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Porter's five forces

Determines an industry’s long-term attractiveness.

Five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979

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Porter's five forces

1. Rivalry among present competitors

2. Threat of new entrants

3. Bargaining power of suppliers

4. Bargaining power of buyers

5. Threat of substitute products

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1. Rivalry among present competitors (conditions that favour a rival)

o Presence of high investment intensity

o Existence of many small firms or no dominant firms exists

o Little product differentiation

o Possibility for customers to switch from one sellers’ products to others easily

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2. Threat of new entrants (make market entry difficult)

o Presence of strong economies of scale and learning effects

o Industries having strong capital requirements at the outset

o Existence of strong product differentiation among current players

o Difficulty in gaining distribution

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3. Bargaining power of suppliers (conditions that increase the power of suppliers)

o Cost of switching suppliers is high

o Prices of substitutes are high

o Suppliers can threaten forward integration (control of the company’s distribution – example: Australian wheat board)

o Suppliers product is a large part of the buyers value added (Carmens Muslie containing Australian grown Sanitarian sultana’s)

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4. Bargaining power of buyers (factors that influence the bargaining power of buyers)

o Extent of buyer concentration

o Switching costs that reduce the buyer bargaining power

o Threat of backward integration (buying or merging with company that supplies its products)

o Product importance to the performance of the buyers product

o Buyer profitability

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5. Threat of substitute products

o Alternative product types

o Perform essentially the same function

o Put a ceiling on the sales volume and profitability of an industry

o Put pressure on the price when supply demand exceeds.

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Porter’s five forces model on Automobile Industry

1. Barriers to Entry

2. Threat of Substitutes

3.Competitive Rivalry

4. Bargaining Power of Suppliers

5. Bargaining Power of Buyers