Five Forces Industry Analysis

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					    Five Forces Industry Analysis

                       Nicole Fiamingo



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Five Forces Industry Analysis
Description & Purpose


       Developed by Michael Porter

       Provides an understanding of an industry and its
        participants

       Used as a means to decrease the gap between a firm’s
        external environment and its internal resources




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Five Forces Industry Analysis
Objective of the Five Forces


       Identify the profit potential of an industry

       Identify the forces that would harm your company’s
        profitability in that industry

       Protect and extend your competitive advantage

       Anticipate changes in industry structure


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Five Forces Industry Analysis
Porter’s Five Forces


1.   Threat of new entrants
2.   Bargaining power of suppliers
3.   Bargaining power of buyers
4.   Threat of substitute products or services
5.   Degree of rivalry among existing competitors




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Five Forces Industry Analysis
1. Threat of New Entrants
    New entrants usually face several barriers to entry, including:

1.     Entry-deterring price
2.     Incumbent retaliation
3.     High entry costs
4.     Experience effects
5.     Other cost advantages
6.     Product differentiation
7.     Distribution access
8.     Government restrictions
9.     Switching costs

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           Easy to Enter if there is:           Difficult to Enter if there is:

•Common technology                      •Patented or proprietary know-how

•Little brand franchise                 •Difficulty in brand switching

•Access to distribution channels        •Restricted distribution channels

•Low scale threshold                    •High scale threshold




           Easy to Exit if there are:           Difficult to Exit if there are:

•Salable assets                         •Specialized assets

•Low exit costs                         •High exit costs

•Independent businesses                 •Interrelated businesses



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Five Forces Industry Analysis
2. Bargaining Power of Suppliers

Suppliers bargaining power may be influenced by:

1.   Concentration
2.   Diversification
3.   Switching costs
4.   Organization
5.   Government




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       Suppliers are Powerful if:                                   Example
Credible forward integration threat by   Baxter International, manufacturer of
suppliers                                hospital supplies, acquired American
                                         Hospital Supply, a distributor

Suppliers concentrated                   Drug industry's relationship to hospitals
Significant cost to switch suppliers     Microsoft's relationship with PC
                                         manufacturers

Customers Powerful                       Boycott of grocery stores selling non-
                                         union picked grapes

         Suppliers are Weak if:                                     Example
Purchase commodity products              Grocery store brand label products
Concentrated purchasers                  Garment industry relationship to major
                                         department stores

Customers Weak                           Travel agents' relationship to airlines
                                         http://www.quickmba.com/strategy/porter.shtml




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Five Forces Industry Analysis
3. Bargaining Power of Buyers

Buyer’s Bargaining power my be influenced by:

1.   Differentiation
2.   Concentration
3.   Profitability
4.   Quality




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          Buyers are Powerful if:                                        Example

Buyers are concentrated - there are a few     DOD purchases from defense contractors
buyers with significant market share
Buyers purchase a significant proportion      Best Buy and Sears' large retail market
of output - distribution of purchases or if   provides power over appliance
the product is standardized                   manufacturers
Buyers possess a credible backward            Large auto manufacturers' purchases of
integration threat - can threaten to buy      tires
producing firm or rival
           Buyers are Weak if:                                           Example
Producers threaten forward integration -      Movie-producing companies have
producer can take over own                    integrated forward to acquire theaters
distribution/retailing
Buyers are fragmented (many, different) -     Most consumer products
no buyer has any particular influence on
product or price
Producers supply critical portions of         Intel's relationship with PC manufacturers
buyers' input - distribution of purchases
                                              http://www.quickmba.com/strategy/porter.shtml

                                                                                              11
Five Forces Industry Analysis
4. Threat of Substitute Products or Services


 Market displacement by existing/potential
  substitutes can be influenced by:

 1.   Relative price/performance trade off
 2.   Switching costs
 3.   Profitability




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  The Threat of Substitutes is High Risk:                                  The Threat of Substitutes Low Risk:




Consumer switching costs are low                                        Consumer switching costs are high

Substitute product is cheaper than industry                             Substitute product is more expensive than
product                                                                 industry product

Substitute product quality is equal or superior                         Substitute product quality is inferior to
to industry product quality                                             industry product quality

Substitute performance is equal or superior to                          Substitute performance is inferior to industry
industry product performance                                            product performance

                                                                        No substitute product is available



http://www.wikicfo.com/Wiki/default.aspx?Page=Threat+of+Substitutes+-
+one+of+Porters+Five+Forces&AspxAutoDetectCookieSupport=1




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Five Forces Industry Analysis
5. The Degree of Rivalry Among Existing Players

 The intensity of competition within an industry is
  determined by:

 1.   Market Growth
 2.   Cost Structure
 3.   Barriers to exit
 4.   Product switching
 5.   Diversity



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                                                     Rivalry will be high:
There are a large number of similar sized firms (rather than a few dominant firms) all
competing with each other for customers

The costs of leaving the industry are high e.g. because of high levels of investment. This
means that existing firms will fight hard to survive because they cannot easily transfer
their resources elsewhere

The level of capacity utilization. If there are high levels of capacity being under-utilized
the existing firms will be very competitive to try and win sales to boost their own
demand

The market is shrinking so firms are fighting for their share of falling sales
There is little brand loyalty so customer are likely to switch easily between products



http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_11.htm




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Five Forces Industry Analysis
Strengths

    Forecast future changes in each of the five forces

    Discover how these changes will affect the other forces

    Discover how the interrelated changes will affect the
     future profitability of the industry

    Discover how you might change the strategy to exploit
     the changing industry structure


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Five Forces Industry Analysis
Weaknesses

    Underestimates the capabilities that may serve as the
     company’s competitive advantage in the long-term

    Does not take into account the synergies and interdependence
     within a corporation’s overall portfolio

    Strict interpretations ignore social & political factors

    Does not address why or how companies are able to get
     advantageous positions

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Five Forces Industry Analysis
How to Do It

Step 1: Collect Information
 Identify your industry
 Look at existing demand & supply patterns
 Identify the characteristics of each of the five forces
 Examine & assess their impact on the industry




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Five Forces Industry Analysis
How to Do It

Main Sources of Competitive Pressures
1. Rivalry among competitors
2. Threat of substitute products
3. Threat of potential entry
4. Bargaining power of suppliers
5. Bargaining power of buyers




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Five Forces Industry Analysis
How to Do It

Step 2: Assess & Evaluate
 Determine the direction of the force


    Give each force a value indicating if it is strong, moderate, or
     weak.
        Scale of 1 – 5, with 1 being the weakest

    The ultimate goal:
          To identify the ability of your company to successfully
     compete within its industry,         given the collective strength
     of the five forces

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Five Forces Industry Analysis
How to Do It

Step 3: Develop Strategy
 Repeat the first two steps in light of industry change and
  evolution

    Long-term industry trends should be analyzed to
     determine whether the profitability of the industry is
     sustainable and how this will affect your company’s
     competitive position.



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Five Forces Industry Analysis
Conclusion

    Understanding how an industry will evolve provides
     important direction for selecting and managing strategy
     around these five criteria

    Not all industries are alike-for companies with product
     portfolios across numerous industries, this technique
     should be repeated for each industry




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