Industry AnalysisPorter's 5 Forces Model

Industry Analysis Porters 5 Forces Model B290 Porters Five forces model POTENTIAL ENTRANTS of new 3a. Threat entrants power 2a.Bargaining of suppliers INDUSTRY COMPETITORS SUPPLIERS power 2b. Bargaining

of buyers BUYERS among 1. Rivalry existing firms of substitute new 3b. Threat products or services SUBSTITUTES Competitive Strategy, Porter, M.E., McMillan, 1980 Three stages in Porters external analysis 1. Analyze industry structure How concentrated is it? What are the dynamics 2. Analyze the industry's appropriability Are there powerful buyers? Are there powerful suppliers?

3. Analyze its long term viability Will more firms enter? Will substitute products or services be found? 1. Competition: Cournots model Suppliers Bargaining power of suppliers Industry competitors Bargaining power of buyers Potential price LRAC 1

2 3 4 # of firms 5 6 Buyers 1. Competition: Industry Suppliers Bargaining power of suppliers Industry competitors

Bargaining power of buyers Buyers 120 How many firms (i.e. competitors) are there in our industry? 4 Firm concentration ratio Sum of revenues of four largest firms divided by total industry revenues Sum of market shares of four largest firms (These are equivalent) Firm sales ordered by size 100

80 60 40 20 0 1 11 21 31 41 1. Competition: Rivalry Suppliers

Bargaining power of suppliers Industry competitors Bargaining power of buyers Buyers Rivalry refers to the extent to which firms compete on the basis of price alone Competing by out spending on advertising is not considered highly rivalrous Competing by out spending on innovation is not considered highly rivalrous Competing by cutting prices is considered highly rivalrous 1. Competition: Summary

Suppliers Bargaining power of suppliers Industry competitors Bargaining power of buyers Buyers Is it a concentrated industry? 4 firm concentration ratio (what % of total industry output is accounted for by the 4 largest firms) concentrated if > 70% fragmented if < 30% If fragmented STOP HERE AND PROCEED INTERNAL ANALYSIS

Otherwise Is there non-price competition? e.g. around brand, through product innovation Are there large economies of scale ? Are there high barriers to exit? Is the product a commodity? Do companies segment the market and differentiate their products from each another? 2. Bargaining power Suppliers Bargaining power of suppliers Industry competitors

Buyers (2b) Are we selling to a monopsony, (or into a highly concentrated market)? (bad) Does our product represent a significant portion of the buyers product costs? (bad) Do they take a significant proportion of our output (bad) Can they backward integrate into our business? (bad) Can they easily switch suppliers (bad) Bargaining power of buyers Buyers Suppliers (2a)

Are we buying from a monopoly (or from a highly concentrated industry)? (bad) Does their product represent an insignificant portion of our product costs? (?) Do we take a small (insignificant) proportion of their output (bad) Can they forward integrate into our business? (bad) Is it difficult for them to switch suppliers (good) Porters Five forces model POTENTIAL ENTRANTS of new 3a. Threat entrants power 2a.Bargaining

of suppliers INDUSTRY COMPETITORS SUPPLIERS power 2b. Bargaining of buyers BUYERS among 1. Rivalry existing firms of substitute new 3b. Threat products or services SUBSTITUTES Competitive Strategy, Porter, M.E., McMillan, 1980

3. Threat of new entry or substitution Are there barriers to entry? (3a) Economies of scale (good?) Significant sunk costs (e.g. brand) to act as a deterrent Does regulation restrict entry? (good) How likely is it that a substitute product for the needs the industry currently meets will be found? (3b) If no likely substitutes and entry barriers are high, above normal returns may persist over time. Entry Deterrence Product proliferation closing any open niches Pricing Limit pricing (scale) Predatory pricing (illegal)

Price signaling Excess capacity Porter 5 Forces Model Summary Grew out of industrial organization economics. Concern with monopoly and oligopoly markets. Focus was industry concentration. Deals with the firms external environment. Specifically its industry and the up- and down-stream industries. Buyers are those that pay the focal firm for its services, not end users or consumers. Sellers are those that sell goods and services to the focal firm, not the firm itself. Large investments in irrecoverable assets are a barrier to entry, requiring large amounts of capital per se is not.

Recently Viewed Presentations

  • Ionic Compounds - East Tennessee State University

    Ionic Compounds - East Tennessee State University

    Ionic Compounds Chapter 5 What are ions? An ion is an atom or group of atom that has an electric charge because it has gained or lost electron. [Na]= 1s2 2s² 2p6 3s1 [Na+] = 1s2 2s² 2p6 When a...
  • Organic Chemistry 4th Edition Paula Yurkanis Bruice Chapter

    Organic Chemistry 4th Edition Paula Yurkanis Bruice Chapter

    Reactions of Acyl Halides Formation of Amides from Acyl Halides Tertiary amines cannot form amides Reactions of Acid Anhydrides Acid anhydrides do not react with sodium chloride or with sodium bromide Reactions of Esters a hydrolysis reaction a transesterification an...
  • Physical Fitness - West Ada School District

    Physical Fitness - West Ada School District

    Physical Fitness. Physical fitness. Ability of the body to carry out daily physical activities . Exercise is best way to maintain physical fitness. ... FITT Formula. F- requency- how often . I- ntensity- the difficulty . T- ime- the duration...
  • Developing a Lung CNS Service at a Tertiary

    Developing a Lung CNS Service at a Tertiary

    A partnership was set up between Macmillan and the Christies Lung Cancer CNS Team. The primary aim was to review and improve the current patient pathways across the network and the critical points at which CNS input is required. This...
  • The OAS

    The OAS

    The OAS seeks to prevent conflicts and to bring political stability, social inclusion and prosperity to the region through dialogue and collective action. A little bit of history The principles that embody the OAS grew out of a history of...
  • ECE 875: Electronic Devices Prof. Virginia Ayres Electrical

    ECE 875: Electronic Devices Prof. Virginia Ayres Electrical

    How to derive one: Slide 10 Slide 11 1st Brillouin zone for fcc primitive cell based crystals: Wigner-Seitz cell 2D example of how to find a Wigner Seitz cell: 2D example of how to find a Wigner Seitz cell: 2D...
  • Genesis 48-50Jacobs Prophetic Ministry I. How can we

    Genesis 48-50Jacobs Prophetic Ministry I. How can we

    The reference in the prophecy to "judging his people" is most likely prophetic of Samson who came from the tribe of Dan (Judg. 13:2). ... The widow of Zarephath was from Sidon in Asher's territory (I Kgs. 17:9; Luke 4:26)...
  • Moral Agency in Difficult Situations

    Moral Agency in Difficult Situations

    Proportionate Reason Is Key. Recall that the natural law in its . application. is a work of the . practical reason. In quandary cases such as the double effect the presence of "proportionate reason" keeps the evil caused on the...