P ORTERS F IVE F ORCES

I NTRODUCTION 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

T HE F IVE F ORCES 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

T HREAT 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?

T HREAT 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

B ARRIERS 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)

E ASE AND D IFFICULTY OF ENTRY 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 Easy to enter if there is Difficulty to enter if there is

B ARGAINING P OWER OF S UPPLIERS If a firm’s suppliers have bargaining power they will: Sell their products at a higher price Squeeze industry profits

B ARGAINING P OWER OF S UPPLIERS 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

B ARGAINING P OWER OF S UPPLIERS 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

B ARGAINING 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

B ARGAINING 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

T HREAT 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

T HREAT 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

D EGREE 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!

D EGREE 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

D EGREE OF RIVALRY This is determined by… Industry concentration Industry growth Product differences Switching costs Brand identity Diversity of rivals Capacity utilization Exit barriers

A SUMMARY OF THE FIVE FORCES 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 High profits are associated with… Low profits are associated with…

W HAT ARE YOUR CONCLUSIONS ?

S TUDENT T ASK Blue book, p688, Q4