HOMEWORK #3 OF

MARKETING MANAGEMENT

Submitted To:
Ms. Kanika Jhamb

Submitted By:
Leena Mohan
RA17B1A30
B-TECH (HONS.)+MBA (CSE)
 INDUSTRY ANALYSIS WITH RESPECT TO COSMETICS INDUSTRY
BY USING PORTER'S MODEL

Michael Porter provided a framework that models an industry which is influenced by five
forces primarily. This framework is useful for firms seeking to develop an edge over rival
firms to better understand the industry context in which the firm operates. It thus helps
in industry analysis and business strategy development.

DIAGRAM OF PORTER’S FIVE FORCES MODEL

Threat of
new entrants

Rivalry
Bargainin Among Bargaining
g Power Existing Power of
of Firms Suppliers
Suppliers

Threat of
Substitute
Products
FORCES FROM HORIZONTAL COMPETITION
INTERNAL RIVALRY
Internal rivalry in the cosmetics industry is very high. There are numerous existing cosmetic
companies competing in the market. The giant corporations acquire numerous brand name
products.
The intensity of rivalry in the cosmetics industry is influenced by the following industry
characteristics:
The degree of Competition: Companies like Revlon, L’Oreal, Garnier Fructis, etc. increase
rivalry because a number of companies compete for the same number of customers. The
companies like L’Oreal and Revlon have nearly equal market share which results into an intense
struggle for market leadership and hence increased rivalry.
Switching Cost: As a customer is free to switch from a product of one brand (say L’Oreal) to
another brand (say Revlon), there is a greater struggle to capture customers and retain them and
hence the low switching cost increases the rivalry in the cosmetic industry.
Degree of Differentiation: Since, there is a negligible level of differentiation in the products
in cosmetic industry( say L’Oreal and Revlon); there is an enhanced level of rivalry in the
cosmetic industry.
Exit Barriers: Since the entire assembly of plant and equipment required that is required for
manufacturing a cosmetic product is highly specialized and particular, these assets cannot easily
be sold to other buyers in another industry and hence this implies that the exit barrier is high
leading to enhanced rivalry. High exit barriers place a high cost on abandoning the cosmetic
product and cause a firm to remain in an industry, even when the venture is not profitable

THREAT OF NEW ENTRANTS

New firms may enter the industry and affect competition. Theoretically, any firm should be able
to enter and exit a market and thus, profits always should be nominal. In real life situation,
industries are characteristically such that they protect the high profit levels of firms in the market
and inhibit additional rivals from entering the market which are called barriers to entry. For
example, at the time when industry profits increase, expectantly additional firms should enter the
market to take advantage of the high levels of profit, over time and hence driving down profits
for all firms in the industry. When profits decrease, expectantly some firms should exit the
market and hence restoring market equilibrium.
Uncertain markets signal high degree of reluctance of firms to enter the industry. Firms may be
reluctant to enter markets involving expensive start-up costs..
The barriers to entry in the cosmetics industry is influenced by the following industry
characteristics:
Government Rules: Cosmetic companies have a lot of regulations and requirements imposed by
the government to launch a single product. This is due to a high level of direct contact between
cosmetics products and human body.
Economies of Scale: Since, the minimum size requirements of the firm to reap a profit is very
high in cosmetic industry considering the expensive and specialized infrastructure requirements,
the threat of new entrants is very high.
High Initial Investments and fixed costs: To build a cosmetic industry requires a significant
amount of capital investments, associated with research and development and marketing
expenditures.
Hence, the threat of new entrants is high in cosmetic industry.

THREAT OF SUBSTITUTES
In Porter's model, substitute products refer to products in other industries. A threat of substitutes
exists when a product's demand is affected by the price change of a substitute product. A
product's price elasticity is affected by substitute products - as more substitutes become
available, the demand becomes more elastic since customers have more alternatives. A close
substitute product constrains the ability of firms in an industry to raise prices.
The intensity of threat of substitutes in the cosmetics industry is influenced by the following
industry characteristics:
Availability of Substitute Products: Product substitutes are readily available in the cosmetic
market. This implies that there is substitute for L’Oreal kajal like Revlon kajal.
Complementary Products: In the cosmetic industry, product complements are high. Beauty
tools (brush, cotton balls, mirrors, etc.) are needed to complement most of cosmetics products
like nail enamel, lipstick, mascara, etc. Naturally, the price of the cosmetic product complements
will definitely affect the sales of cosmetics products like lipstick, mascara, etc.
Brand Loyalty of Customers: There is a very negligible percentage of customers of cosmetic
products who are hard core brand loyals or split loyals. For instance, the loyal customers of
L’Oreal or Revlon are very less.
Switching costs for customers: As there is a high switching cost for customers in switching
from the use of one cosmetic product brand to another brand, this implies high threat of
substitutes.
Hence, the threat of substitutes is very high in cosmetics industry.

FORCES FROM VERTICAL INTEGRATION

BARGAINING POWER OF BUYER
The impact of the customers on the cosmetic producing industry is called the power of
buyers.
A market having many suppliers and one buyer, the buyer sets the price.
Buyer (i.e. consumer) power is very high. There are a variety of products available in the
markets, ranging in price. All firms are competing to attract consumer’s attention by providing
the best quality, most stylish and great price.
The power of buyer in the cosmetics industry is influenced by the following industry
characteristics:
Concentration of Buyers: Since there are a few buyers with a significant market share in
cosmetic industry, the buyer power is high.
Backward Integration Threat of Buyers: Since the buyers of a particular brand (say L’Oreal)
are in a position to threaten to purchase the cosmetic products from some other cosmetic
producing rival brand (say Revlon), the buyer power is high.
Also, the discounts and high-value services extended to the buyers might have a significant
effect on the buyer’s behavior. For instance, Revlon may offer 10% discount to buyers in the
month of December to push-up its sale but L’Oreal on the other hand may not extend any such
offers to the buyers and hence the bargaining power of buyers exert a substantial influence.
Hence, the buyer power is high.

BARGAINING POWER OF SUPPLIER

The company in the cosmetic industry and the companies providing the raw materials to create
products have a buyer-supplier relationship. Powerful suppliers can exert an influence on the
cosmetic producing industry by selling raw materials at a high price so that it can retain some of
the industry's profits.
The power of buyer in the cosmetics industry is influenced by the following industry
characteristics:
Concentration of Purchases: Since there are a few purchasers (say upper-middle income
groups for Revlon and upper income groups for L’Oreal) who has a significant market share in
cosmetic industry, the supplier power is high.
Backward Integration Threat of Buyers: Since the buyers of a particular brand (say L’Oreal)
are in a position to threaten to purchase the cosmetic products from some other cosmetic
producing rival brand (say Revlon), the buyer power is high.
Hence, supplier power ranges from low to medium.

Hence, the cosmetic industry has high barriers to entry, high degree of internal rivals, high threat
of substitutes, low degree of supplier bargaining power and high degree customer bargaining
power, To conclude, we say that Porter’s five forces model serves as an important tool to collect
analyze and then present information for the decision-making and proves it worth to the
maximum when it is used together with SWOT analysis.

REFERENCES

 www.scribd.com/doc/12864233/Porters-Five-Forces-Model

 www.scribd.com/doc/38517957/PORTER’S-FIVE-FORCES-MODEL

 www.quickmba.com/strategy/porter.shtml

 Marketing Management, Dorling Kindersley Pvt. Ltd., 12 th Editon by Philip Kotler, Kelvin Lane
Keller, Abraham Koshy, Mithileshwar Jha