The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose

Chapter-7

Portor’sFive-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

The purpose of Five-Forces Analysis

Threat of New EntrantsThreat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces

Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Expected Retaliation

Government Policy

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Bargaining Power of Suppliers



EntrantsThreat of New

Entrants



Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Bargaining Power of Buyers




Entrants





Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying industry by:

Buyers compete with the supplying industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach

othereach

other

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to seller’s sales

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

Buyers face few switching costs

Buyers’ industry earns low profits

Product unimportant to quality

Buyer has full information

Threat of Substitute Products




Entrants







Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:

Products with improving price/performance tradeoffs relative to present industry products

Example:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery





Entrants

Rivalry Among Competing Firms in Industry

Rivalry Among Competing Firms in Industry







Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Jockeying for strategic position

Using price competition

Staging advertising battles

Making new product introductions

Increasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

Cutthroat competition is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsSlow growth industryHigh fixed costs

Lack of differentiation or switching costs

High storage costs

Capacity added in large increments

High strategic stakesHigh exit barriers

Diverse competitors

The Five Forces are Unique to Your Industry

• Five-Forces Analysis is a framework for analyzing a particular industry.– Yet, the five forces affect all the other

businesses in that industry.

2. External analysis:Strategic Management Issues in Low Cost Airlines

(b) Porter’s Five Forces

Bargaining Power of CustomersRyanair customers are highly price sensitive. It is very easy to change their airline and it is not related to high cost. In this century customer’s knowledge about the cost of service is high and there is no customer loyalty for Ryanair. Even though there is no customer loyalty, bargaining power of customers is low. Ryanair is the cheapest airline for all Europe destinations and customers are –especially in recession times- highly price sensitive.

New EntrantsIt is very hard to be new in airline industry. There are lots of barriers to entry. You should take the flight authorizations. The capital that you will invest in this sector is very high. It is also hard to take a place current competition and also hard to find suitable airports for your flights. In my opinion in short time period there will not be any threats of new entrants against Ryanair even though some existing companies are changing their strategy and reducing their ticket price (Lufthansa).

2. External analysis:Strategic Management Issues in Low Cost Airlines

(b) Porter’s Five Forces

Threat of SubstitutesAs I mentioned before there is not any brand loyalty of customers and Ryanair preferred customer relationship is “not-close relationship”. If their customers find better way to travel they will not feel any hesitation to chose it. So the threat of direct and indirect substitutes is very high and the most important point is there are no switching costs for the customers.

Competitive RivalryThe market is highly competitive. Most of Ryanair’s cost advantages can be copied immediately. In Europe it seems like there is an agreement between Ryanair and Easyjet about not to compete head to head. However if any company does decide to compete on the same basis as Ryanair it will be highly crucial for Ryanair. There will be heavy pressure on prices, margins, and hence on profitability

Competitor AnalysisCompetitor Analysis

The follow-up to Industry Analysis is effective analysis of a firm’s Competitors

CompetitiveEnvironment

Industry EnvironmentIndustry Environment


AssumptionsWhat assumptions do our competitors hold about the future of industry & themselves?

Current Strategy

Does our current strategy support changes in the competitive environment?

Future Objectives

How do our goals compare to our competitors’ goals?

Capabilities

How do our capabilities compare to our competitors?

ResponseResponseWhat will our competitors do in the future?What will our competitors do in the future?

Where do we have a competitive advantage?Where do we have a competitive advantage?

How will this change our relationship with our competition?


Future ObjectivesFuture ObjectivesHow do our goals compare to our competitors’ goals?How do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?Where will emphasis be placed in the future?

What is the attitude toward risk?What is the attitude toward risk?

What Drives the competitor?


What is the competitor doing?

What can the competitor do?



Current StrategyCurrent StrategyHow are we currently competing?How are we currently competing?

Does this strategy support changes in the competitive structure?

Does this strategy support changes in the competitive structure?


What does the competitor believe about itself and the industry?




Does this strategy support changes in the competition structure?


Do we assume the future will be volatile?Do we assume the future will be volatile?

Are we assuming stable competitive conditions?Are we assuming stable competitive conditions?

What assumptions do our competitors hold about the industry and themselves?


AssumptionsAssumptions


What are the competitor’s capabilities?







Are we operating under a status quo?Are we operating under a status quo?




What are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?



Capabilities








Are we operating under a status quo?Are we operating under a status quo?




ResponseResponseWhat will our competitors do in the future?What will our competitors do in the future?Where do we have a competitive advantage?Where do we have a competitive advantage?



CapabilitiesCapabilitiesWhat are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?




Documents

The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose