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Porters Five Forces

Porters Five Forces. Introduction . Devised by Harvard Professor Michael Porter The five forces analysis is a framework used by strategist’s and consultants to assess competition within an industry. The Five Forces .

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Porters Five Forces

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  1. Porters Five Forces

  2. Introduction • Devised by Harvard Professor Michael Porter • The five forces analysis is a framework used by strategist’s and consultants to assess competition within an industry

  3. The Five Forces • Threat of new entrants- the ability of new competitors to enter the industry • Bargaining power of suppliers • Bargaining power of customers • Threat of substitute products • Degree of competitive rivalry

  4. Threat of new entrants • What happens if new entrants move into an industry? • What is the situation if it is difficult to enter an industry? • What if barriers to entry are low?

  5. Threat of new entrants • New entrants may gain market share, rivalry will increase and profits will decline • Existing firms will strengthen their position • Low barriers to entry means threat of new entrants

  6. Barriers to entry • Capital cost of entry • Economies of scale available to existing firms • Regulatory and legal restrictions • Production Differentiation (brand loyalty) • Access to raw materials and distribution channels • Retaliation by established products (price wars)

  7. Ease and Difficulty of entry Easy to enter if there is Difficulty to enter if there is • Common technology • Access to distribution channels • Low capital requirements • Absence of strong brands and customer loyalty • Patented or proprietary know how • Difficult in brand switching • Restricted distribution channels • High capital requirements • High scale threshold

  8. Bargaining Power of Suppliers If a firm’s suppliers have bargaining power they will: • Sell their products at a higher price • Squeeze industry profits

  9. Bargaining Power of Suppliers What determines supplier power? • The uniqueness of the resource that the supplier provides • The number and size of the firms supplying the resources • The competitions for the resource from other industries • The cost of switching to alternative sources

  10. Bargaining Power of Suppliers Suppliers are powerful when… • There are only a few large suppliers • The resource they supply is scarce • The cost of switching to an alternative supplier is higher • The product is easy to distinguish and loyal customers are reluctant to switch • The customer firm is small and unimportant • There are no substitute resources available

  11. Bargaining power of customers (buyers) • Powerful customers are able to exert pressure to drive down prices • The name given to a sole buyer in the market is a monopsony • E.g The UK supermarket business is increasingly dominated by a small number of large retail chains able to exert great power of supply firms

  12. Bargaining power of customers (buyers) What determines bargaining power of customers? • The number of customers • The volume of their order sizes • The number of firms supplying the product • The cost of switching – shopping around or penalties for switching, convenience

  13. Threat of substitute products • A substitute product meets the same need • If there is a substitute to a firm’s product, they will limit the price that can be charged and will reduce profits

  14. Threat of substitute products The extent of the threat depends on… • The price and the performance • The willingness of buyers to switch • Customer loyalty and switching cost

  15. Degree of competitive rivalry Intense rivalry in an industry leads to… • Price wars • Intense competition over R & D and new product development • Competitive promotion and advertising wars This can lead to increased costs and lower profits!

  16. Degree of competitive rivalry The intensity of rivalry is determined by… • The number of competitors in the market More competition in an industry with many current and potential competitors • Market size and growth prospects Competition is always highest in stagnating markets • Product differentiation and brand loyalty Greater customer loyalty means less intense competition Lower degree of product differentiation more intense price competition

  17. Degree of rivalry This is determined by… • Industry concentration • Industry growth • Product differences • Switching costs • Brand identity • Diversity of rivals • Capacity utilization • Exit barriers

  18. A summary of the five forces High profits are associated with… Low profits are associated with… • Weak suppliers • Weak buyers • High entry barriers • Few possibilities for substitution • Little rivalry • Strong suppliers • Strong buyers • Low entry barriers • Many possibilities for substitute products • Intense rivalry

  19. What are your conclusions?

  20. Student Task • Blue book, p688, Q4

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