porters five forces model for rgcms 2012

7/27/2019 Porters Five Forces Model for Rgcms 2012

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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

porters five forces model for rgcms 2012

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