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PORTERS FIVE FORCES MODEL
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The U.S. blue jeans industry.
In the 1970s most firms took low profits.
The extremely low entry barriers allowed almost 100 small jeans manufacturers to
join the competitive ranks; all that was needed to enter the industry was some
equipment, an empty warehouse, and some relatively low-skilled labor. All such
firms competed on price.
Further, these small firms had little control over raw materials pricing. The
production of denim is in the hands of about four major textile companies. No
one small blue jeans manufacturer was important enough to affect supplier prices
or output; consequently, jeans makers had to take the price of denim or leave it.
Suppliers of denim had strong bargaining power.
Store buyers also were in a strong bargaining position. Most of the jeans sold in the
United States were handled by relatively few buyers in major store chains. As a
result, a small manufacturer basically had to sell at the price the buyers wanted to
pay, or the buyers could easily find someone else who would sell at their price.
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But then along came Jordache. Creating designer jeans with heavy up-front
advertising, Jordache designed a new way to compete that changed industry forces.
First, it significantly lowered the bargaining power of its customers (i.e., store
buyers) by creating strong consumer preference. The buyer had to meet Jordaches
price rather than the other way around.
Second, emphasis on the designers name created significant entry barriers.
In summary, Jordache formulated a strategy that neutralized many of the structural
forces surrounding the industry and gave itself a competitive advantage.
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Porters Model of Industry Structure Analysis
Conceptual framework for industry analysis has been provided by Porter. He
developed a five-factor model for industry analysis, as shown in Exhibit .
The model identifies five key structural features that determine the strength of the
competitive forces within an industry and hence industry profitability.
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The degree of rivalry among different firms is a function of the number of
competitors, industry growth, asset intensity, product differentiation, and exit
barriers. Among these variables, the number of competitors and industry growth are
the most influential. Further, industries with high fixed costs tend to be morecompetitive because competing firms are forced to cut price to enable them to
operate at capacity. Differentiation, both real and perceived, among competing
offerings, however, lessens rivalry. Finally, difficulty of exit from an industry
intensifies competition.
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HIGH
More
Low
High
Low
High
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Threat of entry into the industry by new firms is likely to enhance competition.
Several barriers, however, make it difficult to enter an industry. Two cost-related
entry barriers are economies of scale and absolute cost advantage. Economies of
scale require potential entrants either to establish high levels of production or to
accept a cost disadvantage.
Absolute cost advantage is enjoyed by firms with proprietary technology or
favorable access to raw materials and by firms with production experience. In
addition, high capital requirements, high switching costs (i.e., the cost to a buyer of
changing suppliers), product differentiation, limited access to distribution channels,
and government policy can act as entry barriers.
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HIGH
Not required
Proprietary technology / access
to raw materials /productionexperience not important
Not required
Low
Is less stringent
Is easy
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A substitute product that serves essentially the same function as an industryproduct is another source of competition. Since a substitute places a ceiling on the
price that firms can charge, it affects industry potential. The threat posed by a
substitute also depends on its long-term price/performance trend relative to the
industrys product.
Substitute products are those that the customer views as alternatives; i.e. those
that give the customer the same or similar benefits. For example:
Eyeglasses vs. Contact lens.
Sugar vs. Artificial sweeteners.
Plastic containers vs. Glass vs. Tin vs. Aluminium.
DTH and cable TV
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HIGH
High
Same
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Bargaining power of suppliers is the degree to which suppliers of the industrys
raw materials have the ability to force the industry to accept higher prices or
reduced service, thus affecting profits.
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HIGH
High
High
Is not there
Is there
High
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Bargaining power of buyers refers to the ability of the industrys customers to
force the industry to reduce prices or increase features, thus bidding away profits.
Buyers gain power when they have choiceswhen their needs can be met by
a substitute product or by the same product offered by another supplier. In
addition, high buyer concentration, the threat of backward integration, and low
switching costs add to buyer power.
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HIGH
Low
Is there
Is there
High
High
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SR.No
The various forces Effect Effects in Attractiveness
1 Degree of rivalry High Attractiveness decreases
2 Threat of new entrants High Attractiveness decreases
3 Threat of Substitute High Attractiveness decreases
4 Bargaining power of buyers High Attractiveness decreases
5 Bargaining power of suppliers High Attractiveness decreases
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PORTERS 5 FORCES AND PROFIT
Force Profitability will be
higher if:
Profitability will be
lower if:
Bargaining power of
suppliers
Weak suppliers Strong suppliers
Bargaining power ofbuyers Weak buyers Strong buyers
Threat of new
entrants
High entry barriers Low entry barriers
Threat of substitutes Few possiblesubstitutes
Many possiblesubstitutes
Competitive rivalry Little rivalry Intense rivalry
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THANK YOU
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