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. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products or services 5. Degree of rivalry among existing competitors 4

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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 advantages 6. Product differentiation 7. Distribution access 8. Government restrictions 9. Switching costs New entrants usually face several barriers to entry, including: 6

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 7

Five Forces Industry Analysis 2. Bargaining Power of Suppliers Suppliers bargaining power may be influenced by: 1. Concentration 2. Diversification 3. Switching costs 4. Organization 5. Government 8

Suppliers are Powerful if:Example Credible forward integration threat by suppliers Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor Suppliers concentratedDrug industry's relationship to hospitals Significant cost to switch suppliersMicrosoft's relationship with PC manufacturers Customers Powerful Boycott of grocery stores selling non- union picked grapes Suppliers are Weak if:Example Purchase commodity productsGrocery store brand label products Concentrated purchasersGarment industry relationship to major department stores Customers WeakTravel agents' relationship to airlines 9

Five Forces Industry Analysis 3. Bargaining Power of Buyers Buyer’s Bargaining power my be influenced by: 1. Differentiation 2. Concentration 3. Profitability 4. Quality 10

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 11

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 off 2. Switching costs 3. Profitability 12

The Threat of Substitutes is High Risk:The Threat of Substitutes Low Risk: Consumer switching costs are lowConsumer 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 +one+of+Porters+Five+Forces&AspxAutoDetectCookieSupport=1 No substitute product is available 13

Five Forces Industry Analysis 5. The Degree of Rivalry Among Existing Players The intensity of competition within an industry is determined by: 1. Market Growth 2. Cost Structure 3. Barriers to exit 4. Product switching 5. Diversity 14

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 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