Porters 5 Forces

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Porters 5 Forces

• By Mr. Ahmad

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(No Transcript)
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Lesson Objectives

• By the end of this lesson-
• All of you will be able to identify Porters 5
  forces
• Most of you will be able to understand Porters
  theory about the competitive market
• Some of you will be able to explain the two
  forces which we have done in lesson

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Purpose of Porters 5 forces

• Most important factors determining the
  performance of a business were the features of
  the industry it was in
• Is a framework for industry analysis and business
  strategy development
• It uses the 5 forces to determine the competitive
  intensity and attractiveness of a market

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• An attractive market is a market where large
  profits can be made. The more attractive the
  market is the less competition there will be
  hence more profit to be made.
• An unattractive market is where the combination
  of forces act to drive down overall market
  profitability. The more unattractive the market
  is the lower the profits will be due to heavy
  competition.

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Competitive Rivalry

• For most industries, the intensity of competitive
  rivalry is the major determinant of the
  competitiveness of the industry.
• This is most likely to be high where entry is
  likely there is the threat of substitute
  products, and suppliers and buyers in the market
  attempt to control.

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• This is the most obvious form of competition!
• - price wars
• - similar products/service
• - uniqueness
• Excessive price cutting, advertisement,
  promotional expenses will have negative affects
  on profits.
• May be governed by unwritten agreements.

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• So remember the more companies in an
• industry the more competitive it will become.
• The more competitive an industry then lower
• profits will be made by companies then
• opposed to being in the industry with fewer
• competitors.
• Therefore, an attractive industry is a
• profitable one. A unattractive industry is an
• industry where profits are not as high.

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The threat of the entry of new competitors

• Profitable industries\markets will inevitably
  attract
• new firms. For example, Ford was
• the first automobile company to produce a
• car. Industry profits were high at the time and
• still are high therefore since then it has
  attracted
• many other companies to come into the
• automobile industry and gain a slice of the
  profits.
• i.e. BMW, Mercedes, Peugeot, Toyota etc.

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• Unless the entry of new firms can be
• blocked somehow, then profit will inevitably
• fall due to increased competition. The
• following factors affect the threat of new
• entrants-
• Existence of barriers to entry (some sort of
  rights/licence)
• Importance of brand. In sports industry a new
  company will not be able to compete with Nike and
  Adidas simply because of their brand image
  (thats just the first factor!)

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• Economies of scale. The benefits of buying in
  bulk (will new entrants be able to achieve
  economies of scale. If they can then industry
  will attract more entrants)
• Capital requirements. Low costs will attract
  many entrants i.e. fast food takeaways. High
  costs acts as a barrier for entrants i.e.
  computer games console industry.
• Access to distribution. How easy is it to
  distribute to goods/services. Nike private
  contracts with Cargos/Airlines/Railways/Lorry
  companies. Can new entrants distribute their
  goods with ease?

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• Customer loyalty to establish brand image
• How importance is product differentiation? Will
  new entrants be able to differentiate their
  products/services. If differentiation is not
  important in the industry then that industry will
  attract many entrants i.e. corner shops/post
  offices.
• Government policies. Will new laws be introduced
  that will weaken competitive position? For
  instance, if there was a law stating all new cars
  from 2010 can only produced cars which release a
  certain amount of omissions, many of the car
  companies competitive position will decrease.
  i.e. BMW, Mercedes, Range Rover (Not to mention
  the 5ltr Lamborghinis, Ferraris and 3.6ltr
  Porches)

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Bargaining Power of Customers/buyers

• This is the ability of customers to put the firm
• under pressure. If the customers have a lot of
  power
• then they can drive down industry profits,
  whereas if
• the customers have little bargaining power then
• industry profits can increase.
• i.e. Petrol is a perfect example of a commodity
  which
• customers have very little influence over
  determining
• the price. Hence, the oil industry is worth
  trillions!

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• Powerful buyers can bargain away potential
  profits. They can cause firms to undercut each
  other to gain the buyers business.
• Buyers tend to be powerful when are there a few
  of them buying from a number of different
  options.
• i.e. George, Fruit.

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Bargaining power of suppliers

• This refers to the power of suppliers. It is the
  opposite to the power of buyers.
• When the power of suppliers is high it can lead
  to them increasing profits, therefore making the
  industry more attractive.
• Power of suppliers is high when the brand/company
  is powerful such as Pizza Hut, Microsoft,
  Bentley.

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The threat of substitutes

• This refers to those products which
• consumers may buy as alternatives to
• current products. Eg. Using email instead of
• sending post, or drinking tea instead of
• coffee.
• The more available a substitute product is the
• more likely it will affect industry profits in a
• negative way and vice versa.

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• The following factors of substitute products will
• reduce attractiveness of an industry. The
• opposite of these factors will increase
• attractiveness of an industry.
• Buyers preferring to buy the substitute products
• Substitute products being perceived to be more
  value for their money
• Buyers wanting to reduce costs therefore may
  switch to substitute products
• There may be more product differentiation with
  the substitute products
• May be a variety of substitute products available
  in the market. i.e. as opposed to sending post
  you could email, fax, video message.