sbm tsb grp 6 - porters 5 force

8/3/2019 Sbm Tsb Grp 6 - Porters 5 Force

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EVALUATING COMPANYS EXTERNAL

ENVIORNMENT

INTRODUCTION

Firstly in order to estimate a companys external environment we first

need to know the external forces which affect the working and the

operations of the company and as all companies operate in macro

environment they all are affected by factors such as

1. Economy at large;

2. Demographic condition;

3. Social values;

4. Lifestyles;

5. Technology;

6. Government regulations and legislations.

Although these factors are beyond the control of the company, but for

smooth and regular functioning and also to complete in the world

market, the company manager needs to upgrade themselves with

these factors and consider them while drafting their goals, making

policies, giving directions and planning objectives.

For example: Many automobile companies are coming up with the

strategy of using LPG in the automobiles looking at the continuous

increase in fuel prices.

The companies need to keep a track of these changes because

unlike internal factors of the internal environment, the smallest of

change in the external factors affects the demand of there product.


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Therefore while a companys manager scans the external

environment, he must be alert for potential important outer ring

development, assess their impact and influences and adapt the

companys directions and strategies as needed to prosper.

Where as, the industrys dominant economic features, which helps in

knowing the company better and feature which makes then distinct

from others because of huge competition in the market, the factors

supporting the cause are:

Market size and growth rate states how big is the industry andhow fast it is growth (i.e. rapid development, rapid growth andtake off, early maturing and slow growth, saturation andstagnation, decline).

Number of buyers as the demand for the product is known bythe number of buyers for the product, the buyers play a veryimportant role, also as the buyers have bargaining power whichthey attain on purchasing goods in large volume.

Degree of product differentiation Due to increase incompetition, in the global market it is important to have certainfeatures which makes ones product different from others tocreate their product demand.

Product innovation this factor helps to know the pace ofproduct innovation that is the R&D conditions of the companywhich eventually leads in determining the PLC.

Pace of technology As technologies keeps on advancingwithin short spans, it is important for a company in order towithstand its product, to adapt such changes or it would lead toits decline.

Economies of scale this factor helps in knowing whether theindustry is characterized by economies of scale in purchasing,manufacturing, advertising or shipping, which help thecompanies with large production to have a cost advantage overthe others.


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And as per Michael Porter a companys macro environment is

particularly affected by factors such as:

1. Companys immediate industry and competitive environment competitive pressure,

2. The action of the rival firms ,3. Buyer behavior ,4. Supplier-related consideration ,5. Potential New Entrants .

Consequently these 5 factors by M.Porter form the 5- Forces. Which

can be pictured us beneath.


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Where as the way to use these 5-forces model to determine the

nature and strength of competitive pressure in a given industry is to

build the picture of competition in the three steps:


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Step 1 Identify the specific competitive pressureassociated with each of the five forces.

Step 2 Evaluate how strong the pressure compromisingeach of the five forces are (fierce, strong, moderate, normalor weak).

Step 3 Determine whether the collective strength of 5competitive forces is conducive to earning attractive profits.

INTENSITY OF RIVALRY AMONG THE COMPETING SELLERS:

The intensity of rivalry among competitors in an industry refers to theextent to which firms within an industry put pressure on one another

and limit each others profit potential. If rivalry is fierce, competitors

are trying to steal profit and market share from one another. This

reduces profit potential for all firms within the industry. According to

Porters 5 forces framework, the intensity of rivalry among firms is

one of the main forces that shape the competitive structure of an

industry.

How will competition react to a certain behavior by another firm?Competitive rivalry is likely to be based on dimensions such as price,

quality, and innovation. Technological advances protect companies

from competition. This applies to products and services. Companies

that are successful with introducing new technology, are able to

charge higher prices and achieve higher profits, until competitors

imitate them. Examples of recent technology advantage in have

been mp3 players and mobile telephones. Vertical integration is a

strategy to reduce a business' own cost and thereby intensifypressure on its rival...

Rival sellers are prone to employ whatever weapons they have in

their business arsenal to improve their market position, strengthen

their market position with buyers, and earn good profits.
http://en.wikipedia.org/wiki/MP3http://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/MP3http://en.wikipedia.org/wiki/Vertical_integration


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In pursuing an advantage over its rivals, a firm can choose fromseveral competitive moves:

Changing prices - raising or lowering prices to gain a temporaryadvantage

Improving product differentiation - improving features,implementing innovations in the manufacturing process and inthe product itself.

Creatively using channels of distribution - vertical integration orusing a distribution channel that is novel to the industry. Forexample, with high-end jewelry stores reluctant to carry itswatches, Timex moved into drugstores and other non-traditionaloutlets and cornered the low to mid-price watch market.

Exploiting relationships with suppliers - for example, from the1950's to the 1970's Sears, Roebuck and Co. dominated the

retail household appliance market. Sears set high qualitystandards and required suppliers to meet its demands forproduct specifications and price.

The intensity of rivalry is influenced by the following industrycharacteristics:

A larger number of firms-increases rivalry because more firms mustcompete for the same customers and resources. The rivalry

intensifies if the firms have similar market share, leading to a strugglefor market leadership.Slow market growth causes firms to fight for market share. In agrowing market, firms are able to improve revenues simply becauseof the expanding market.High fixed costs result in an economy of scale effect that increasesrivalry. When total costs are mostly fixed costs, the firm must producenear capacity to attain the lowest unit costs. Since the firm must sellthis large quantity of product, high levels of production lead to a fight.

High storage costs or highly perishable products cause aproducer to sell goods as soon as possible. If other producers areattempting to unload at the same time, competition for customersintensifies.


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Low switching costs increases rivalry. When a customer can freelyswitch from one product to another there is a greater struggle tocapture customers.

Low levels of product differentiation is associated with higherlevels of rivalry. Brand identification, on the other hand, tends toconstrain rivalry.

Strategic stakes are high when a firm is losing market position orhas potential for great gains. This intensifies rivalry.High exit barriers place a high cost on abandoning the product.The

firm must compete. High exit barriers cause a firm to remain in anindustry, even when the venture is not profitable. A common exitbarrier is asset specificity. When the plant and equipment required for

manufacturing a product is highly specialized, these assets cannoteasily be sold to other buyers in another industryA diversity of rivals with different cultures, histories, andphilosophies make an industry unstable. There is greater possibilityfor mavericks and for misjudging rival's moves. Rivalry is volatile andcan be intense. The hospital industry, for example, is populated byhospitals that historically are community or charitable institutions, byhospitals that are associated with religious organizations oruniversities, and by hospitals that are for-profit enterprises. This mixof philosophies about mission has lead occasionally to fierce localstruggles by hospitals over who will get expensive diagnostic andtherapeutic services. At other times, local hospitals are highlycooperative with one another on issues such as community disasterplanning.Industry Shakeout.A growing market and the potential for high

profits induces new firms to enter a market and incumbent firms to

increase production. A point is reached where the industry becomes

crowded with competitors, and demand cannot support the new

entrants and the resulting increased supply. The industry maybecome crowded if its growth rate slows and the market becomes

saturated, creating a situation of excess capacity with too many

goods chasing too few buyers. A shakeout ensues, with intense

competition, price wars, and company failures.


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THREAT OF SUBSTITUTES:

Substitute goods are goods which, as a result of changed conditions,

may replace each other in use (or consumption). Substitutes matter

when customers are attracted to the products of the firms in other

industries.

Competitive pressures from the sellers of substitute products:

Companies in one industry come under competitive pressures fromthe action of companies in a closely adjoining industry whenever

buyers view the products of the two industries as good substitutes.

For example the producers of eyeglasses and contact lenses are

currently facing mounting competition from growing consumer interest

in corrective laser surgery. Newspapers are feeling the competitive

force of the general public turning to cable news channels for late

breaking news and using internet sources to get information.

Just how strong the competitive pressures are from the sellers of

substitute products depends on 3 factors:

1) Whether substitutes are readily available and attractively priced: the presence of readily available and attractively priced

substitutes creates competitive pressure by placing a ceiling onthe prices industry members can charge without givingcustomers an incentive to switch to substitutes and riskingsales erosion. This price ceiling , at the same time, puts a lid onthe profits that industry members can earn unless they findways to cut costs. When substitutes are cheaper than anindustrys product, industry members come under heavy


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competitive pressures to reduce their prices and find ways toabsorb the price cuts with cost reductions.

2) Whether buyers view the substitutes as being comparable orbetter in terms of quality,performance and other relevantattributes: the availability of substitutes inevitably invitescustomers to compare performance, features, ease of use, andother attributes as well as price. For example camera usersconsider the convenience and performance trade offs whendeciding whether to substitute a digital camera for a film basedcamera. Competition from good performing substitutes

unleashes competitive pressures on industry participants toincorporate new performance features and attributes that maketheir product offerings more competitive.

3) Whether the costs that buyers incur in switching to thesubstitutes are high or low : high switching costs deterswitching to substitutes while low switching costs make it

easier for the sellers of attractive substitutes to lure buyers totheir offering. Typical switching costs include the time andinconvenience that may be involved, the costs of additionalequipment, the time and cost in testing the quality and reliabilityof the substitute, the psychological costs of severing oldsupplier relationships and establishing new ones, payments fortechnical help in making the changeover, and employeeretraining costs. High switching costs can materially weaken thecompetitive pressures that industry members experience fromsubstitutes unless the sellers of substitutes are successful in

offsetting the high switching costs with enticing price discountsor additional performance enhancements.

As a rule , the lower the price of substitutes, the higher their quality

and performance , and the lower the users switching costs, the more

intense the competitive pressures posed by substitute products.


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Other market indicators of the competitive strength of substitute

products include :

a) whether the sales of substitutes are growing faster thanthe sales of the industry being analyzed( a sign that thesellers of substitutes may be drawing customers awayfrom the industry in question)

b) whether the producers of substitutes are moving to addnew capacity

c) whether the profits of the producers of substitutes are onthe rise.

Factors affecting competition from substitute products

Competitive pressures from substitutes are stronger when :

- good substitutes are readily available or new ones areemerging

-

substitutes are attractively priced- substitutes have comparable or better performance features- end users have low costs in switching to substitutes- end users grow more comfortable with using substitutes

Competitive pressures from substitutes are weaker when :

- good substitutes are not readily available or dont exist

- substitutes are higher priced relative to the performance theydeliver

- end users have high costs in switching to substitutes


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Competitive pressures associated with the Threat of New

Entrants

Several factors determine whether the threat of new companiesentering the marketplace poses significant competitive pressures.

One factor relates to the size of the pool of likely entry candidates

and the resources at their command. The bigger the pool of entry

candidates, the stronger the threat of potential entry. This is

especially true when some of the likely entrants have ample

resources and the potential to become formidable contenders for

market leadership.

Existing industry members are often strong candidates for entering

market segments or geographic areas where they currently do not

have a market presence.

A second factor concerns whether the likely entry candidates face

high or low entry barriers. High barriers reduce the competitive threat

of potential entry, while low barriers make entry more likely,

especially if the industry is growing and offers attractive profit

opportunities. The most widely encountered barriers include:

The presence of sizable economies of scale in productionor other areas of operation - when incumbent companiesenjoy cost advantages associated with large scale operation,outsiders must either enter on a large scale which is a costlyand risky move or accept a cost disadvantage andconsequently lower profitability. Trying to overcome thedisadvantages of small size by entering on a large scale atoutset can result in long term overcapacity problems for thenew entrants.

Cost and resource disadvantage not related to scale ofoperation industry incumbents can have cost advantagesthat stem from learning or experience curve effects, the


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possession of key patents or proprietary technology ,partnerships with the best and cheapest suppliers of rawmaterials and components, favorable locations and low fixedcosts(because they have older facilities that have been mostlydepreciated).

Strong brand preferences and high degrees of customerloyalty- The stronger the attachment of buyers to establishedbrands, the harder it is for a newcomer to break into themarketplace. In such cases a new entrant must have thefinancial resources to spend enough on advertising and salespromotion to overcome customer loyalties and build its ownclientele. If it is difficult or costly for a customer to switch to anew brand, a new entrant must persuade buyers that its brandis worth the switching cost and provide them the products at

discounted prices or an extra margin of quality or service. Allthis can mean lower profit margins for new entrants whichincrease the risk of start up.

High capital requirements- The larger the total capitalinvestment needed to enter the market successfully, the morelimited pool of potential entrants. The capital investments relateto manufacturing facilities and equipment, introductoryadvertising and sales promotion campaigns. Working capitalrequirements. Customer credit and sufficient cash to cover startup costs.

The difficulties of building a network of distributors orretailers and securing adequate space on retailersshelves- A potential new entrant can face numerousdistribution channel challenges.Wholesale distributors may be reluctant to take on a productthat lacks buyer recognition. Retailers have to be recruited andconvinced to give a new brand ample display space and anadequate trial period.Potential entrants sometimes have to buy their way into

wholesale or retail channels by cutting their prices to providedealers and distributors with higher markups and profitmargins. As a consequence their profits may be squeezed untilits product gains enough consumer acceptances.

Restrictive regulatory policies Government agencies canlimit or even bar entry by requiring licenses and permits.Regulated industries like cable TV, telecommunications, electric


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and gas utilities and television broadcasting, liquor retailing andrailroads entail government controlled entry. In internationalmarkets, host governments limit foreign entry and must approveall foreign investment applications.

Tariffs and international trade restrictions nationalgovernments commonly use tariffs and trade restrictions (antidumping rules, local content requirements, quotas, etc.) to raiseentry barriers for foreign firms and protect domestic producersfrom outside competition.

The ability and inclination of industry incumbents tolaunch vigorous initiatives to block a newcomerssuccessful entry- Even if a potential entrant has or canacquire the needed competencies and resources to attemptentry it must still worry about the reaction of existing firms.

Sometimes the incumbents do all they can to make it difficult fora new entrant using price cuts, increased advertising ,product improvements and whatever else they can think of toprevent an entrant from building a clientele.

In evaluating whether the threat of additional entry is strong or weak,

company managers must look at:

How formidable the entry barriers are for each type ofpotential entrant- startup enterprises, specific candidate

companies in other industries, and current industry participantslooking to expand their market reach.

How attractive the growth and profit prospects are for newentrants. Rapidly growing market demand and high potentialprofits act as magnets, motivating potential entrants to committhe resources needed to hurdle entry barriers. When growthand profit opportunities are sufficiently attractive, entry barriersare unlikely to be an effective entry deterrent.

The best test of whether potential entry is a strong or weakcompetitive force in the market place is to ask if the industrys growthand profit prospects are strongly attractive to potential entrycandidates.The stronger the threat of entry, the more thatincumbent firms must seek ways to fortify their positions againstnewcomers and make entry more costly or difficult.


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The threat of entry changes as the industrys prospects growbrighter or dimmer and as entry barriers rise or fall.For example, in the pharmaceutical industry the expiration of a key

patent on a widely prescribed drug virtually guarantees that one or more drug

makers will enter with generic offerings of their own. Use of the Internet forshopping is making it much easier for web bases retailers to enter into

competition against some of the best-known retail chains. In international

markets, entry barriers for foreign-based firms fall as tariffs are lowered, as host

governments open up their domestic markets to outsiders, as domestic

wholesalers and dealers seek out lower-cost foreign-made goods, and as

domestic buyers become more willing to purchase foreign brands

Entry threats are stronger when:

The pool of entry candidates is large and some of thecandidates have resources that would make them formidablemarket contenders.

Entry barriers are low or can be easily hurdled by the likelyentry candidates.

When existing industry members are looking to expand their

market reach by entering product segments or geographicareas where they currently do not have a presence.

New comers can expect to earn attractive profits.

Buyer demand is growing rapidly.

Industry members are unable or unwilling to strongly contestthe entry of new comers.

Entry threats are weaker when:

The pool of entry candidates is small. Entry barriers are high.

Existing competitors are struggling to earn healthy profits.

The industrys outlook is risky or uncertain.

Buyers demand is growing slowly or is stagnant.


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Industry members will strongly contest the efforts of newentrants to gain a market foothold.

COMPETITIVE PRESSURES FROM SUPPLIER BARGAINING

POWER AND SUPPIER- SELLER COLLABORATION:

The supplier-seller relationship represents a weak or strong

competitive force depending on:

1) whether the major suppliers can exercise sufficient bargaining

powers to influence the terms and conditions of supply in theirfavor ,and

2) the nature and extent of supplier-seller collaboration in theindustry.

Whenever major suppliers have leverage in determining the terms

and conditions of supply in their favor, then they are in a position to

exert competitive pressure on one or more rival sellers. For example,

Microsoft and Intel are known for charging premium prices forpersonal computers(PC) and leverage PC makers in other ways due

to their dominant market status. Microsoft pressures PC makers to

load only Microsoft products in Pcs and to position the icons for

Microsoft software prominently on the screens of new computers.

Intel pushes greater use of Intel microprocessors in Pcs by granting

PC makers sizable advertising allowances on PC models equipped

with Intel Inside stickers.The ability of Microsoft and Intel to pressure

PC makers for a preferential treatment effects competition amongrival PC makers.

Small-scale retailers must contend with the power of the

manufacturers whose product enjoy prestigious brand names.When a

manufacturer knows that a retailer needs to stock a product that the

consumers look for then the manufacturer has some degree of pricing


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power.For example,the operators of Mc Donald's, Dunkin' Donuts and

Pizza Hut frequently agree to source some of their suppliers from

franchisor at the prices and terms available to that franchisor as well

as operate their facilities in a manner as dictated by the franchisor.

The factors determining whether any of the suppliers to an industry

are in a position to exert substantial bargaining power or leverage

are:

1)Whether the item being sold is a commodity that is readily available

from many suppliers at the going market price:Suppliers have little orno bargaining power or leverage when industry members have the

ability to source their requirements at competitive prices fro

alternative suppliers.The suppliers of the commodity item only have

market power when supplies become tight and industry members are

eager to secure what they need at terms favorable to the suppliers.

2)Whether a few large suppliers are the primary sources of aparticular item: The leading suppliers have pricing leverage unless

they are plagued with overcapacity,Major suppliers with good

reputation who have high demand for their suppliers are harder to

concessions from than struggling suppliers.

3)Whether it is difficult or costly for industry members to switch their

purchases from one supplier to another or to switch to attractivesubstitute inputs: High switching costs show strong bargaining power

on supplier's part whereas low switching costs and ready availability

of good substitutes show weak bargaining power.


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4)Whether certain needed inputs are in short supply:Suppliers of

items in short supply have some degree of pricing power, whereas if

the items are readily available then the bargaining power is weak.

5)Whether certain suppliers provide a differential input that enhances

the performance or quality of the industry's product:The more

valuable a particular input is in terms of enhancing the performance

or quality of the products of the industry members or of improving the

efficiency of the production process,the more bargaining leverage its

suppliers possess.

6)Whether certain suppliers provide equipment or services that

deliver valuable cost saving efficiencies to industry members in

operating their production process :Suppliers providing cost saving

equipment or other valuable or necessary production related services

possess bargaining leverage.Industry members who do not source

from such suppliers have a cost disadvantage.

7)Whether suppliers provide an item that accounts for a sizable

fraction of the cost of the industry's product: The suppliers raise and

lower the prices depending on the bigger the cost of the component

or part.

8)Whether industry members are major customers of

suppliers:Suppliers have less bargaining leverage when their sales toone industry member constitutes a big percentage of their total sales

because the well being of the customer then becomes the well being

of the supplier.Suppliers then have a big incentive to protect and

enhance their customers competitiveness viz. reasonable

prices,exceptional quality and advancement in their technology.


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9)Whether it makes good economic sense for industry members to

integrate backward and self manufacture items they have been

buying from suppliers: This issue generally boils down to whethersuppliers who specialize in the production of a particular part or

component in volume for many customers have the expertise and

scale economies to supply as good or better component at a lower

cast than industry members could achieve via self manufacture.

How seller-supplier partnership create competitive pressures: In

more and more industries sellers are forming strategic partnership

with select suppliers in effort to :

1)reduce inventory and logistic costs(e.g. Through just in time

deliveries).

2)speed the availability of next-generation components.

3)enhance the quality of the parts and components being supplied

and reduce defect rates,

4)squeeze out important cost savings for both themselves and their

suppliers.

COMPETITIVE PRESSURES FROM BUYER BARGAINING

POWER AND SELLER-BUYER COLLABORATION:

Whether seller-buyer relationships represent a weak or strong

competitive force depends on:

1)whether some or many buyers have sufficient bargaining leverage

to obtain price concessions and other favorable terms and conditions

of sale.

2) the extent and competitive importance of seller-buyer strategic


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partnerships in the industry.

Individual customers rarely have much bargaining power in

negotiating price concessions or other favorable terms with sellers

like in consumer goods but an exception is price haggling in buying

new motor vehicles,a house and other luxury goods.Whereas large

retail chains like Wal-Mart,Home Depot typically have considerable

negotiating leverage in purchasing products from manufactures

because of manufacture's need for broad retail exposure.Retailers

may stock two or three competing brands of a product so competition

among rival manufactures for visibility on the shelves of popular multi-

store retailers gives such retailers bargaining strength.

Even if buyers do not purchase in large quantities or offer a seller

important market exposure or prestige they gain a degree of

bargaining leverage in the following circumstances:

1)If buyers' switching cost to competing brands or substitutes are

relatively low: buyers who can readily switch brands have morenegotiating leverage than buyers having high switching costs.When

the products of rival sellers are virtually identical,it is relatively easy

for buyers to switch from seller to seller at little or no cost and anxious

sellers give concessions to win buyers.

2)If the number of buyers is small or if a customer is particularly

important to a seller: The smaller the number of buyers,the less easyit is for sellers to find alternative buyers when a customer is lost to a

competitor and if that customer is not replaced it makes a seller grant

concessions of one kind or another.


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3)If buyer demand is weak and sellers are scrambling to secure

additional sales of their products:Weak or declining demand creates a

buyers market,conversely strong or rapidly growing demand creates

a sellers market and shifts bargaining power to sellers.

4)If buyers are well informed about sellers' products,prices and

costs:The more information buyers have, the better bargaining

position they are in.The availability of product information on the

internet is giving bargaining power to individuals.Buyers can easily

use the internet to compare features and prices of different products

and packages.Further,internet has created oppurtunities for

manufactures,wholesalers,retailers and individuals to join onlinebuying groups to pool their purchasing power and approach vendors

for better terms than they would have got individually.

5)If buyers pose a credible threat of integrating backward into the

business of seller:Companies like Heinz have integrated backward

into metal can manufacturing to gain bargaining power in obtaining

the balance of their can requirements from otherwise powerful metalcan manufacturers.

6)If buyers have discretion in whether and when they purchase the

product:.Many consumers,if their are unhappy with the present deals

offered on major appliances or hot tubs can delay purchase until

prices and financial terms improve or they can wait for next

generation products.

Lastly it should be remembered that not all buyers of an industry's

product have equal degree of bargaining power with sellers, some


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maybe less sensitive than others to price,quality or service

differences.

How seller-buyer partnership create competitive

pressures:Partnership between sellers and buyers are an important

element of the competitive picture in business to business

relationships.Many sellers providing items to business customers

have found it beneficial to collaborate in matters of just-in-time

deliveries,order processing,data sharing.

Porter's Five Forces, also known as P5F, is a way of examining the

attractiveness of an industry. It does so by looking at five forces

which act on that industry. These forces are determinants of that

industry's profitability.

The five forces are:

1. The threat of new entrants

In the auto manufacturing industry, this is generally a very low threat.

Factors to examine for this threat include all barriers to entry such as

-Upfront capital requirements -it costs a lot to set up a car

manufacturing facility,


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- brand equity -a new firm may have none,

- Legislation and government policy -safety, EPA and

emissions,

- Ability to distribute the product -Alfa Romeo has been out of

the US since the early 90s largely due to the inability to re-establish

a dealer network

-Customer loyalty to established company brands -productquality is the most important factor effecting customer loyalty of

automobile industry.

In India maruti Suzuki has the highest customer loyalty(according to

International Journal of Trade, Economics and Finance, Vol. 2, No. 4,

August 2011 by

U. Thiripurasundari and P. Natarajan)

-switching cost car companies offers to purchase the owners

present car in exchange for a discount to reduce the switching cost

However, given India's incredible growth forecasts, infrastructure

progress (especially new and better roads), and ever-expanding

financing options to rural residents, the market is attractive. As such,

we expect the threat of new entrants to be high


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2. The bargaining power of buyers/customers

While quantity purchases of a buyer is usually a good factor in

determining this force, even in the automotive industry when buyersonly usually purchase one car at a time, they still wield considerable

power.

Buyer volume- Indian auto industry, which is currently growing at the

pace of around 18% per annum, has become a hot destination for

global auto players like Volvo, General Motors and Ford.

Also the automobile industry has a high buyer information

availability, numerous magazines (top gear, auto India), and TV

shows give the buyer with detailed comparisons and up coming

models

Buyers in India have a wide variety of choice. There are more than

20 foreign manufacturers selling in India (including ultra high-end

such as Rolls-Royce and Lamborghini). Of course there are also a

plethora of incredibly cheap choices, like the famous Tata Nano

Even though a customer might have a wide choice of cars to choose

form in the low end and mid sized cars(tata, fiat, Chevrolet, maruti,skoda, Volkswagen, Honda, Hyundai, ford, Toyota etc), choices are

narrowed down when a customer looks for a high-end and ultra

luxury car (Mercedes Benz, Audi, BMW, and Jaguar)


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Generally, the customers buying power depend on the market.

3. The threat of substitute products

If buyers can look to the competition or other comparable products,

and switch easily (they have low switching costs) there may be a high

threat of this force. With new cars, the switching cost is high because

you can't sell a brand new car for the same price you paid for it. A

P5F analysis of the car industry covers the new market, not used or

second-hand.

-Threats of substitute products - One need to know whetherthe market you are analyzing has many good alternatives to new cars

such as a vibrant used car market. Used cars threaten the new

market or also a very good mass-transportation system.

Purchasing a second hand car has lot of benefits such as

the value of a used car is considerably lower than a new car,

the depreciation cost is lesser as compared to the new car,

loans are simpler, easily available and cost lower than the new car

loans

Used car can be modified according to the owner's preference.

Mass transportation may not offer the utility, convenience,

independence, and value afforded by automobiles the switching

costs associated with using a different mode of transportation, such

as AC Metro train, may be high in


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terms ofpersonal time convenience, and utility (e.g., luggage

capacity),

but not necessarily monetarily (e.g., train fare is a lot cheaperthanthe cost of fuel consumed on a similar round trip, daily parking, car

insurance, and maintenance).

The rate of substitution may depend on the buyers propensity to

substitute

-Product differentiation is important too. In the car industry,

typically there are many cars that are similar if we are looking at

any mid-range Ford we easily find a very similar Volkswagen,

Chevrolet, Hyundai or fiat. However, if you are looking at amphibious

cars, there may be little threat of substitute products (this is an

extreme example!).

India is famous for its two-wheelers (bikes and mopeds) and three-

wheelers. These are very real and obvious threats to auto

manufacturers.

4. The amount of bargaining power suppliers have

In the car industry this refers to all the suppliers of parts, tires,

components, electronics, and even the assembly line workers (auto

unions!). Labor unions are important sources of supplier power.

Where an industry has a high percentage of its employees unionized

as in automobiles profitability is reduced.


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Number and Size of Suppliers A company to manufacture its

products requires raw material, labor etc. If there are few suppliers

providing material essential to make a product then they can set theprice high to capture more profit. Powerful suppliers can squeeze

industry profitability to great extend. Incase of NANO the supplier are

limited and the size of the suppliers are big enough to bring about the

controlling power in the price of the car. The NANO car has more

than 128 suppliers in all and the major portion of the building cost of

the car is the parts supplied by the suppliers

But we also know that some suppliers are small firms who rely on the

carmakers, and may only have one carmaker as a client.

Suppliers products have high switching costs.

In many case even when substitute are available its not that easy to

opt for substitute as the next product in the assembly line depends

upon it. If the change in the any part is brought about the long list of

depended parts also have to be changed, which in most cases is not

feasible to do.

5. The intensity of the competitive rivalry

Number and Diversity of Competitor - This describes the competition

between the existing firms in an industry. the current scenario, the

small car market in India is very competitive with players like Maruti


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Suzuki, Tata Motors, Hyundai etc. which was pretty much dominated

by Maruti. But with launch of Nano the 1lakh car the whole

momentum of the market has shifted. Now to be competitive in

market other companies have to either slash rates of their existing

model or have to go back to the drawing board and build again

Price Competition - Advertising battles may increase total industry

demand, but may be costly to smaller competitors. Products with

similar function limit the prices firms can charge. Price competition

often leaves the entire industry worse off. NANO is the only player so

it has the price freedom but as the Maruti and Honda are also

planning to launch the car in the same segment the price competitionwill start

Product Quality - Increasing consumer warranties or service is very

common these days. To maintain low cost, companies consistently

has to make manufacturing improvements to keep the business

competitive. This requires additional capital expenditure which tends

to eat up company's earning. On the other hand if no one else can

provide products/ services the way you do you have a monopoly

sbm tsb grp 6 - porters 5 force

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