MANAGERIAL ECONOMICS

III CONTINUOUS ASSESSMENT

AN ANALYSIS OF VARIOUS INDUSTRIES IN LIGHT OF THE FIVE FORCES FRAMEWORK

National Law University, Jodhpur

Summer Session

(July-November 2014)

Submitted by: Submitted to:

Arushie Marwah, 1056 Dr. Rituparna Das

S Vibu Nandhan, 1069 Faculty of Law

Sanjay Krishna, 1070

Semester III

B.B.A. LL.B. (Hons)

INTRODUCTION

“Porter’s five forces” have shaped a generation of academic research and business practice.

Micheal Porter, through his classic work, provides extensive analysis and addresses common

misunderstandings, providing for practical guidance to implementing an effective business

strategy; the five forces framework.’1

Porter five forces is a framework to analyse the level of competition within an industry

and business strategy development. Porter felt that often, managers define competition too

narrowly, and hence competition for profits must be understood to be beyond the scope of

just industry rivals. It provides a framework that models the industry as being influenced by

five forces. These include - three forces from 'horizontal' competition: the threat of substitute

products or services, the threat of established rivals, and the threat of new entrants; and two

forces from 'vertical' competition: the bargaining power of suppliers and the bargaining

power of customers. The extended rivalry that results from all five forces defines an

industry’s structure and shapes the nature of competitive interaction within an industry.

In essence, the job of a business strategist is to understand and cope with competition. The

strategic business manager seeking to develop an edge over rival firms can thus, use this

model to better understand the industry context in which the firm operates. A change in any

of the forces, normally requires a business unit to re-assess the marketplace given the overall

change in industry information. Porter’s five forces has been applied to a diverse range of

problems, from helping businesses become more profitable to helping governments stabilise

industries.2

Let us now examine each of these five forces:

1 Harvard Business Review, January 2008.2 Michael Simkovic, Competition and Crisis in Mortgage Securitization.

 

SUPPLIER POWER

-Supplier concentration 

-Importance of volume to supplier 

-Differentiation of inputs 

-Impact of inputs on cost or differentiation 

-Switching costs of firms in the industry 

-Presence of substitute inputs 

-Threat of forward integration 

-Cost relative to total purchases in industry

 

THREAT OF

NEW ENTRANTS 

-Absolute cost advantages 

-Proprietary learning curve 

-Access to inputs 

-Government policy 

-Economies of scale 

-Capital requirements 

-Brand identity 

-Switching costs 

-Access to distribution 

-Expected retaliation 

-Proprietary products

THREAT OF

SUBSTITUTES 

-Switching costs 

-Buyer inclination to

 substitute 

-Price-performance

 trade-off of substitutes

 

BUYER POWER 

-Bargaining leverage 

-Buyer volume 

-Buyer information 

-Brand identity 

-Price sensitivity 

-Threat of backward integration 

-Product differentiation 

-Buyer concentration vs. industry 

-Substitutes available 

-Buyers' incentives

DEGREE OF RIVALRY 

-Exit barriers 

-Industry concentration 

-Fixed costs/Value added 

-Industry growth 

-Intermittent overcapacity 

-Product differences 

-Switching costs 

-Brand identity 

-Diversity of rivals 

-Corporate stakes

THE FIVE FORCES FRAMEWORK3

3 Source: http://web.ntpu.edu.tw/~jason/120%20MM/reference%201/Porter's%20Five%20Forces.pdf.

I. INDUSTRY RIVALRY

Firms constantly strive for a competitive advantage over their rivals. The intensity of rivalry

varies across industries and strategic analysts seek to gain advantage of these differences.

The intensity of rivalry in an industry may be influenced by the following characteristics:

number of firms, strength of market growth, usage of channels of distribution, switching

costs, degree of product differentiation, strength of exit barriers, diversity of rivals and

industry shakeout. In pursuing an advantage over its rivals, a firm may choose from several

competitive moves such as:

Changing prices - raising or lowering prices to gain a temporary advantage.

Improving product differentiation - improving features, implementing innovations in

the manufacturing process and in the product itself.

Creatively using channels of distribution - using vertical integration or using a

distribution channel that is novel to the industry. For example, with high-end

jewellery stores reluctant to carry its watches, Timex moved into drugstores and other

non-traditional outlets and cornered the low to mid-price watch market.

Exploiting relationships with suppliers - for example, from the 1950's to the 1970's

Sears, Roebuck and Co. dominated the retail household appliance market. Sears set

high quality standards and required suppliers to meet its demands for product

specifications and price.4

II. THREAT OF SUBSTITUTES

In Porter's model, substitute products refer to products in other industries. As more substitutes

become available the demand for it becomes more elastic since customers have more

alternatives to choose from. Products with available close substitutes, constrains the ability of

firms in an industry to raise prices. While the threat of substitutes typically impacts an

industry through price competition, there can be other concerns in assessing the threat of

substitutes. These can be enlisted as: buyers propensity to substitute, relative performance of

4 Source: http://web.ntpu.edu.tw/~jason/120%20MM/reference%201/Porter's%20Five%20Forces.pdf.

substitute, buyer switching costs, perceived level of product differentiation, ease of

substitution, quality depreciation etc.

III. BARGAINING POWER OF THE BUYERS

The bargaining power of customers is also described as the market of outputs: the ability of

customers to put the firm under pressure, which also affects the customer's sensitivity to price

changes. Firms can take measures to reduce buyer power, such as implementing a loyalty

programmes. The numerous factors that influence the power of the buyers are as follows:

buyer concentration to firm concentration ratio, switching costs, dependency on channels of

distribution, buyer information availability, buyer price sensitivity etc.

IV. BARGAINING POWER OF THE SUPPLIER

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw

materials, components, labour, and services (such as expertise) to the firm can be a source of

power over the firm when there are few substitutes. For example, suppliers may refuse to

work with the firm or charge excessively high prices for usage of unique resources. Thus, the

potential factors can be summarised as: supplier switching costs, differentiation level of

inputs, presence of substitute inputs, strength of distribution channel, supplier competition

etc.

V. THREAT OF NEW ENTRANTS

The entry of new firms increases competition, thereby reducing the profitability for all firms

in an industry. Thus, unless the entry of new firms can be blocked by incumbents  the

abnormal profit rate will trend towards zero (perfect competition). The following factors can

have an effect on how much of a threat a new entrant may pose: existence of barriers to entry,

government policy, capital requirements, economies of scale, product differentiation, entry

costs, switching costs, sunk costs, customary loyalty, industry profitability etc.

Through the present assignment, we look to examine the applicability of porters five forces

framework to the following industries: biscuit, paints, and pharmaceuticals. Following this,

we examine the industry which has best utilised this extremely potent tool of strategic and

marketing management.

THE BISCUIT INDUSTRY

The Indian Biscuits Industry is the largest among all the food industries with a turnover of

around Rs.3000 Crores. India is known to be the second largest manufacturer of biscuits in

the world, the first being the United States of America. The Indian biscuits industry came

into existence and started gaining a sound status in the later part of 20th century when the

urbanized society called for readymade food products at a tenable cost. Biscuits were

assumed as sick-man's diet in earlier days. But today, as a result of them being easy to carry,

tasty to eat, cholesterol free and reasonable at cost, they have become one of the most loved

fast food products for every age group.

In the year 1990, the total production of bakery products had risen from 5.19 lakh tonnes in

1975 to 18.95 lakh tonnes. Today Biscuits contributes to over 33 % of the total production of

bakery and above 79 % of the biscuits are manufactured by the small scale sector of bakery

industry comprising both factory and non-factory units in the country. Government has

established The Federation of Biscuit Manufacturers of India (FBMI) which has confirmed a

bright future of India Biscuits Industry in the year 1953. According to FBMI, a steady growth

of 15 % per annum in the next 10 years will be achieved by the biscuit industry of India.

Besides, the export of biscuits will also surpass the target and hit the global market

successfully.

The largest consumers of biscuits are the states of Maharashtra, West Bengal, Andhra

Pradesh, Karnataka, and Uttar Pradesh. Maharashtra and West Bengal in particular, are the

most industrially developed states that account for the maximum amount of consumption of

biscuits. Even, the rural sector consumes around 55 % of the biscuits in the bakery products.

In order, to develop an in-depth understanding of the competitive landscape of the biscuit

industry we must now examine the industry in light of Porters five force framework i.e. with

respect to entry in the industry, bargaining power of suppliers and buyers, industry rivalry

and the availability of substitutes.

I. BARGAINING POWER OF SUPPLIERS

Any producing industry requires raw materials, labour, components, machinery and other

supplies. This requirement leads to buyer-supplier relationships between the industry and the

firms that provide the raw materials used to create products. The biscuit industry’s principal

raw material requirements are that of wheat flour, sugar, shortenings, salt, sal volatile, sweet

jelly, glucose, and starch. Further, the industry requires processing through the use of

technologically advanced machines that carry out the procedures of dough mixing,

laminating, cutting/moulding, baking, cooling, stacking and packing. In India, wheat flour,

sugar and salt are made available locally by means of wholesale purchases from farmers.

Thus, due to the presence of a large number of suppliers across the country, the industry does

not bear the brunt of bargaining power of the suppliers. On the other hand, for the supply of

the other raw materials such and sweet jelly, starch etc. mainly imports are relied upon. Also,

the biscuit processing machines are usually purchased from certain select suppliers as such

advanced technology is not easily accessible in the Indian markets. Yet, the threat of

bargaining power of the suppliers for the biscuit industries is limited. This is because the

inputs are relatively standardised and the government by means of FBMI ensures certain

ceilings on prices.

II. BARGAINING POWER OF BUYERS

The power of buyers is the impact that customers have on a producing industry. In the case of

the biscuit industry, the market conditions in India can be characterised as those with a large

and diverse buyer base, spread across the country, with the availability of numerous

substitutes. The prices of most biscuit brands are thus kept within the reach of the budget of

the ordinary man. Therefore, biscuits are supplied to buyers in both urban and rural areas of

the country. There are also many convenience outlets for biscuits including neighbourhood

kirana shops. These stores have been set up mainly to capture the bargaining power of the

buyers. The power of the buyers in the biscuit industry is such that the general situation o the

market for biscuits has grown towards full fledged competition through brand development,

range of products offered, delivery, advertisements and packaging.

III. INDUSTRY RIVALRY

The sustainability of industry profits also depends on the nature and intensity of the rivalry

among firms competing in the industry. The Indian biscuit industry, is divided into two

segments; the organised and unorganised sector. In terms of volume the production of the

organised sector is estimated at 1.3 million tonnes. In the organised sector, the industry is

mainly dominated by Parle and Britannia, though a recent report terms ITC as the leader of

the biscuit industry in India. Other organised players include domestic players like

Brakeman’s champion, Kwality, Priya and MNC’s like Sara, Heinz, United Biscuits etc. On

the other hand, the unorganised sector consists of small bakery units, cottage and household

type manufacturing. The organised sector produces around 60% of the total production, the

balance 40% being contributed by the unorganised bakeries.

Thus, the biscuit industry in India, can

be characterised as one with immense

competition and the presence of a

multitude of producers. Also, the

cyclic nature of demand for biscuits in

India, ensures an environment of cut-

throat competition. In such a dynamic

environment, every manufacturer

seeks to gain a competitive edge over

the other by means of improving quality, diversification, reducing switching costs and

increasing information available to the consumers. Only those manufacturers that skilfully

master the force of industry rivalry are able to sustain their profits in the business industry.

For example, large scale manufacturers like Cadbury, Nestle and Brooke Bond tried to enter

the biscuit market but could not successfully hit the market because of the presence of

domestic companies that only produced biscuits. Even today, though a battery of new players

such as Kraft, Pepsico, Glaxo etc are waiting to enter the biscuit market, it has been seen that

with the exception of Horlicks Biscuits most MNC’s have ceased production in the country.

Therefore, even though there exist numerous players in the biscuit industry, the Indian market

is still largely un-penetrated offering scope for ample growth. Growth, that can be attained by

effectively managing industry rivalry.

IV. THREAT OF SUBSTITUTES

The level and sustainability of industry profits also depend on the presence of substitutes.

Porter’s five force framework emphasized that the presence of close substitutes erodes

industry profitability. As seen through the preceding section, numerous substitutes, in both

the organised as well as unorganised sector can be found in the biscuit industry. Thus, the

industry is extremely price sensitive where profits are constrained by the presence of more

alternatives. The numerous substitutes for biscuits have also affect the demand which has

become more elastic as if the policy of one producer is not appealing the consumer may

switch to another available substitute. Thus, the profits in this sense remain restricted in the

biscuit industry as if one brand decides to increases its profits through a price hike, the

consumers would shift their income to another alternative manufacturer.

V. THREAT OF NEW ENTRANTS

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that

new firms may enter the industry also affects competition. With respect to the biscuit industry

in India, the threat of new rivals in the market depending upon the following factors:

Government Regulation and Policies: Government regulation is a major concern in

any food industries where, there are often extensive regulatory controls on minimum

quality standards and other requirements. In India, the biscuit industry is marked by

multiplicity of food laws and their enforcing agencies in the Central and State

Governments that have overlapping functions & implementation. Also, government

policies such as ban on plastic for the packaging of biscuits in various states further

complicate manufacturing of biscuits. Thus, the industry is marked by a lack of clarity

with respect to the applicable regulatory laws and this serves as a hindrance to the

entry of new manufacturers.

Budget and Taxation : The annual growth of the biscuit industry has shown a decline

of 3.5% in 2000-01, mainly due to 100% hike in Central Excise Duty (from 9% to

16%). The rate of growth as a result increased by a marginal 2.75% through the years.

The commodity is also price sensitive, as a consequence of which, even when the

Excise Duty was doubled on biscuits in 2000-01 biscuit manufacturers, including the

major brands, were not able hike MRPs to the extent of the steep increase in the

Duty. Taxation, both Central Excise Duty as also State Sales Tax, other miscellaneous

levies i.e. turnover tax, local area tax, mandi taxes, purchase tax, octroi etc etc, have

been a major deterrent in the growth of the biscuit industry and prevent new firms

from entering the market.

Economies of Scale : As there is mass production for a particular commodity, the

efficiency increases, reducing the cost of production. In the case of the biscuit

industry, as the demand of biscuits is cyclic in nature there is continuous production,

resulting in specialised production mechanisms which render the cost of production as

extremely tenable. Also, since the amount of investment required is not too high, new

entrants are largely seen in the unorganised sector in the form of bakeries and coffee

houses etc. Subsidies provided by various states for fixed capital investments also

encourage entrepreneurs to look the biscuit industry.

Changing Consumer Preference : The biscuit industry in India is extremely dynamic.

The sustained growth in the country has led to increased disposable incomes among

Indian consumers. Urban dwellers are becoming increasingly health conscious and are

demanding healthier options. Along with this consumers are also willing to

spend more and experiment. As more women join the work force, convenience and

time have become major factors among urban households. Consumers are

increasingly relying on snacks and baked goods as substitutes to traditional breakfast.

With the launch of a series of cookies and sandwich biscuits offerings, biscuits are

now being viewed as a quick breakfast option among women and children. This has

helped increase sales of biscuits which tempt new firms to enter the market and also

gain from such an increase. Further, while biscuit consumption was clearly a very

well formed habit with clear and strong consumer preferences, there has been a

willingness to try new products, be it in higher order indulgence products, or in the

rapidly evolving health and wellness space. As a result the upgradation of consumer

preferences from glucose biscuits provide a viable business opportunity to new

entrants in the market.

Thus, the threat of entry of new firms in the biscuit industry is reasonably high as investment

requirements and production costs remain low with a perpetual demand for the commodity in

the market. Even though there is a lack of infrastructure and government assistance in the

industry, it continues to grow, changing the entire market structure. The greatest example of

this would be the entry of ITC in the market that has pushed down the market share of the

‘biscuit king’ Britannia by 10% in a span of less than 2 years. Therefore in order to ensure the

sustainability of profits, each firm in the biscuit industry must strengthen their own

production and sale policies in order to minimise the rising threat of new rivals.

FURTHER TRENDS OF THE BISCUIT INDUSTRY

The market for biscuits is very promising, and expecting a higher growth in near

future. The Indian biscuit market is currently 1.1 million tonnes per annum at Rs 50

billion. About 90% of Indians buy and eat biscuits.

According to the AC Nielsen retail sales audit in March 2006, both Britannia and

Parle have lost volumes. Britannia's shares have dropped from 35.8 % in 2004-05 to

30.5 % in May 2006 (volumes). Parle's shares have also dropped from 42.2 to 38.4 %

in the same period. Even Priya Gold has seen a minor dip from 6.4 % to 5 %. ITC's

Sunfeast has been a big gainer with its share increasing from 2.7 to 6.7 %.

Biscuit is a hygienically packaged nutritious snack food available at very competitive

prices, volumes and different tastes. According to the NCAER Study, biscuit is

predominantly consumed by people from the lower strata of society, particularly

children in both rural and urban areas with an average monthly income of Rs. 750.00. 

As regards the consumption pattern is concerned. surveys and estimates by industry

from time to time indicate the average consumption scenario in the four Zones have

been more or less close to each other, as below:

Northern States: 28%

Southern States: 24%

Western States: 25%

 Eastern States: 23%

Though India is considered as the third largest producer of Biscuits after USA and

China, the per capita consumption of biscuits in our country is only 2.1 Kg., compared

to more than 10 kg in the USA, UK and West European countries and above 4.25 kg

in south east Asian countries, Le. Singapore, Hong Kong, Thailand, Indonesia etc.

China has a per capita consumption of 1.90 kg, while in the case of Japan it is

estimated at 7.5 kg.

A SWOT analysis of the industry can be seen as follows:

THE PAINT INDUSTRY

The paints and coatings industry is highly dynamic and one which poses several challenges to

suppliers in the market. Strong price sensitivity, rising raw material prices and the resultant

squeeze in profit margins are issues paint suppliers have to deal with on almost an everyday

basis. 

To understand the competitive landscape of the paint market better, it can be useful to employ

Michael Porter's model of market competition. In this model, one can analyze the paint

market from 4 key angles: the buyers, raw material suppliers, potential new entrants and

threats from substitute products being introduced into the market. After looking at all these

factors, this article will finally conclude what the key challenges are in this market and what

companies can do to succeed in it.

BUYERS BECOME STRONGER

For any industry, the key factor affecting the competitive scenario in the market is the end-

users or the buyers, and the paints industry is no exception to that. Paints are sold through

direct sales as well through distributors. While architectural paints mainly follow the retail

channels, industrial paints are sold directly to end-use companies. It has been observed that

these buyers, both direct end-users and retail channel, are becoming increasing powerful with

their growing bargaining power. End-users are demanding higher quality paint for the same

or a lower cost. Paint manufacturers are continuously being forced to reduce prices, and those

who fail to do so are losing out to the closely fought competition. In recent years, it has also

been seen that, due to economic recession, end-users have lower purchasing power and this is

forcing paint companies to reduce prices in order to keep up their sales volumes.

HIGH RAW MATERIAL PRICES SQUEEZING PAINT SUPPLIERS MARGINS

To aggravate the situation, the cuts in price of product are being accompanied by increase in

the raw material prices. Resins prices have been rising in the past few years for almost all

kind of paints. Thus, paint companies are getting squeezed from both directions resulting in

thinning of their profit margins. 

Another challenge on the resin front is that the introduction of newer technologies and newer

types of resins are pushing out few conventionally used resins. Governmental regulations

against paints containing volatile organic compounds (VOC) will be a major factor in

throwing out certain kinds of paints from the market. This will definitely affect the resin

situation in the market and would require the paint companies to adjust accordingly.

Companies have to be proactive and cannot sit back and wait for other companies to act

because these will be the companies which will surely lose out in the market in the medium

run, if not the short.

LARGE COMPANIES BECOME LARGER

Paint markets in Asia are dominated by multinationals and a few large local companies.

These companies are now looking to expand in the region and almost all of them are looking

at the golden goose of the region, China. Multinationals like Akzo Nobel have already done

very well in this direction and have made a significance presence in the Chinese market. Thai

paint giant, TOA, is among the top local companies which are also aggressively looking at

the Chinese market. 

Besides China, these large companies are also looking into new unexplored markets like

Vietnam and Cambodia as these countries are showing tremendous growth potential for the

paints industry. These countries are slowly opening up and purchasing power of customers is

on the rise. This will encourage the growth of industries like construction and manufacturing

and will correspondingly encourage paints. Besides being a growing market for sale of paints,

Vietnam is also being looked at as an important country for production and export for various

kinds of coatings. This is due to the low cost of labour and other resources making it an ideal

manufacturing base.

PAINT CONSUMER LOOKING TO OTHER ALTERNATIVES TO PAINT

Last among the key factors of competition in Porter's model is the threat from substitutes and

this is one issue which is, slowly but surely, irking the paint suppliers. As countries in the

Asian region become affluent, there is an increasing demand for more trendy and easy-to-use

alternatives to paints. Colourful patterned wallpapers and wall paneling are being preferred

by some for architectural use instead of regular emulsion paints. In terms of industrial use,

the use of coatings for office equipment is decreasing significantly. Equipment suppliers

prefer to use metallic finishes and oxidation process to give a more matt and sleek look to the

equipment. Also, these metallic options are considered more hassle-free as there are no issues

of paint chipping, re-painting etc.

FURTHER ANALYSIS OF THE INDIAN PAINT INDUSTRY

Over the past few years, the Indian paint market has substantially grown and caught the

attention of many international players. The country continues to enjoy a healthy growth rate

compared to other economies, backed by the increasing level of disposable income, and

demand from infrastructure, industrial and automotive sectors. On the back of such advocacy,

it is anticipated that the sector will post a CAGR of around 15% during FY 2012 to FY 2015,

according to our new research report, “Indian Paint Industry Forecast to 2015”.

The following are the drivers of the paint industry market in the country:-

Marketing and Technology Initiatives

In this industry that is shedding the shackles of low-involvement, which one would normally

associate with the purchase of products such as paints, and moving up to acquire the

trappings of an FMCG industry. Brands, distribution strength and innovative use of

technology in the form of tinting machines have become the pillars supporting a company's

growth in a landscape of ever-changing customer preferences. While paint companies have

cultivated a loyal base of painters, the attempt now is to address customer needs directly

through advertisements.

In line with the new adage that in the age of the e-enabled enterprise, it is not organisations

that compete against each other but their respective supply chains, paint companies have

chosen to judiciously deploy technology that would serve to benefit the end-customer. The

benefits of investing in ERP packages and supply chain management solutions are two-fold.

While, on the one hand, it ensures the availability of the right product at the right place and

right time, thereby minimising orders lost, it brings in tangible benefits for companies in

terms of cost advantages. Asian Paints, for instance, has seen a reduction in its working

capital and higher fixed asset productivity.

Technological innovations

All the paint majors have tie-ups with global paint leaders for technical expertise. Asian

Paints has formed a JV with PPG Industries Inc to service the automotive OEMs. 

Berger has a series of tie-ups for various purposes. It has a technical tie-up with Herbets

Gambh of Germany in addition to its joint venture with Becker Industrial. With the

agreement with Herbets coming to an end in 2001, Berger has now allied with the Japanese

major Nippon Paints to boost its OEM turnover since the Indian roads are being flooded with

Japanese automobiles. It also has an agreement with Orica Australia Pvt. Ltd. to produce new

generation protective coatings. The company also has tie-ups with Valspar Corp and Teodur

BV for manufacturing heavy duty and powder coatings. 

Incidentally, ICI makes paints with the technical support of Herbets, which has been recently

acquired by by E I Du Pont de Nemours of the US. Interestingly, Du Pont, which is a leader

in automotive coatings in the US, has a technical tie-up with Goodlass Nerolac for the

manufacture of sophisticated coatings for the automotive sector. Goodlass also has technical

collaborations with Ashland Chemcials Inc, USA, a leader in the petrochemical industry,

Nihon Tokushu Toryo Co and Oshima Kogyo Co Ltd, Japan.

Strategies Deployed by the industry

Architectural coating sales have shown a healthy increase in demand. The market continues

to offer opportunities for growth. With sustained investments in brand building and various

promotional activities, the industry is poised to take advantage of a booming infrastructure

and housing industry. 

The dealers have to face the challenge of satisfying very demanding customers who want the

exact colours which meet their need. The Companies thus, continue to strengthen its offering

through the Computerised Colour Dispenser (CCD) machines at dealer counters. CCD

machines help to offer variety of shades at the press of a button to consumers. Also, a series

of initiatives have been undertaken to enable dealers to offer a complete painting solution to

the end consumer.

Developments to the paint industry

Technology: 

Cross-border tie-ups in industrial paints are becoming the order of the day with

massive investment thrusts in automobiles and consumer durables. None of the Indian

paint manufacturers possess the requisite technology to manufacture auto-paints.

What this means is more collaborations on the cards, mainly for auto paints. Besides

technological assistance, tie-up with an international paint manufacturer catering to a

foreign auto company translates into orders from the latter's local venture (for

instance, Asian Paints is the sole supplier of paints to DCM - Cielo and Opel Astra to

whom PPG of the US caters abroad). Such tie-ups will involve imparting technology

for a specific fee or setting up of separate joint ventures. The lack of technology also

affects the chances of Indian paint companies in setting up manufacturing units

abroad. Only Asian Paints has being innovative in setting up a number of subsidiaries

abroad with independent manufacturing units to broaden its base. APL has a holding

of 51 per cent in two of them - Asian Paints Fuji& Asian Paints Nepal, while 25 per

cent is held in subsidiaries at Tonga and Queensland. APL owns 45 per cent in the

subsidiary at Solomon Islands, and 20 per cent in Asian Paints, Vanuatu. Jensen &

Nicholson has the honour of being the first paint company in India to join the

prestigious Nova Paint Club - an association of eight exclusive paint companies all

over the world. This enables it to access the latest technology in the paint industry.

Unorganized sector: 

The unorganized players usually small, have been relegating to lower priced paint

producers and conversion agents for the bigger players. The paint majors in the

organized category will in due course expand their reach and consolidate their

positions taking advantage of the lower tax differential between the organized and the

unorganized sector. Lower excise duties and extension of MODVAT benefits to

petro-based inputs have been the reasons for the lowering of the differential in price.

This factor, coupled with the large amounts of expenditure required in the industry

will mean that the small scale sector will slowly get edged out. However, the

flexibility of the SSIs and their ability to move from one product to the other or from

one specification to the other will continue to stand them in good stead. The big

players therefore stand to gain by sourcing from the SSIs.

Rising demand:

 The industry can broadly classified into decorative and industrial segments with the

former accounting for a major chunk of 70 per cent of the total market in value terms.

While there undoubtedly is currently a slowdown in demand, this is part of the

economic cycle. Looking ahead, analysts estimate substantial lag in demand till the

end of the century. Sluggish capital markets too have been responsible for the failure

of capacity creation to catch up with demand. The response of paint companies to this

scenario will be to initially increase outsourcing. Paint companies had developed

subsidiaries and processing units for sub-contracting of high-volume-low value

products. But all that has changed. As of now, with captive capacity shortages, the

trend is towards outright purchases from extern sources. As a matter of fact, the lag in

capacity creation is likely to force existing companies to takeover the weaker players

to enable quick augmentation of capacities.

Rural market: 

The huge rural market in India offers huge potential for paint companies. For example

ICI Plc which till now has a presence in the premium segment, after having taken a

stake in Asian Paints might try to penetrate the rural segment by forging strategic

alliances with APL.

Thus, rising dominance of the top companies coupled with improved profitability will

provide the large existing companies with the critical mass and the internal generation to fund

creation of greater capacities in the Indian paint industry. Major global players will be

reluctant to enter this area because it is not technology-intensive and a strong distribution

network is a necessary condition for success. In the future only players well integrated in the

value added chain as also in the various product segments with a wide distribution reach will

be the gainers. In the future the new corporate trend in this industry would be brand wars,

product innovations and superior distribution logistics.

THE PHARMACEUTICAL INDUSTRY

The Pharmaceutical Industries is one of the largest growing industries in India. By virtue of

the essential nature of the product the industry has no genuine sustainability concerns. Since

Indian independence the government has taken a series of reforms in the country. Earlier,

owing to a genuine dearth in supply prices were unbearably high and the poor were denied

healthcare facilities. The government then eased patent regulations and protected its domestic

producers to help make India one of the largest and cheapest markets for over the counter

drugs. The Indian industry is now analysed keeping in mind Porters five functions however

represented by SWOT analysis and a comparison has been made with China, the other major

competitor in the global market.

STRENGTHS

Low cost - Indian manufacturers are one of the lowest cost producers of drugs in the

world. With a scalable labor force, Indian manufactures can produce drugs at 40%to

50% of the cost to the rest of the world. In some cases, this cost is as low as 90%.

 Strong technical skills – Indian pharmaceutical industry posses excellent chemistry

and process reengineering skills. This adds to the competitive advantage of the Indian

companies. The strength in chemistry skill help Indian companies to develop

processes, which are cost effective.

 Fluency in English speaking - Most people in India, especially those who are

educated and have advanced degrees, are fluent in English. This aptitude allows them

to communicate with most of the outside world, which is an important asset to the IPI.

The health statistics of India make it clear that India produces a sufficient number of

medical and pharmacy graduates, which contributes to the strengthening of the IPI.

 Patent – The Patent Act and Drug Price Control Order of the 1970s forced MNCs to

shrink their operations in India, thus providing space for indigenous pharmaceutical

companies to expand in the local market. As a result, in the past two to three decades

domestic pharmaceutical companies have established operations and are self

sufficient in all aspects. For example, Cipla Limited could provide the generic version

of the AIDS triple cocktail to impoverished South African people at $350/patient/year

or at a price that is one-thirtieth its cost in the United States. Indian patent laws

allowed local companies to set up operations to produce bulk drugs that are still under

patent, by various synthetic routes. The prevalence of this reverse engineering is

controversial, but it suggests that the IPI’s chemists have a strong showing in organic/

medicinal chemistry. The IPI’s tremendous potential to produce bulk drugs will be a

major asset in future drug discovery programs.

WEAKNESSES

Poor R&D expenditure -Compared to the global pharmaceutical industry, Indian

R&D expenditure is still minuscule, which could have a negative effect in the long

run, especially in Product Patent regime. The average R & D spend in India, though

growing at a CAGR of 18% over last five years, is just 1.9% of sales, as against 10-

16% spend by global pharma companies. Even if 25% of gross sales are invested in

R&D, the IPI’s total R&D budget is comparatively very small. Individual R&D

budgets of many US companies probably amount to much more than the cumulative

R&D budgets of all the companies in India. Thus, availability of funds is a major

weakness of the IPI.

Tag of being “Copy Cats” – Majority of the Indian companies are dependent on

replicating drugs developed by MNCs, hence Indian companies are viewed in not so

good light.

Price Regulation - The Indian pharma companies are marred by the price regulation.

Over a period of time, this regulation has reduced the pricing ability of companies.

The NPPA (National Pharma Pricing Authority), which is the authority to decide the

various pricing parameters, sets prices of different drugs, which leads to lower

profitability for the companies. The companies, which are lowest cost producers, are

at advantage while those who cannot produce have either to stop production or bear

losses.

 Slow growth - Indian pharma market is one of the least penetrated in the world.

However, growth has been slow to come by. As a result, Indian majors are relying on

exports for growth. To put things in to perspective, India accounts for almost 16% of

the world population while the total size of industry is just 1% of the global pharma

industry.

Low entry barriers - Due to very low barriers to entry, Indian pharma industry is

highly fragmented. This makes Indian pharma market increasingly competitive.

The industry witnesses price competition, which reduces the growth of the industry in

value term. To put things in perspective, in the year 2003, the industry actually grew

by 10.4% but due to price competition, the growth in value terms was 8.2% (prices

actually declined by 2.2%)

 Labour laws - Outdated and restrictive labour laws are hampering all the industries in

India and making it unviable for the MNCs to set up production base in

India.

Animal rights - Animal experiments are an essential part of pharmaceutical R&D.

Every drug molecule must be screened using animals first to determine its efficacy

and side or toxic effects. If Indian animal rights activists block the use of animals in

R&D experimentation, the IPI will be forced to turn to other countries for animal

studies. A great need exists to provide appropriate information to animal activists in

India so a balance can be struck between animal rights and human rights.

 Infrastructure - The infrastructure in India is good but could be improved. The

development of infrastructure is a key to success, and the IPI must take more

definitive steps to overcome this weaknesses.

 

OPPORTUNITIES

Off patent drugs - Large number of drugs going off-patent in Europe and in the US

between 2005 to 2009 (approx. $80 billion) offers a big opportunity for the Indian

companies to capture this market. Since generic drugs are commodities by nature,

Indian producers have the competitive advantage, as they are the lowest cost

producers of drugs in the world.

Expansion - Opening up of health insurance sector and the expected growth in per

capita income are key growth drivers from a long-term perspective. This leads to the

expansion of healthcare industry of which pharmaceutical industry is an integral part.

 Outsourcing - Being the lowest cost producer combined with FDA approved plants;

Indian companies can become a global outsourcing hub for pharmaceutical products.

 Patent - A patent is granted to an invention that is novel, non obvious, and useful.

The IPI has a clear opportunity to be part of the international patent community in the

acquisition of patents. This process will stimulate economic development, provide

job opportunities, and help India build a global reputation as a nation with a strong

scientific community. It will also make modern medicines available to the entire

Indian population. More important, indigenous R&D activities will help domestic

companies discover drugs to treat tropical diseases.

 

THREATS

 Transition from “Process” patent to “Product” patent – This is the major threat

Indian pharmaceutical industry is facing. Indian companies especially medium and

small sized do not have capabilities to develop new molecules, and they may succumb

to the giants.

 Counterfeit drugs – The extent of the problem of counterfeit drugs is unknown.

Counterfeiting is difficult to detect, investigate, and quantify. So, it is hard to know or

even estimate the true extent of the problem. What is known is that they occur

worldwide and are more prevalent in developing countries. It is estimated that

upwards of 10% of drugs worldwide are counterfeit, and in some countries more than

50% of the drug supply is made up of counterfeit drugs\

Other low cost countries - Threats from other low cost countries like China and Israel

exist. However, on the quality front, India is better placed relative to China. So,

differentiation in the contract manufacturing side may wane.

INDIA VS. CHINA: VARIANCE IN THE PHARMACEUTICAL INDUSTRY

In the global economy, both India and China have staked claims as nations to watch out for in

the future. Both these countries along with their counterparts Russia and Brazil (labeled as

the BRIC nations) have been touted to emerge as the fastest growing economies by 2050.

While much has been said about the impact of India and China on the dynamics of the global

economy, here, we shall attempt to find out as to which country has the edge in the global

pharmaceutical space.

Where China has an edge

China has proven its capabilities in the manufacturing space and the same advantage extends

to the pharmaceutical segment as well. Being a cost-efficient country, it has emerged as the

preferred destination for outsourcing intermediates (used in the manufacture of APIs) and

Active Pharmaceutical Ingredients. Chinese companies have forged growing relationships

with top global pharma companies (referred to as Big Pharma) in custom manufacturing and

also for outsourcing older APIs. Besides this, China also has the edge over India in the

biotech field due to the presence of high quality research institutions and the Chinese

government's commitment.

The number of DMF (Drug Master File) filings made by Chinese companies have also been

witnessing a rise in recent times, highlighting the growing interest of multinationals in the

country. In fact, India too, has been sourcing intermediated from China for the purpose of

manufacturing low cost APIs. 

Where India Scores

That said, while China is set to provide stiff competition to India in the API space, it still lags

behind in the formulations segment. This can be gauged by the fact that in the global generics

market, while India accounts for 25% of the Abbreviated New Drug Applications (ANDA)

filed in the US market, China has yet to file a single ANDA. India's advantage vis-à-vis

China lies in R&D, availability of scientific manpower, laws that have begun to recognize

intellectual property and Indian companies having alliances with global pharma companies in

research, generics and manufacturing. Even in the API space, while China has been growing

at a fast pace, it still falls behind India in terms of overall filings made until now.

India is making increasing strides in the global generics space, as can be evinced by the

progress made by Tier-I companies such as Ranbaxy and Dr.Reddy's. Ranbaxy is already

ranked amongst the top ten generic companies in the world. Both of them have emerged as

major contenders in the consolidation activity gaining momentum in the generics market and

have also been aggressive in challenging innovator patents (Para IV). In contrast, the Chinese

Tier -I company, Zhejiang Hisun, has yet to make a significant mark in the global generics

market.

India VS China: Top company comparison

  Ranbaxy Hisun

Formulations presence in US Yes No

Formulations presence in EU Yes No

API presence in the US Yes Yes

API presence in the EU Yes Yes

Local formulations presence Yes Yes

Drug discovery research Yes No

DMF filings Yes Yes

ANDA filings including Para IV Yes No

Source: Newport Strategies

The equation: Present and future

Given the fact that the 'low cost distinction' is no longer a trait unique to the Indian

pharmaceutical sector with the resurgence of Chinese companies in this area, Indian

companies will have to focus more than ever on moving up the value chain. This has to be by

capitalizing on the generics opportunity (in both plain vanilla and value added products),

strengthening efforts on the NDDS and NCE research front and continuing relationships with

global pharma in research and manufacturing. At present, on an overall basis, India does have

the edge over China in terms of relevance to the global pharmaceutical industry. That said,

Indian companies need to capitalize on the window of opportunity currently available before

the competition from China begins to pose a significant threat.

CONCLUSION

After carefully analysing each industry we have reached the conclusion that the

Pharmaceutical Industry is the best to invest in, for India as-

The ease in patent norms means that there is no product differentiation and generic

drugs are easily created

The fact that the top 5 Companies have only 18% market share points to a thriving

industry of SMEs.

Unlike the other two industries, international competition is significantly reduced

In the case of both paint and biscuits, demand fluctuates significantly on the

purchasing power of the consumer but not in the case of the pharmaceutical industry

The low entry barriers and the ease of exit by way of takeover etc means it is a

relatively less risky venture

In terms of supply, as most raw materials are available in abundance and are not

affected by season etc the industry has the advantage of regular and cheap supply of

raw materials due to heavy, standardised supply.

While we observed that all three industries have their merits, comparison was rather easy as

the products were varied in nature which implied significant variance in governmental policy

which is probably the greatest factor as it controls most of the factors mentioned by Porter.