PORTERS FIVE FORCES MODEL

PORTERS FIVE FORCES MODEL

Outside-in business unit strategy

Determine the intensity of competition and hence the profitability and attractiveness of an industry.

An important tool for analyzing an organization industry structure in strategic processes

THREAT OF NEW ENTRANTS

The threat of New Entries will depend on the extent to which there are barriers to entry. They are,

Supply-side economies of scale Incumbency advantages

Demandside benefits of sale Unequal access to distribution channels Capital requirements

Customer switching costs Restrictive government policy

REDUCE THE THREATS OF NEW ENTRANTS

BARGAINING POWER OF SUPPLIERS

The term Suppliers comprises all sources for inputs that are needed in order to provide goods or services.

Supplier bargaining power is likely to be high when:

More concentrated than the industry Credibly threaten to integrate forward Face switching costs

Does not depend heavily on industries

Offer products that are differentiated No substitute

BARGAINING POWER OF SUPPLIERS Purchase commodity products

Many competitive suppliers

Supplier bargaining power is likely to be LOW when:

Concentrated suppliers

Backward integration threat by purchasers

Reducing the Bargaining Power of Suppliers

Partnering
Supply chain management

Supply chain training

Increase dependency

Build knowledge of supplier costs and methods

Take over a supplier

BARGAINING POWER OF CUSTOMERS

Determines how much Customers can impose pressure on margins and volumes.

Customer bargaining power is likely to be high when:

Limited Customers

Large Volume Buyer

Can credibly threaten to integrate backward

Face Switching Costs

BARGAINING POWER OF CUSTOMERS

Customer bargaining power is likely to be low when:

Buyers are fragmented

Producers supply critical portion of buyers input

Producers threaten forward integration

Significant buyer switching cost

Reducing the Bargaining Power of Customers

Partnering Supply chain management Increase loyalty Increase incentives and value added Move purchase decision away from price Cut put powerful intermediaries (go directly to customer)

THREAT OF SUBSTITUTES

A substitute is the product which performs the same or a similar function as an industrys product by a different means Eg. E-mail is a substitute for express mail, Plastic for aluminium. Substitutes are easy to overlook. reduce the bonanza an industry can reap in good times.

THREAT OF SUBSTITUTES THREAT OF SUBSTITUTES

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same product.

better the Brand loyalty of The threat of relative value customers. substitutes is of the determined substitute by following technological factors: changes. Attractive price Eg: plastic Switching costs to performance trade substitutes is less off to product eg.generic drug eg.skype

Reducing the Threat of Substitutes

Legal actions Increase switching costs

Alliances
Customer surveys to learn about their preferences Enter substitute market and influence from within Accentuate differences (real or perceived)

COMPETETIVE RIVALRY BETWEEN EXISTING PLAYERS

Rivalry exists in form of including price discounting, new product introductions, advertising campaigns, and service improvements. Degree of rivalry depends on intensity with which they compete & basis on which they compete

THE INTENSITY . OF RIVALRY

Competition between existing players is likely to be high when:

Competitors are numerous

Industry growth is slow

Exit barriers are high. Commitment and aspirations. Firms cannot read each others signals.

Rivalry also affects basis of competition

Dimensions:on which they compete. whether rivals converge on same dimension or different. PRICE DIMENSION: Destructive to profitability of industry and transfer profit to customers. Diverts attention of customers towards product features and service. Price competition is most liable to occur if: Products identical & few switching costs for buyers. Fixed costs are high and marginal costs are low. Large capacity expansion. Product is perishable

Rivalry also affects basis of competition

OTHER DIMENSION(NON-PRICE RIVALRY ): On product features, support services, delivery time, or brand image, Features: no erosion of profitability. Improves customer value. Justifies higher prices. Improve value over substitute or raise barrier for new entrant. Positive sum competition. Higher average profitability Expand industry. Thus nature of competition is towards positive direction.

Reducing the Competitive Rivalry between Existing Players

Avoid price competition

Differentiate your product

Buy out competition Reduce industry over-capacity Focus on different segments Communicate with competitors

Limitations
1.All the strategies may not be effective 2.More on defensive side 3.Synergy among even competitors 4.Alliances, M&A 5.Changing the rules of the game, Rather than playing by existing rules(blue ocean strategy) 6.It should be used as a tool.

Porters Five Force Model in Pharma Industries

Conclusion
Industry is not static in nature, it's dynamic. Larger players in the industry will survive with their proprietary products and strong franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Change in the patent regime, will see new proprietary products coming up, making imitation difficult. Government too will have bigger role to play.

He that knows nothing doubts nothing.