michael porter analysis (five forces model)

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michael porter analysis (fve orces model)

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Page 1: Michael Porter Analysis (Five Forces Model)

8/9/2019 Michael Porter Analysis (Five Forces Model)

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michael porter analysis

(fve orces model)

Page 2: Michael Porter Analysis (Five Forces Model)

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INTRODUCTION

An industry consists o a roup o companieso!erin products or services" #hich are similar andsu$stitutes or each other% &trateists analy'ecompetitive orces #ithin an industry to identiy

opportunities and threats acin a frm% A model oranaly'in the industry environment is developed $yichael % *orter" stratey% This model is +no#n asan authority on competitive stratey% This model is

+no#n as fve orces model and it helps manaersto identiy and analy'e the competitive orces in anindustry environment%

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Porter’s FiveForces Model

Threat of NewEntrants

 BargainingPower ofSuppliers

 Rivalry amongEistingFirms

Threat ofSu!stitutes

BargainingPower ofBuyers

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(,) Threat o Ne# ntrants

ntry o potential competitors to an industryis a threat to the possi$ility o esta$lishedplayers% in any industry" ne# entrants $rinin ne# capacity" su$stantial resources and

aressiveness to ain mar+et share% itincludes ollo#in -

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(a)conomies o scale -

.irms reali'e economies o scale as theoutput o manuacturin units increases%

 They manuacture oods at a lo#er averae

cost compared to other manuacturers #ithlo#er levels o output% These economies oscale act as a $arrier aainst frms #hichconsider enterin an industry #ith a smallermanuacturin capacity%

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($) *roduct di!erentiation -

.irms di!erentiate their products $yesta$lishin $rand identifcation andcustomer loyalty% /rand identifcation and

customer loyalty can $e $uilt throuhadvertisin" customer service" productdi!erences" or frst mover advantae%

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(c) Capital re0uirements -

A frm need capital not only or advertisinand R1D and $ut also or customer credit"inventories" and to a$sor$ start2up losses%

3ue capital re0uirements limit the num$ero players in industries such as computermanuacturin and mineral e4traction%

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(d) Cost advantaes -

 e4istin frms in an industry sometime en5oyadvantaes that are not ne# entrants% theseadvantaes similarly" proprietary

technoloy" access to the $est sources ora# materials" assets purchased at lo#erprices" overnment su$sidies and avora$lelocations etc%

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(e) Access to distri$ution channel -

&mall frm oten fnd it di6cult to ac0uireshel space or distri$ution o their products$ecause lare retailers oten ivepreerence to esta$lished frms% Theesta$lished frms are prepared to pay oradvertisement needed to create customer

demand%

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() 7overnment policy -

 The overnment can limit entry into anindustry throuh licensin re0uirements" airand #ater pollution standards and saety

reulations% The mandatory re0uirement oe8uent treatment plant in suar mill" sotdrin+ unit" mil+ processin units and plasticmanuacturin units has escalated the cost

o production in India% This has restricted theentry o potential competitors%

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(9) /arainin *o#er o &uppliers

 The $arainin po#er o suppliersdetermines the company:s profta$ility #henthe suppliers are a$le to orce the price thatthe $uyer must pay% &uppliers are po#erul

under the ollo#in circumstances -

  ;hen the product that they sell has e#

su$stitutes and is important to thepurchasin company or $uyer%

  #hen no sinle industry is a ma5orcustomer or the suppliers%

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  #hen products in the industry aredi!erentiated to such an e4tent that theyare not easily su$stituta$le and it is costlyor a $uyer to s#itch rom one supplier toanother%

 A purchasin frm $uys a small 0uantity oa supplier<s oods and services it isunimportant to the supplier%

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(=) The /arainin *o#er o /uyers

/uyers vie#ed as a threat #hen they orcethe companies to chare lo# prices ordemand hiher 0uality and $etter service

#ith their $arainin po#er% /uyers can $evie#ed as a #ea+" i they ive the companythe opportunity to raise price and ma+emore profts% Accordin to porter the $uyers

are po#erul in the ollo#in circumstances%

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  The suppliers are more in num$er $ut the $uyersare e#%

 The $uyers $uy in lare 0uantity%

ore num$er o alternative suppliers and theirproducts are not standardi'ed and undi!erentiated%

 The cost o chanin suppliers is not much%

 The suppliers depend on the $uyer or a larepercentae o their total orders%

 The purchase item is not important to the fnal0uality or price o $uyer:s product%

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(>) threat o su$stitute -

&u$stitutes are those products" #hich satisysimilar needs thouh appear to $e di!erent%Co!ee" tea an &ot drin+s" all serves the

consumer:s need or rereshment% Due tothe e4istence o su$stitutes such as tea andsot drin+s" the prices chared $y companiesin the co!ee industry are restricted% I co!ee

prices are hi+ed" consumers have option os#itchin over to tea or sot drin+s" #hich

are its su$stitutes% 

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A su$stitute is a potential threat to the

company:s product% The e4istence o asu$stitute limits the price #hich can $echared or a product and thereore theprofta$ility o the company%

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(?) Rivalry amon 4istin .irms

;hen the intensity o rivalry is #ea+ amonesta$lished players #ithin an industry"companies can raise prices and earn reaterprofts% I the rivalry is stron amon otherplayers" price competition and price #ar mayresult and it #ill reduce the proft marin% The intensity o rivalry amon esta$lished

players is mainly due to three reasons- Industry competitive structure

 Demand conditions

 The heiht o e4it $arriers in the industry%

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Thankyou