EXTERNAL ENVIRONMENT
INDUSTRY MACRO COUNTRY
ENVIRONMENT ENVIRONMENT ENVIRONMENT
PORTER PESTEL PORTER
FIVE FORCES MODEL
PORTER FIVE FORCES MODEL - 1
HOW DO WE ANALYSE INDUSTRY ENVIRONMENT ?
LOOK FOR OPPORTUNITY POWER COMPANY OWNS
COAL BLOCKS
LOOK FOR THREAT COMPANY WHICH IS PART OF
AN INDUSTRIAL GROUP ENTERS AIRLINE INDUSTRY
USE MODEL TO PROVIDE FRAMEWORK TO SPOT
OPPORTUNITIES AND THREATS.
PORTER FIVE FORCES MODEL - 2
IDENTIFIES FIVE FORCES WHICH PLAY DISTINCTIVE
ROLE IN GENERATING OPPORTUNITIES AND THREATS
AND IN MAKING INDUSTRY MORE ATTRACTIVE
ROLE OF STRATEGY: TAKE ADVANTAGE OF
OPPORTUNITIES AND GUARD AGAINST THREATS
ANOTHER ROLE OF STRATEGY: ALTER STRENGTH OF
THESE FORCES TO THE ADVANTAGE OF COMPANY
PORTER FIVE FORCES MODEL - 3
FORCE 1 EASE OF ENTRY OF POTENTIAL COMPETITOR
DEPENDS ON THE ENTRY BARRIERS
BRAND LOYALTY
ECONOMIES OF SCALE
ACCESS TO DISTRIBUTION CHANNELS
PORTER FIVE FORCES MODEL - 4
FORCE 1 EASE OF ENTRY OF POTENTIAL COMPETITOR
DEPENDS ON ENTRY BARRIERS
BRAND LOYALTY
* Product quality Dettol
* Product innovation Apple
* High promotion Colgate
PORTER FIVE FORCES MODEL - 6
FORCE 1 EASE OF ENTRY OF POTENTIAL COMPETITOR
DEPENDS ON ENTRY BARRIERS
ECONOMIES OF SCALE
Standardisation Boeing
Bulk purchase Walmart
Spreading fixed costs Pharma
PORTER FIVE FORCES MODEL - 7
FORCE 1 EASE OF ENTRY OF POTENTIAL COMPETITOR
DEPENDS ON ENTRY BARRIERS
ACCESS TO DISTRIBUTION CHANNELS
Jewellery
PORTER FIVE FORCES MODEL - 8
FORCE 2 RIVALRY AMONG COMPANIES
COMPETITIVE STRUCTURE
RATE OF GROWTH
PRODUCT CHARACTERISTICS
AMOUNT OF FIXED COSTS
SIZE OF CAPACITY INCREASE
EXIT BARRIER
PORTER FIVE FORCES MODEL - 9
FORCE 2 RIVALRY AMONG COMPANIES
COMPETITIVE STRUCTURE
Number and relative size of players
Few players of equal size Rivalry high Telecom
Many small players Rivalry low Lodges
Few players of different
backgrounds Rivalry high Full service
airlines
PORTER FIVE FORCES MODEL - 10
FORCE 2 RIVALRY AMONG COMPANIES
RATE OF GROWTH
Rate of growth high Rivalry low Automobiles
No price wars
PORTER FIVE FORCES MODEL - 11
FORCE 2 RIVALRY AMONG COMPANIES
PRODUCT CHARACTERISTICS
Differentiated Rivalry low Restaurants
Each to his own
Commodity Rivalry high Newspaper
distribution
PORTER FIVE FORCES MODEL - 12
FORCE 2 RIVALRY AMONG COMPANIES
AMOUNT OF FIXED COSTS
High fixed costs Rivalry high Telecom
PORTER FIVE FORCES MODEL - 13
FORCE 2 RIVALRY AMONG COMPANIES
SIZE OF CAPACITY INCREASE
High size of capacity Rivalry high Metals
increase Frequent price war
PORTER FIVE FORCES MODEL - 14
FORCE 2 RIVALRY AMONG COMPANIES
EXIT BARRIER
High exit barrier Rivalry high
Difficult to leave
Plant can make no other product Telecom
Plant has many workers who have
to be given severance wages Banks
PORTER FIVE FORCES MODEL - 15
FORCE 3 EXISTENCE OF SUBSTITUTES
SUBSTITUTE – PRODUCT SATISFYING SAME NEED
STRONG SUBSTITUTES MAKE INDUSTRY LESS
ATTRACTIVE
CINEMA THEATRES - DECLINING
MULTIPLEX - GROWING
PORTER FIVE FORCES MODEL - 16
FORCE 4 BARGAINING POWER OF BUYERS
PROPORTION OF PRODUCT BOUGHT
POTENTIAL FOR BACKWARD INTEGRATION
HOW MANY ALTERNATE SUPPLIERS
SWITCHING COSTS
IMPORTANCE OF PRODUCT TO BUYER
PORTER FIVE FORCES MODEL - 17
FORCE 4 BARGAINING POWER OF BUYERS
PROPORTION OF PRODUCT BOUGHT
High proportion High power Supplier to HUL who
brands and sells
Low proportion Low power Supplier to dealers who
stock and sell
PORTER FIVE FORCES MODEL - 18
FORCE 4 BARGAINING POWER OF BUYERS
POTENTIAL FOR BACKWARD INTEGRATION
High potential High power Supplier of machined part
to Maruti
Low potential Low power Supplier of forged part to
Maruti
PORTER FIVE FORCES MODEL - 19
FORCE 4 BARGAINING POWER OF BUYERS
HOW MANY ALTERNATE SUPPLIERS
Many suppliers High power Supplier of steel to Maruti
Few suppliers Low power Supplier of gears to ELGI
wet grinder
PORTER FIVE FORCES MODEL - 20
FORCE 4 BARGAINING POWER OF BUYERS
SWITCHING COST
Switching cost high Power low Paint supplier to Maruti
Switching cost low Power high Steel supplier to Maruti
PORTER FIVE FORCES MODEL - 21
FORCE 4 BARGAINING POWER OF BUYERS
IMPORTANCE OF PRODUCT TO BUYER
Importance high Power low Supplier of motor to ELGI
wet grinder
Importance low Power high Supplier of paint to ELGI
wet grinder
PORTER FIVE FORCES MODEL - 22
FORCE 5 BARGAINING POWER OF SUPPLIERS
NUMBER OF SUPPLIERS
PRODUCT BEING SUPPLIED IS COMMODITY
OR DIFFERENTIATED
ARE THERE SWITCHING COSTS
CAN SUPPLIERS INTEGRATE FORWARD
PROPORTION OF SUPPLIER’S PRODUCT
BEING BOUGHT
PORTER FIVE FORCES MODEL - 23
FORCE 5 BARGAINING POWER OF SUPPLIERS
NUMBER OF SUPPLIERS
Number high Power low Telecom service to house
Number low Power high Electricity supplied to house
PORTER FIVE FORCES MODEL - 24
FORCE 5 BARGAINING POWER OF SUPPLIERS
IS PRODUCT BEING SUPPLIED DIFFERENTIATED OR
COMMODITY
Differentiated Power high Paint supplier to Maruti
Commodity Power low Steel supplier to Maruti
PORTER FIVE FORCES MODEL - 25
FORCE 5 BARGAINING POWER OF SUPPLIERS
SWITCHING COSTS
Switching cost high Power high Paint supplier to Maruti
Switching cost low Power low Steel supplier to Maruti
PORTER FIVE FORCES MODEL - 26
FORCE 5 BARGAINING POWER OF SUPPLIERS
CAN SUPPLIERS INTEGRATE FORWARD?
Yes Power high Colour Plus supplying to retail store
No Power low Small supplier to a big retail store
PORTER FIVE FORCES MODEL - 27
FORCE 5 BARGAINING POWER OF SUPPLIERS
PROPORTION OF SUPPLIER’S PRODUCT BEING
BOUGHT
Proportion high Power low Small supplier who supplies
soap to HUL who brands it
Proportion low Power high Petrol pump supplying petrol
to individual customer
PORTER FIVE FORCES MODEL - 28
PORTER FIVE FORCES MODEL - 29
Evaluates attractiveness of an industry
sustained profit making potential
PORTER FIVE FORCES MODEL - 30
Organised retail industry ie supermarket industry
Walmart asking itself question:
Is supermarket industry in India attractive ?
PORTER FIVE FORCES MODEL - 31
MODEL APPLIED TO SUPERMARKET INDUSTRY
FORCE 1 EASE OF ENTRY FOR COMPETITORS
( Potential Competitors: TESCO, METRO )
BRAND LOYALTY Difficult for competitors +1
ECONOMIES OF SCALE Difficult for competitors +1
ACCESS TO DISTRIBUTION CHANNELS not relevant
ATTRACTIVENESS SCORE = +1 +1 = +2
PORTER FIVE FORCES MODEL - 32
MODEL APPLIED TO SUPERMARKET INDUSTRY
FORCE 2 RIVALRY AMONG COMPANIES
COMPETITIVE STRUCTURE Rivalry high -1
RATE OF GROWTH Rivalry low +1
PRODUCT CHARACTERISTICS Rivalry low +1
AMOUNT OF FIXED COSTS Rivalry high -1
SIZE OF CAPACITY INCREASE Rivalry low +1
EXIT BARRIER Rivalry high -1
ATTRACTIVENESS SCORE = -1 +1 +1 -1 +1 -1 = 0
PORTER FIVE FORCES MODEL - 33
MODEL APPLIED TO SUPERMARKET INDUSTRY
FORCE 3 EXISTENCE OF SUBSTITUTES
THERE ARE NO SUBSTITUTES +1
ATTRACTIVENESS SCORE = +1
PORTER FIVE FORCES MODEL - 34
MODEL APPLIED TO SUPERMARKET INDUSTRY
FORCE 4 BARGAINING POWER OF BUYERS
PROPORTION OF PRODUCT BOUGHT +1
POTENTIAL FOR BACKWARD INTEGRATION +1
HOW MANY ALTERNATE SUPPLIERS -1
SWITCHING COSTS -1
IMPORTANCE OF PRODUCT TO BUYER -1
ATTRACTIVENESS SCORE = +1 +1 -1 -1 -1 = -1
PORTER FIVE FORCES MODEL - 35
MODEL APPLIED TO SUPERMARKET INDUSTRY
FORCE 5 BARGAINING POWER OF SUPPLIERS
NUMBER OF SUPPLIERS +1
PRODUCT BEING SUPPLIED IS COMMODITY 0
OR DIFFERENTIATED
ARE THERE SWITCHING COSTS +1
CAN SUPPLIERS INTEGRATE FORWARD +1
PROPORTION OF SUPPLIER’S PRODUCT +1
BEING BOUGHT
ATTRACTIVENESS SCORE = +1 0 +1 +1 +1 = +4
PORTER FIVE FORCES MODEL - 36
MODEL APPLIED TO SUPERMARKET INDUSTRY
ATTRACTIVENESS SCORE
FORCE 1 +2
FORCE 2 0
FORCE 3 +1
FORCE 4 -1
FORCE 5 +4
COMBINED +6
attractive
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