Presentation on theme: "Tutorial 5 Five forces and PEST analysis"— Presentation transcript:
1 Tutorial 5 Five forces and PEST analysis External environmentTutorial 5Five forces and PEST analysis
2 Q1What is the main purpose of Five-Forces Analysis?
3 answerThe 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.
4 Q2Discuss the main contents of the five forces analysis?
5 Answer Five forces analysis PotentialentrantsThreat ofentrantsSuppliersCOMPETITIVERIVALRYBuyersBargainingpowerBargainingpowerThreat ofsubstitutesSubstitutesSource: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4.
6 Porter’s Five Forces Model of Competition Threat of New Entrants11
7 Threat of New Entrants Barriers to Entry Expected Retaliation Government PolicyEconomies of ScaleProduct DifferentiationCapital RequirementsSwitching CostsAccess to Distribution ChannelsCost Disadvantages Independent of ScaleBarriers to EntryExpected Retaliation12
8 Bargaining Power of Suppliers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of Suppliers14
9 Bargaining Power of Suppliers Suppliers are likely to be powerful if:Suppliers exert power in the industry by:* Threatening to raiseprices or to reduce qualityPowerful suppliers can squeeze industry profitability if firms are unable to recover cost increasesSupplier industry is dominated by a few firmsSuppliers’ products have few substitutesBuyer is not an important customer to supplierSuppliers’ product is an important input to buyers’ productSuppliers’ products are differentiatedSuppliers’ products have high switching costsSupplier poses credible threat of forward integration15
10 Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of BuyersBargaining Power of Suppliers17
11 Bargaining Power of Buyers Buyer groups are likely to be powerful if:Buyers are concentrated or purchases are large relative to seller’s salesPurchase accounts for a significant fraction of supplier’s salesProducts are undifferentiatedBuyers face few switching costsBuyers’ industry earns low profitsBuyer presents a credible threat of backward integrationProduct unimportant to qualityBuyer has full informationBuyers compete with the supplying industry by:* Bargaining down prices* Forcing higher quality* Playing firms off ofeach other18
12 Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute Products20
13 Threat of Substitute Products Keys to evaluate substitute products:Products with similar function limit the prices firms can chargeProducts with improving price/performance tradeoffs relative to present industry productsExample:Electronic security systems in place of security guardsFax machines in place of overnight mail delivery21
14 Bargaining Power of Suppliers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsThreat of New EntrantsBargaining Power of SuppliersRivalry Among Competing Firms in IndustryBargaining Power of BuyersThreat of Substitute Products23
15 Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways:Jockeying for strategic positionUsing price competitionStaging advertising battlesMaking new product introductionsIncreasing consumer warranties or serviceOccurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse offAdvertising battles may increase total industry demand, but may be costly to smaller competitors25
16 Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when:Numerous or equally balanced competitorsSlow growth industryHigh fixed costsLack of differentiation or switching costsHigh storage costsCapacity added in large incrementsHigh strategic stakesHigh exit barriersDiverse competitors26
17 Q3Identify the main components of PEST analysis?
18 answer Political factors Economic factors Socio-cultural factors Technological factors
19 Q4Give examples of the items involved in PEST ANALYSIS?