Porter-Five-Force-Model.pptx.ppt
- 2. Introduction ● Michael Porter developed the Five Forces Model in 1980. ● Five Forces Model is a powerful competitive analysis tool to determine the principal competitive influence in a market. It is a broadly used model in business that refers to the five important factors which drives firm's competitive position within an industry. ● The model aimed to provide a new way to use effective strategy to identify, analyse and manage external factors in an organization's environment. ● It is an analysis tool that uses five industry forces to determine the intensity of competition in an industry and its profitability. www.noteslearning.com
- 3. Michael Porter’s Five Forces Framework Threats of Substitute Bargaining Power of Suppliers Bargaining Power of Buyers Threat of New Entrants Industry Rivalry www.noteslearning.com
- 4. Threat of new entrants This force determines the ease of entrance in a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. Threat of new entrants is high when: ● Low amount of capital is required to enter a market ● Existing companies can do little to retaliate ● There is no government regulation ● Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries) ● There is low customer loyalty ● Products are nearly identical ● Economies of scale can be easily achieved www.noteslearning.com
- 5. Bargaining power of buyers Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when: ● Buying in large quantities or control many access points to the final customer ● Only few buyers exist ● Switching costs to other supplier are low ● They threaten to backward integrate ● There are many substitutes ● Buyers are price sensitive www.noteslearning.com
- 6. Bargaining power of suppliers Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when: ● There are few suppliers but many buyers ● Suppliers are large and threaten to forward integrate ● Few substitute raw materials exist ● Suppliers hold scarce resources ● Cost of switching raw materials is especially high. www.noteslearning.com
- 7. Threat of substitutes This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle. The following factors cause a higher threat of substitutes for an industry: ● Customers can easily switch between products. ● Substitute products are readily available to customers. ● Substitute products have better features ● Substitute products have higher quality/reliability ● Substitute products have lower costs www.noteslearning.com
- 8. Rivalry among existing competitors This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when: ● There are many competitors ● Exit barriers are high ● Industry of growth is slow or negative ● Products are not differentiated and can be easily substituted ● Competitors are of equal size ● Low customer loyalty www.noteslearning.com
- 9. Importance of Porter five forces ● What Strategy to use? ● Basic knowledge of Business Strategy & that influence the design making. ● Industry Analysis ● Measure and monitor strategies www.noteslearning.com
- 10. Using the tool: We now understand that Porter’s five forces framework is used to analyse industry’s competitive forces and to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have identified the following steps: ● Step 1. Gather the information on each of the five forces ● Step 2. Analyse the results and display them on a diagram ● Step 3. Formulate strategies based on the conclusions www.noteslearning.com
- 11. Supplier Power ● No. of Suppliers ● Size of Suppliers ● Uniqueness of service ● Ability to substitute ● Cost of Switching Buyer Power ● No. of Customers ● Size of each order ● Difference in competitors ● Price sensitivity ● Cost of Switching Threat of New Entry ● Time and cost of entry ● Specialist knowledge ● Cost advantages ● Technology protection ● Barriers to entry Competitive Rivalry ● No. of competitors ● Quality difference ● Switching Costs ● Customer Loyalty Competitive Rivalry www.noteslearning.com