THE MICHAEL PORTER’S FIVE FORCES ANALYSIS:-

*******************************************************************************
THE MICHAEL PORTER’S FIVE FORCES ANALYSIS FRAMEWORK IS USED TO *******************************************************************************
Analyse industry External business environment of the industry. Risk Identification The Degree of Rivalry *******************************************************************************
It Helps us to know whether or not we should ENTER AN INDUSTRY, and what can be the challenges faced by us. The basis of the Five forces analysis model is competition. This model is used when we are entering an industry with lot of competition. The key driving force is to determine Attractiveness of the industry. An industry is attractive if the five forces are arranged in a manner that they drive PROFITABILITY. The industry is unattractive if all the five forces are interconnected in such a manner that they cause the profitability to DROP. The Michael Porter’s FIVE FORCES analysis framework is used to *******************************************************************************
Analyse industry External business environment of the industry. Risk Identification The Degree of Rivalry *******************************************************************************
It Helps us to know whether or not we should ENTER AN INDUSTRY, and what can be the challenges faced by us. The basis of the Five forces analysis model is competition. This model is used when we are entering an industry with lot of competition. *******************************************************************************
The key driving force is to determine Attractiveness of the industry. An industry is attractive if the five forces are arranged in a manner that they drive PROFITABILITY. The industry is unattractive if all the five forces are interconnected in such a manner that they cause the profitability to DROP. *******************************************************************************
The Five Forces Model was developed by Michael E. Porter to help companies assess the nature of an industry’s competitiveness This framework was first published in Harvard Business Review in 1979 Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found both lacking in rigor and ad hoc The Porter’s Five Forces model is a simple tool that supports strategic understanding where power lies in a business situation. *******************************************************************************
CONCLUSION:- Avoid entering an industry which is UNATTRACTIVE or at least take the PRECAUTIONS while entering such an industry, where profitability is LOW. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness. *******************************************************************************
Attractiveness:- consumer durable business / White Goods *******************************************************************************
In consumer durable, the toughest competition is between companies which have a good customer base (dealer network). If the dealer network has high bargaining power, this means that the dealers are cash rich and hence entering such a segment is difficult for your company. There are a lot of substitutes in the consumer durable industry with Chinese brands mass manufacturing alternative products. *******************************************************************************
Thus, the overall profitability is low in the industry. Threats of substitutes, the competition and the bargaining power of customers has to be taken into consideration before establishing yourself in the consumer durable industry. THREAT OF NEW ENTRANTS :- DOTCOM INDUSTRY Do you know why the dotcom industry went bust in 2000? *******************************************************************************
Because anyone, was starting a website and attracting investors. The dotcom industry was expected to reap huge profits, but what we had was a lot of new entrants with failed business models attracting a lot of money. This was all because it is very easy to enter the dotcom market, but very tough to establish yourself in it. This is the threat of new entrants. And this threat exists in all industries. Even telecommunications brands, which have been shouting out to the government to stop giving more licenses, find this fear in their mind. That a new entrant will come who will try to win marketshare in an already intense industry. *******************************************************************************
The industry attractiveness increases when there are barriers to entry. For example – In the import export business, a lot of barriers exist with regards to government policy. An established player will see new entrants as a lesser challenge as compared to an existing competitor. To avoid new entrants, and to keep the industry profitable, the industry needs several entry barriers in place. *******************************************************************************
2. THREAT OF SUBSTITUTE PRODUCTS *******************************************************************************
Do you know why China is one of the fastest growing nations in the world? Because of its manufacturing capability, and because of its smart strategy of making substitute products in millions, such that the original loses some of its value. However, what do you do when the threat of substitute products are too high? *******************************************************************************
For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines, automobiles, trains, and ships; *******************************************************************************
For example, whenever you consider spare parts of an automobile or even consumer durable, you will find a lot of substitute spare parts available. Many consumers prefer the use of substitutes over the original because of the low price and almost equivalent value added. *******************************************************************************
These substitutes affect the prices of the company, its demand pattern and therefore its profitability. In an industry with high threat of substitute products, it is highly likely that you will worry more about the substitutes eating your business, and then you will worry about the competition present in the industry itself. 3. BARGAINING POWER OF CUSTOMERS/BUYERS Do you know why modern retail is taking away the business from small retail outlets? It is because these modern retail companies have huge bargaining power due to bulk buying. Hence they are crushing the small retailers. *******************************************************************************
Consider this, the company is selling products to both, the small retailer as well as the modern retailer. However, the small retail is buying from a distributor who in turn is buying from a carrying and forwarding agent. Thus, the chain is huge and profits are lost in the chain. *******************************************************************************
But in the modern retail scenario, there is at most 2-3 modern retail chains who are buying by truckloads, selling huge quantities and also don’t require a channel. *******************************************************************************
Thus, these modern retailers will have huge bargaining power due to which a small retailer can consider them as a huge problem when establishing his own business. There are different ways in which a customer or a buyer can have high bargaining power over the supplier. In such cases, the industry tends to be unprofitable because you have to overcome the challenge of having the buying power over suppliers. *******************************************************************************
4. BARGAINING POWER OF SUPPLIERS *******************************************************************************
Parachute is one of the top brand in hair cosmetics and it is known for its coconut oil. What if tomorrow, the coconut vendors were to go upto Parachute, and tell them that the union has decided, from tomorrow rates will go up by 20%? Will Parachute be able to do anything? There are only few places in the whole country which can provide them with the raw material. Parachute will have no other option but to say yes. Or on the other hand, Parachute can negotiate with the vendors, find out their problems and try to solve the problems so that the rate goes down. What Parachute did when vendors asked them to raise prices was, they made depots in each small village so that the villagers could drop their raw material there. And this was collected by the company. *******************************************************************************
This brought down costs of collection by a huge margin and Parachute Was able to avoid the price hike proposed by coconut farmers. But other companies might not be lucky when they are dealing with suppliers who have a high bargaining power. And a successful company has to deal with a lot of suppliers. A restaurant has to deal with vegetable vendors, *******************************************************************************
a company has to deal with raw material supplies, the manufacturers have to deal with transporters and distributors. Any industry with low bargaining power of suppliers, can be profitable. *******************************************************************************
For example – in the Automobile Industry, if manufacturer wants spare parts, *******************************************************************************
there is no bargaining power with the supplier. If he does not give spare parts, there are 100 others who will give the customer spare parts. An industry which does not have bargaining power with suppliers can be tension free. If supply is limited, then the company has the threat of the supply running dry, ruining the company’s business. *******************************************************************************
5. COMPETITIVE RIVALRY *******************************************************************************
This looks at the number and strength of your competitors How many rivals do you have. Who are they, and how does the quality of their products and services compare with yours Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns. In markets with lots of rivals, your suppliers and buyers can go elsewhere if they feel that they're not getting a good deal from you. *******************************************************************************
where competitive rivalry is minimal, and no one else is doing what you do, then you'll likely have tremendous strength and healthy profits. *******************************************************************************
Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If a company fully understands the nature of the Porter’s five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. *******************************************************************************
Example: Wal-Mart as an organization thrives on the basis of its relationship with its suppliers Example McDonald’s faces tough competition because the fast food restaurant market is already saturated. *******************************************************************************
*******************************************************************************
Toyota :- *******************************************************************************
The bargaining power of Toyota’s supplier is Weak • Toyota has many suppliers in its automotive manufacturing sector. Resources like metal, raw materials, leather, plastic, computers, cooling system, electrical system, breaking system and fuel supply system are all bought from hundreds of different suppliers and different bargaining prices distributed across the globe. • One of the competitive advantages of Toyota is its strong relationship with the suppliers and its efficient manner of monitoring supply chain places low bargaining power on the suppliers. • In addition most vehicle manufactures own many interchangeable suppliers, and also have the ability to produce the components by their own in the short time. Thus, the suppliers do not own the power to change the price. *******************************************************************************
EXAMPLE OF THREAT OF NEW ENTRANT – ENTRY OF RELIANCE JIO TELECOMMUNICATIONS *******************************************************************************
1. Jio has grown at a scorching pace:-the network, which has been adding 1- 1.2 million subscribers a day, will likely have 25 million 4G customers. *******************************************************************************
2. Jio has set off a fierce mobile tariff war in the country: *******************************************************************************
3. Jio is hurting the balance sheets of other telecom companies: Airtel saw a 4.9% decline in its Q2 profit following the operator slashing data tariffs. *******************************************************************************
4. Jio is forcing the other players to join forces:-Vodafone and Idea Merger *******************************************************************************
5. Jio could impact the online content market in India:-The Jio suite offers more than 300 live streaming TV channels and hundreds of music albums and movies. This forces other incumbents to up their game in the online video streaming space. *******************************************************************************