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

2. 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.

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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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).

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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