3.3 Five Forces of Competition[1]
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kulkarniradha2453.3 Five Forces of Competition[1]
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kulkarniradha245Industry
Analysis
Porter’s Five
Forces
Model of
Competition
Industry Analysis
Industry analysis is a market assessment tool
used by businesses and analysts to understand
the competitive dynamics of an industry. It helps
them get a sense of what is happening in an
industry.
• demand-supply statistics
• degree of competition within the industry
• state of competition of the industry with other
emerging industries
• future prospects of the industry taking into
account technological changes
• credit system within the industry, and the
influence of external factors on the industry
Types of Industry Analysis
There are three commonly used and
important methods of performing industry
analysis. The three methods are:
1. Competitive Forces Model (Porter’s 5
Forces)
2. Broad Factors Analysis (PEST Analysis)
3. SWOT Analysis
Industry Analysis
The purpose of
Five-Forces Analysis
• The five forces are environmental
forces that impact on a company’s
ability to compete in a given market.
• The purpose of five-forces analysis is
to diagnose the principal competitive
pressures in a market and assess
how strong and important each one
is.
Porter’s Five Forces
Model of Competition
Threat
Threat of
of
Threat
New of
New
New Entrants
Entrants
Entrants
Threat of New Entrants
Economies of Scale
Barriers to Product Differentiation
Entry
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Government Policy
Expected Retaliation
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of
New Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert Supplier industry is dominated by a few
power in the firms
industry by: Suppliers’ products have few substitutes
* Threatening to
raise
prices or to reduce
Buyer is not an important customer to
quality supplier
Powerful
suppliers can Suppliers’ product is an important input
squeeze to buyers’ product
industry
profitability if Suppliers’ products are differentiated
firms are
Suppliers’ products have high
unable to switching costs
recover cost
increases Supplier poses credible threat of
forward integration
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of
New Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are
large relative to seller’s sales Buyers compete
with the supplying
Purchase accounts for a significant fraction industry by:
of supplier’s sales
Products are undifferentiated * Bargaining down prices
Buyers face few switching costs * Forcing higher
quality
Buyers’ industry earns low profits
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of
New Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Threat of
Substitute
Products
Threat of Substitute Products
Keys to evaluate substitute products:
Products Products with improving
with similar price/performance tradeoffs
function limit relative to present industry
the prices products
firms can
charge
Example:
Electronic security systems in place of securit
guards
Fax machines in place of overnight mail
delivery
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of
New Entrants
Entrants
Bargaining Rivalry Among Bargaining
Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of
New Entrants
Entrants
Bargaining Rivalry Among Bargaining
Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
Rivalry Among Existing
Competitors
Intense rivalry often plays out in the following
ways:
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an
opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Rivalry Among Existing
Competitors
Cutthroat competition is more likely to occur
when:
Numerous or equally balanced
competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching
costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Industry Analysis- 5 forces model
OPINION POLL QUESTIONS
1. Rivalry among the competitors
Thank
You……..
