Portor’s Five-Forces Analysis Chapter-7 Portor’s Five-Forces Analysis

The purpose of Five-Forces Analysis The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Porter’s Five Forces Model of Competition Threat of New Entrants 11

Threat of New Entrants Economies of Scale Product Differentiation Government Policy Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Barriers to Entry Expected Retaliation 12

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers 14

Bargaining Power of Suppliers Suppliers are likely to be powerful if: Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Supplier industry is dominated by a few firms Suppliers’ products have few substitutes Buyer is not an important customer to supplier Suppliers’ product is an important input to buyers’ product Suppliers’ products are differentiated Suppliers’ products have high switching costs 15

Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers 17

Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to seller’s sales Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Product unimportant to quality Buyer has full information Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other 18

Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products 20

Threat of Substitute Products Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery 21

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 23

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Making new product introductions Increasing consumer warranties or service Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors 25

Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs Lack of differentiation or switching costs High storage costs Capacity added in large increments High strategic stakes High exit barriers Diverse competitors 26

The Five Forces are Unique to Your Industry Five-Forces Analysis is a framework for analyzing a particular industry. Yet, the five forces affect all the other businesses in that industry.

2. External analysis: Strategic Management Issues in Low Cost Airlines (b) Porter’s Five Forces Bargaining Power of Customers Ryanair customers are highly price sensitive. It is very easy to change their airline and it is not related to high cost. In this century customer’s knowledge about the cost of service is high and there is no customer loyalty for Ryanair. Even though there is no customer loyalty, bargaining power of customers is low. Ryanair is the cheapest airline for all Europe destinations and customers are –especially in recession times- highly price sensitive. New Entrants It is very hard to be new in airline industry. There are lots of barriers to entry. You should take the flight authorizations. The capital that you will invest in this sector is very high. It is also hard to take a place current competition and also hard to find suitable airports for your flights. In my opinion in short time period there will not be any threats of new entrants against Ryanair even though some existing companies are changing their strategy and reducing their ticket price (Lufthansa).

2. External analysis: Strategic Management Issues in Low Cost Airlines (b) Porter’s Five Forces Threat of Substitutes As I mentioned before there is not any brand loyalty of customers and Ryanair preferred customer relationship is “not-close relationship”. If their customers find better way to travel they will not feel any hesitation to chose it. So the threat of direct and indirect substitutes is very high and the most important point is there are no switching costs for the customers.  Competitive Rivalry The market is highly competitive. Most of Ryanair’s cost advantages can be copied immediately. In Europe it seems like there is an agreement between Ryanair and Easyjet about not to compete head to head. However if any company does decide to compete on the same basis as Ryanair it will be highly crucial for Ryanair. There will be heavy pressure on prices, margins, and hence on profitability

Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors Competitive Environment Industry Environment 33

Competitor Analysis Response Assumptions What assumptions do our competitors hold about the future of industry & themselves? Response What will our competitors do in the future? Current Strategy Does our current strategy support changes in the competitive environment? Where do we have a competitive advantage? Future Objectives How do our goals compare to our competitors’ goals? How will this change our relationship with our competition? Capabilities How do our capabilities compare to our competitors? 38

Competitor Analysis Future Objectives What Drives the competitor? How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? 34

Competitor Analysis Future Objectives Current Strategy What is the competitor doing? How do our goals compare to our competitors’ goals? What can the competitor do? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Does this strategy support changes in the competitive structure? 35

Competitor Analysis Future Objectives Current Strategy Assumptions How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What does the competitor believe about itself and the industry? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Assumptions Do we assume the future will be volatile? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions? 36

Competitor Analysis Future Objectives Current Strategy Assumptions How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What are the competitor’s capabilities? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors? 37

Competitor Analysis Future Objectives Response Current Strategy How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? Response What will our competitors do in the future? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Where do we have a competitive advantage? Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions How will this change our relationship with our competition? Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors? 38