?
?
?
Rivalry Occurs because one or more competitors either feels the pressure or sees the opportunity to improve position Price Competition are highly unstable & leave industry worse off from profitability standpoint Advertising Battles well expand the demand or enhance levels of product differentiation for betterment
?
Numerous or Equally Balanced Competitors
? ? ?
Numerous Firms Relatively Few firms & Relatively balanced Domination by one or very few firms
?
Slow Industry Growth
? ?
High competition for Firms seeking expansion More Volatile than rapid growth markets
?
High Fixed or Storage Costs
? ?
?
Strong pressures for firms to fill capacity Rapid Price Cutting Product once produced is very difficult or costly to store
?
Lack of Differentiation or Switching Costs
?
?
Commodity based implies buyer is largely based on price and service Result is Intense Price & Service Competition
?
Diverse Competitors:
?
?
Diversity in goals lead to different strategies for competing No set of Rules of the Game High Stakes in achieving success leads to greater Rivalry MNC’s Foray into new countries & markets Corporate Strategy Fit
?
High Strategic Stakes:
?
? ?
High Exit Barriers
? ? ? ?
?
Specialized Assets Fixed Costs of Exit Strategic Interrelationships Emotional Barriers Government & Social Restrictions
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers Bargaining power of customers
THE INDUSTRY Current competitors
Threat of substitute products or services
Pressure from Substitute Products
? ?
?
Limit the Profit Potential Products that can perform the same FUNCTION Substitute Products:
?
?
Are Subject to trends improving the Price Performance Trade Off with Industry’s Product Are produced by Industries earning high Profits
PORTER’S FIVE FORCES
Threat of new entrants Bargaining power of suppliers
THE INDUSTRY Current competitors
Bargaining power of customers
Threat of substitute products or services
Bargaining Power of Buyers
? ?
? ? ? ? ?
?
Purchases large volumes relative to seller sales Product represents significant fraction of buyer’s cost Product are standard or undifferentiated Few switching costs Earns Low Profits Buyers pose threat of backward integration Industry’s product is unimportant to quality of buyer’s products or services Buyer has full Information
PORTER’S FIVE FORCES
Threat of new entrants
Bargaining power of suppliers
THE INDUSTRY Current competitors
Bargaining power of customers
Threat of substitute products or services
Bargaining Power of Suppliers
? ? ? ?
?
?
Dominated by few players No substitute products available Industry not important customer of supplier group Supplier’s product is an important input to buyer’s business Supplier’s group’s products are differentiated or high switching costs Credible threat of Forward Integration
Threat of New Entrants
?
Barriers to entry
?
? ? ?
?
? ? ?
Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation
Bargaining Power of Suppliers
?
A supplier group is powerful when:
?
?
?
? ?
?
it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry
Bargaining Power of Buyers
?
Buyers (customers) are powerful when:
? ?
? ?
they purchase a large portion of an industry’s total output the sales of the product being purchased account for a significant portion of the seller’s annual revenues they could easily switch to another product the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry
Threat of Substitute Products
?
Product substitutes are strong threat when:
? ? ?
customers face few switching costs substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product
Intensity of Rivalry
?
Intensity of rivalry is stronger when competitors:
?
? ? ?
?
?
are numerous or equally balanced experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers
Effective Competitive Strategy
?
?
?
Positioning the firm so that its capabilities provide the best defense against existing array of competitive forces Influencing the balance of forces through strategic moves Anticipating change in factors underlying forces & responding to them
Internal Environmental Analysis
?
Resources – Capabilities – Core Competencies – Discovering Core Competencies – Competitive Advantage Strategic Competitiveness
doc_301871401.ppt