Five Force Analysis Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Porter 5 Forces Analysis An excellent framework that could help managers, entrepreneurs and investors Evaluate whether a business is operating in a profitable industry. Helps to oppose a competitive environment ( environment audit = environment invistigation) focus on the business not specific product. Porter’s model deals with the strategy towards the opportunities and threats in the organizations external environment (especially competitive strategy ).

Porter´s Model Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability . From the results of Porter´s model analysis, strategies could be formulated to help companies identify opportunities and avoid threats.

Porter’s five forces model

Porter’s five forces model Each force in this framework could be categorized as : Strong Strong forces are perceived as threats to the enterprise. Strong forces have strong bargaining power thus limit the enterprise’s ability to increase price or lower cost. Medium Weak Weak forces are perceived as opportunities. Weak forces have low bargaining power thus the enterprise could increase price or lower cost to sustain more profit. (c) 2008 Prentice-Hall, All rights reserved.

PORTE´S MODEL Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Threat of Entry New competitor could change major determinants of the market environment (e.g. prices, customer loyalty). Always a latent pressure for reaction and adjustment for existing players in the market.

Threat of entry Economies of scale e.g. the benefits associated with bulk purchasing. The high or low costs of entry e.g. how much will it cost for the latest technology? How long does it take for new staff to acquire the necessary skills to do the work? How loyal are the end users in this industry?

Will competitors retaliate? Threat of entry Ease of access to distribution channels e.g.: Do our competitors have the distribution channels sewn up? Will competitors retaliate? Government action e.g. will new laws be introduced that will weaken our competitive position? How important is differentiation? E.g. The Champagne brand cannot be copied.

Bargaining Power of buyer Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Bargaining Power of buyer Hotel industry Especially Users Sensitive to prices. Tourists looking for cheaphotels.com More hotel competitors within a tourist hotspot, bargaining power of customer will be higher because customer able to do comparison Hotel will use different type of promotion, prices, advertisement or other way to attract customer.

Bargaining Power of buyer Buyers has ability to influence the prices and demand higher quality. Ex: airline industry Trigger competition in a competitive environment ( airline industry). This forces airlines to bring down prices in order to compete which gives the buyers the advantage of enjoying lower prices and different promotions

Bargaining Power of buyer How large are your buyers’ company? How many companies are there for the buyer to choose from? Are the buyers buying a huge volume? Do you depend only on a few buyers to sustain your sales? How hard is it for the buyers to switch and use a competing product? Are the buyers purchasing from you as well as your competitors? Do the buyers have the capacity to enter your business and produce the goods themselves?

Bargaining power of suppliers The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services e.g. Hotel industry ( furnishings companies, training service providers, marketing companies , ..etc)

Bargaining power of suppliers The more powerful a seller is on buyer, more influence the seller has. This influence reduce the profits of the buyer through more advantageous pricing, limiting quality of the product or service, or shifting some costs onto the buyer (e.g. shipping costs).

Bargaining power of suppliers Suppliers are powerful if: Suppliers are concentrated or differentiated: If there are only a few suppliers (or one) in the market, the suppliers will have more leverage because of the lack of available alternatives. Significant costs involved in switching suppliers: Customers are less likely to switch suppliers if there are large costs associated with switching. Suppliers can forward integrate: If a supplier has the power to or threatens to forward integrate, the buyer may be forced to accept influence from the supplier.

Bargaining power of suppliers Are there substitutes for your suppliers’ products? Do your suppliers serve multiple industries? Does the total industry revenue accounting for only a small portion of the supplier’s total revenue? Do you have high switching cost to use another supplier? Do suppliers have the capacity to enter your business? Does your company capable to enter the supplier’s business?

Treath of substitute A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. Ex: Hotel face a threat of substitutes,(cottage and B&B , Inn ) popular and acceptable for consumer (standard service with very reasonable price)

How many close substitutes are available? Treath of substitute How many close substitutes are available? How pricy are the substitutes? What is the perceived quality of the substitutes?

Rivality This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry Rivalry among competitors can lead to an aggressive pricing and promotion in battles to benefit and attract more customers. In hotel industry, there is low switching cost for consumer, they can change hotel anytime so degree rivalry is very high.

Strategies formulation After analyzing each force individually, the next step is to interrupt the results of this framework as a whole. having strong suppliers that are raising their prices, are you able to shift the cost to your customers? Do you have a weak buyer? You can also formulate strategies according to the results to change your situation. For instance, you can stop buying from your suppliers. You can also launch your own retailers and sell your own goods through your own distribution channels. Depending on your own situation, try to formulate the right strategies to increase your bargaining power against the five forces.