PORTERS FIVE FORCES MODEL COMPETITIVE ANALYSIS

Defining an indust ! An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry). Some industries are more profitable than others. Why? he answer lies in understanding the dynamics of competitive structure in an industry. he most influential analytical model for assessing the nature of competition in an industry is !ichael "orter#s $ive $orces !odel, which is described below%

"orter e&plains that there are five forces that determine industry attractiveness and long' run industry profitability. hese five (competitive forces( are ' ' ' ' ' he threat of entry of new competitors (new entrants) he threat of substitutes he bargaining power of buyers he bargaining power of suppliers he degree of rivalry between e&isting competitors

T" eat #f Ne$ Ent ants )ew entrants to an industry can raise the level of competition, thereby reducing its attractiveness. he threat of new entrants largely depends on the barriers to entry. *igh entry barriers e&ist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). +ey barriers to entry include ' ,conomies of scale ' -apital . investment re/uirements ' -ustomer switching costs ' Access to industry distribution channels ' he likelihood of retaliation from e&isting industry players. T" eat #f Su%stitutes he presence of substitute products can lower industry attractiveness and profitability because they limit price levels. he threat of substitute products depends on% ' 0uyers# willingness to substitute ' he relative price and performance of substitutes ' he costs of switching to substitutes &a gaining P#$e #f Su''(ie s Suppliers are the businesses that supply materials 1 other products into the industry. he cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company#s profitability. 2f suppliers have high bargaining power over a company, then in theory the company#s industry is less attractive. he bargaining power of suppliers will be high when% ' here are many buyers and few dominant suppliers ' here are undifferentiated, highly valued products ' Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) ' 0uyers do not threaten to integrate backwards into supply ' he industry is not a key customer group to the suppliers &a gaining P#$e #f &u!e s 0uyers are the people . organisations who create demand in an industry he bargaining power of buyers is greater when ' here are few dominant buyers and many sellers in the industry ' "roducts are standardised

' 0uyers threaten to integrate backward into the industry ' Suppliers do not threaten to integrate forward into the buyer#s industry ' he industry is not a key supplying group for buyers Intensit! #f Ri)a( ! he intensity of rivalry between competitors in an industry will depend on% * T"e st u+tu e #f +#,'etiti#n ' for e&ample, rivalry is more intense where there are many small or e/ually si3ed competitors4 rivalry is less when an industry has a clear market leader * T"e st u+tu e #f indust ! +#sts ' for e&ample, industries with "ig" fi-ed +#sts encourage competitors to fill unused capacity by price cutting * Deg ee #f diffe entiati#n ' industries where products are commodities (e.g. steel, coal) have greater rivalry4 industries where competitors can differentiate their products have less rivalry * S$it+"ing +#sts ' rivalry is reduced where buyers have high switching costs ' i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier * St ategi+ #%.e+ti)es ' when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are (milking( profits in a mature industry, the degree of rivalry is less * E-it %a ie s ' when barriers to leaving an industry are high (e.g. the cost of closing down factories) ' then competitors tend to e&hibit greater rivalry.