•Cost conditions
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
.
SUBSTITUTE COMPETITION
• Buyers’ propensity to substitute
• Relative prices & performance of substitutes
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Examples of industry analysis
• Airlines • Pharmaceuticals • Professional football • Road Recovery Services
.
10
Airlines
• The threat of entry
– Very high because
Porter’s Five Forces Industry Analysis
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1
Industry analysis
• The profitability of any industry depends upon five environmental factors
• The five forces
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6
Power of suppliers
• Ability of suppliers to dictate the terms and conditions of supply
– Supply concentration and differentiation is key
• Eg operating system component of PC • Eg the transmission system in bicycles
• Depends on buyer concentration, information, switching costs
– Eg fragmented horticulture industry faces concentrated, expert buyers with low switching costs
• Eg scale economies, patents
.
4
The threat of substitution
• Threat other industries will take business away:
– eg aluminium industry faces threat from glass, plastics, steel
THREAT OF ENTRY
•Capital requirements •Economies of scale •Absolute cost advantage •Product differentiation •Access to distribution channels •Legal/ regulatory barriers •Retaliation
Bargaining power of buyers
BUYERS
.
3
The threat of entry
• Threat that new entrants will start up, increase capacity and competition and erode profits
• Depends on the size of the entry barriers
.Hale Waihona Puke 7Competitive Rivalry
• The degree of competition within the industry for market share
– Especially the degree of price competition
• Some industries are very price competitive
• These substitute products place a cap upon industry prices above which buyers will desert
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5
Power of buyers
• Power of industry’s buyers to secure discounts or negotiate added value to products
• Deregulated
• Low start up costs
• Modest economies of scale
SUPPLIER POWER
• Buyers’ price sensitivity
• Relative bargaining power
INDUSTRY RIVALRY
•Concentration
•Diversity of competitors
•Product differentiation
•Excess capacity & exit barriers
SUPPLIERS
Bargaining power of suppliers
POTENTIAL ENTRANTS
Threat of
new entrants
INDUSTRY COMPETITORS
Rivalry among existing firms
Threat of SUBSTITUTES
substitutes
– Eg airlines
• Others are non price competitive and highly differentiated in products
– Eg pharmaceuticals
.
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The Structural Determinants of Competition
– The threat of entry – The threat of substitution – The power of the buyers – The power of the suppliers – Competitive rivalry within the industry
.
2
Porter’s Five Forces of Competition Framework