Five Forces Industry Analysis

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Five Forces Industry Analysis
Nicole Fiamingo
1
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
2
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
3
Five Forces Industry Analysis
Porter’s Five Forces
1.
2.
3.
4.
5.
4
Threat of new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products or services
Degree of rivalry among existing competitors
5
Five Forces Industry Analysis
1. Threat of New Entrants
New entrants usually face several barriers to entry, including:
1.
2.
3.
4.
5.
6.
7.
8.
9.
6
Entry-deterring price
Incumbent retaliation
High entry costs
Experience effects
Other cost advantages
Product differentiation
Distribution access
Government restrictions
Switching costs
Easy to Enter if there is:
Difficult to Enter if there is:
•Common technology
•Patented or proprietary know-how
•Little brand franchise
•Difficulty in brand switching
•Access to distribution channels
•Restricted distribution channels
•Low scale threshold
•High scale threshold
Easy to Exit if there are:
Difficult to Exit if there are:
•Salable assets
•Specialized assets
•Low exit costs
•High exit costs
•Independent businesses
•Interrelated businesses
7
Five Forces Industry Analysis
2. Bargaining Power of Suppliers
Suppliers bargaining power may be influenced by:
1.
2.
3.
4.
5.
8
Concentration
Diversification
Switching costs
Organization
Government
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 nonunion 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 airlines
http://www.quickmba.com/strategy/porter.shtml
9
Five Forces Industry Analysis
3. Bargaining Power of Buyers
Buyer’s Bargaining power my be influenced by:
1.
2.
3.
4.
10
Differentiation
Concentration
Profitability
Quality
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
11
Five Forces Industry Analysis
4. Threat of Substitute Products or Services
Market displacement by existing/potential
substitutes can be influenced by:
1.
2.
3.
12
Relative price/performance trade off
Switching costs
Profitability
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
No substitute product is available
http://www.wikicfo.com/Wiki/default.aspx?Page=Threat+of+Substitutes++one+of+Porters+Five+Forces&AspxAutoDetectCookieSupport=1
13
Five Forces Industry Analysis
5. The Degree of Rivalry Among Existing Players
The intensity of competition within an industry is
determined by:
1.
2.
3.
4.
5.
14
Market Growth
Cost Structure
Barriers to exit
Product switching
Diversity
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
15
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
16
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
17
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
18
Five Forces Industry Analysis
How to Do It
Main Sources of Competitive Pressures
1. Rivalry among competitors
2. Threat of substitute products
3. Threat of potential entry
4. Bargaining power of suppliers
5. Bargaining power of buyers
19
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
20
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.
21
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
22
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