External Analysis: Porters' 5 forces Flashcards
(7 cards)
What is porters’ 5 forces
Competition is not manifested only in the other players
- Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry
Collective strength of these forces determines the ultimate profit potential of an industry
- stronger the forces, lower the opportunity for superior profitability
Different forces take on prominence in shaping competition in each industry
- Identifying the strongest force may be useful in determining the pain points in low profitability
Threat of new entrance, looking into sources of barriers to entry
Economies of scale
- New entrants either have to come in on a large scale, or to accept the cost disadvantage compared to current surviving competitors
- Some include production, research, marketing, distribution, sales force utilisation
Product Differentiation
- Brand identity creates a barrier by forcing new entrants to spend heavily to overcome customer loyalty
- Attributes include advertising, customer service, first mover’s advantage
- Eg. Soft drinks, OTC drugs, cosmetics, investment banking
Capital Requirements
- Requirement to invest large financial resources to compete - esp. if capital is unrecoverable
- Eg. computer manufacturing, mineral extraction
Cost disadvantage, independent of size
- Entrenched firms may have cost advantages not available to potential rivals no matter their size or economies of scale
- Stem from effects of learning curve, proprietary technology, longstanding contracts and assets purchased at pre-inflation prices (linked to history)
- Eg. strong intangible assets
Access to distribution channels
- Channels allow firms to connect with end customers
- Lack of channels due to established firms already tying up the distribution network
Government Policy
- License requirements and blocking access to raw materials
- Indirect influence exists, such as controls over air and water with pollution standards and safety regulations that must be adhered
Bargaining power of suppliers
Raising prices or reducing quality of goods - squeeze profitability out of an industry
Sources of supplier powers:
No of suppliers
- If dominated by a few firms and are more concentrated than the industry they sell to
Differentiated supplies
- For unique and differentiated goods (or built up of switching costs,) it is hard for industry to switch suppliers
- Likely due to specialised ancillary equipment or tailoring to supplier’s needs and equipment
- Possibility of physical connection with suppliers in supply chain
Poses credible threat of integration forward and into industry’s business = this threat checks against the industry’s ability to improve on the terms of purchases
Bargaining power of buyers
Force down prices, demand higher quality and play competitors off against each other, at the expense of industry profits
Sources of buyers power:
- Concentration of buyers and purchases in large volume
- Goods within industry is undifferentiated and commoditized
- Products purchased forms the bulk of buyers’ costs in forming the product as they become more price sensitive
- Interests in quality rather than the price
- Credible threat of backwardation and make products in the industry
Threat of substitutes (outside of industry)
More attractive the price-performance trade-off offered by substitutes, the lower the industry’s profit potential and greater inability to increase prices
Firms should look into substitutes that are subjected to trends that improve the price-performance trade-off, and are produced by industries earning high profits
Depends on how is the industry defined
Complements vs substitutes
Rivalry among existing competitors
In order to out-perform competitors, firms within industry utilise price competition, product introductions and marketing efforts
Intensity of rivalry is based on:
- Numerous competitors and are equal in size and power
- Industry growth is slow, resulting in red ocean where firms are seizing market share
- Products lack differentiation, and have low switching costs - unable to lock in customers’ loyalty
- High fixed costs or products are perishable, incentivising firms to cut prices when demand falls
- High exit barriers - specialised assets or management’s loyalty to a particular business
Conclusion
Introduce: identify clearly the boundaries of industry being analysed and time period and justify why such a boundary and time period
Conclude: on the overall performance and subsequent profitability of the industry (usually is low to moderate) and attractiveness of market
- this is an attractive market as
- this is not an attractive market as
- this is an attractive market only for established players, but not for the new players as…
