five forces industry analysis nicole fiamingo 1. five forces industry analysis description &...
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Five Forces Industry Analysis
Nicole Fiamingo
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Five Forces Industry Analysis Description & Purpose
Developed by Michael Porter
Provides an understanding of an industry and its participants
Used as a means to decrease the gap between a firm’s external environment and its internal resources
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Five Forces Industry Analysis Objective of the Five Forces
Identify the profit potential of an industry
Identify the forces that would harm your company’s profitability in that industry
Protect and extend your competitive advantage
Anticipate changes in industry structure
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Five Forces Industry Analysis Porter’s Five Forces
1. Threat of new entrants2. Bargaining power of suppliers3. Bargaining power of buyers4. Threat of substitute products or services5. Degree of rivalry among existing competitors
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Five Forces Industry Analysis 1. Threat of New Entrants
1. Entry-deterring price 2. Incumbent retaliation 3. High entry costs 4. Experience effects 5. Other cost advantages6. Product differentiation 7. Distribution access 8. Government restrictions9. Switching costs
New entrants usually face several barriers to entry, including:
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Easy to Enter if there is:
•Common technology
•Little brand franchise
•Access to distribution channels
•Low scale threshold
Difficult to Enter if there is:
•Patented or proprietary know-how
•Difficulty in brand switching
•Restricted distribution channels
•High scale threshold
Easy to Exit if there are:
•Salable assets
•Low exit costs
•Independent businesses
Difficult to Exit if there are:
•Specialized assets
•High exit costs
•Interrelated businesses
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Five Forces Industry Analysis 2. Bargaining Power of Suppliers
Suppliers bargaining power may be influenced by:
1. Concentration2. Diversification 3. Switching costs 4. Organization 5. Government
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Suppliers are Powerful if: Example
Credible forward integration threat by suppliers
Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor
Suppliers concentrated Drug industry's relationship to hospitals
Significant cost to switch suppliers Microsoft's relationship with PC manufacturers
Customers Powerful Boycott of grocery stores selling non-union picked grapes
Suppliers are Weak if: Example
Purchase commodity products Grocery store brand label products
Concentrated purchasers Garment industry relationship to major department stores
Customers Weak Travel agents' relationship to airlineshttp://www.quickmba.com/strategy/porter.shtml
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Five Forces Industry Analysis 3. Bargaining Power of Buyers
Buyer’s Bargaining power my be influenced by:
1. Differentiation2. Concentration3. Profitability4. Quality
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Buyers are Powerful if: Example
Buyers are concentrated - there are a few buyers with significant market share
DOD purchases from defense contractors
Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized
Best Buy and Sears' large retail market provides power over appliance manufacturers
Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival
Large auto manufacturers' purchases of tires
Buyers are Weak if: Example
Producers threaten forward integration - producer can take over own distribution/retailing
Movie-producing companies have integrated forward to acquire theaters
Buyers are fragmented (many, different) - no buyer has any particular influence on product or price
Most consumer products
Producers supply critical portions of buyers' input - distribution of purchases
Intel's relationship with PC manufacturers
http://www.quickmba.com/strategy/porter.shtml
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Five Forces Industry Analysis 4. Threat of Substitute Products or Services
Market displacement by existing/potential substitutes can be influenced by:
1. Relative price/performance trade off2. Switching costs3. Profitability
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The Threat of Substitutes is High Risk:
The Threat of Substitutes Low Risk:
Consumer switching costs are low Consumer switching costs are high
Substitute product is cheaper than industry product
Substitute product is more expensive than industry product
Substitute product quality is equal or superior to industry product quality
Substitute product quality is inferior to industry product quality
Substitute performance is equal or superior to industry product performance
Substitute performance is inferior to industry product performance
http://www.wikicfo.com/Wiki/default.aspx?Page=Threat+of+Substitutes+-+one+of+Porters+Five+Forces&AspxAutoDetectCookieSupport=1
No substitute product is available
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Five Forces Industry Analysis 5. The Degree of Rivalry Among Existing Players
The intensity of competition within an industry is determined by:
1. Market Growth2. Cost Structure3. Barriers to exit4. Product switching5. Diversity
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Rivalry will be high:
There are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers
The costs of leaving the industry are high e.g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere
The level of capacity utilization. If there are high levels of capacity being under-utilized the existing firms will be very competitive to try and win sales to boost their own demand
The market is shrinking so firms are fighting for their share of falling sales
There is little brand loyalty so customer are likely to switch easily between products
http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_11.htm
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Five Forces Industry Analysis Strengths
Forecast future changes in each of the five forces
Discover how these changes will affect the other forces
Discover how the interrelated changes will affect the future profitability of the industry
Discover how you might change the strategy to exploit the changing industry structure
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Five Forces Industry Analysis Weaknesses
Underestimates the capabilities that may serve as the company’s competitive advantage in the long-term
Does not take into account the synergies and interdependence within a corporation’s overall portfolio
Strict interpretations ignore social & political factors
Does not address why or how companies are able to get advantageous positions
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Five Forces Industry Analysis How to Do It
Step 1: Collect Information Identify your industry Look at existing demand & supply patterns Identify the characteristics of each of the five
forces Examine & assess their impact on the industry
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Five Forces Industry Analysis How to Do It
Main Sources of Competitive Pressures1. Rivalry among competitors2. Threat of substitute products3. Threat of potential entry4. Bargaining power of suppliers5. Bargaining power of buyers
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Five Forces Industry Analysis How to Do It
Step 2: Assess & Evaluate Determine the direction of the force
Give each force a value indicating if it is strong,
moderate, or weak. Scale of 1 – 5, with 1 being the weakest
The ultimate goal: To identify the ability of your company to
successfully compete within its industry, given the collective strength of the five forces
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Five Forces Industry Analysis How to Do It
Step 3: Develop Strategy Repeat the first two steps in light of industry
change and evolution
Long-term industry trends should be analyzed to determine whether the profitability of the industry is sustainable and how this will affect your company’s competitive position.
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Five Forces Industry Analysis Conclusion
Understanding how an industry will evolve provides important direction for selecting and managing strategy around these five criteria
Not all industries are alike-for companies with product portfolios across numerous industries, this technique should be repeated for each industry