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1、Porters Five Forces Industry Analysis,Industry analysis,The profitability of any industry depends upon five environmental factors The five forces The threat of entry The threat of substitution The power of the buyers The power of the suppliers Competitive rivalry within the industry,Porters Five For
2、ces of Competition Framework,SUPPLIERS,POTENTIAL ENTRANTS,SUBSTITUTES,BUYERS,INDUSTRY COMPETITORS,Rivalry among existing firms,Bargaining power of suppliers,Bargaining power of buyers,Threat of new entrants,Threat of substitutes,The threat of entry,Threat that new entrants will start up, increase ca
3、pacity and competition and erode profits Depends on the size of the entry barriers Eg scale economies, patents,The threat of substitution,Threat other industries will take business away: eg aluminium industry faces threat from glass, plastics, steel These substitute products place a cap upon industr
4、y prices above which buyers will desert,Power of buyers,Power of industrys buyers to secure discounts or negotiate added value to products Depends on buyer concentration, information, switching costs Eg fragmented horticulture industry faces concentrated, expert buyers with low switching costs,Power
5、 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,Competitive Rivalry,The degree of competition within the industry for market share Especially th
6、e degree of price competition Some industries are very price competitive Eg airlines Others are non price competitive and highly differentiated in products Eg pharmaceuticals,THREAT OF ENTRY Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distributio
7、n channels Legal/ regulatory barriers Retaliation,SUBSTITUTE COMPETITION Buyers propensity to substitute Relative prices & performance of substitutes,BUYER POWER Buyers price sensitivity Relative bargaining power,INDUSTRY RIVALRY Concentration Diversity of competitors Product differentiation Excess
8、capacity & exit barriers Cost conditions,SUPPLIER POWER Buyers price sensitivity Relative bargaining power,The Structural Determinants of Competition,Examples of industry analysis,Airlines Pharmaceuticals Professional football Road Recovery Services,Airlines,The threat of entry Very high because Der
9、egulated Low start up costs Modest economies of scale The threat of substitution High in some short haul routes lower in long haul The power of the buyers Considerable Little customer loyalty despite air miles Easy to switch between carriers,Airlines,Power of the suppliers Considerable Aircraft manu
10、facturers large and very differentiated, high switching costs Unionised staff Capacity shortages in many airports Competitive Rivalry Intense price competition Very high fixed operational costs and low variable costs encourages discounting to maximise utilisation,Airlines: conclusion,All five forces
11、 are operating to the industrys disadvantage Would expect the industry to experience poor profit performance,Pharmaceuticals,The threat of entry Very low Products protected by patents and copyright Formidable research, development and approval costs of new drugs Very large medical sales force requir
12、ed The threat of substitution Very low Often no alternative to a drug in dealing with an illness,Pharmaceuticals,Power of buyers Limited Purchase decisions made by powerful medical profession able to influence what the state or insurance co. must pay for Power of suppliers Negligible Drug ingredient
13、s are largely commodities, widely available Competitive rivalry Limited Little or no price competition,Conclusion on Pharmaceuticals,All five forces working to industrys advantage Would expect the industry to be highly profitable,Profitability of US Industries,Pharmaceuticals 26.8Gas & Electric Util
14、ities 10.5 Tobacco22.0 Food and Drug Stores 10.3 Household & Personal Products 20.5 Motor Vehicles & Parts 9.8 Food Consumer Products20.3Home Equipment 9.5 Medical Products & Equipment 18.8Railroads 9.0 Beverages18.8 Hotels, Casinos, Resorts 8.0 Scientific & Photographic Equipt.16.5Insurance: Life a
15、nd Health 7.6 Commercial Banks16.0 Building Materials, Glass 7.0 Publishing, Printing 14.3 Metals 6.0 Petroleum Refining14.3 Semiconductors & Apparel 14. 3 Electronic Components 5.8 Computer Software 13.5 Insurance: Property & Casualty 5.3 Electronics, Electrical Equipment 13.3 Food Production 5.3 F
16、urniture13.3Telecommunications 3.5 Chemicals12.8Forest and Paper Products 3.5 Computers, Office Equipment11.8 Communications Equipment (4.0) Health Care11.5 Airlines (34.8) (Grant, 2005),Median return on equity (%), 1999-2002,Some comments on the method,Very similar to the structure, conduct perform
17、ance model Old wine in a new bottles? Porter stresses that the five forces are the only factors: there never any others Example of government as possible “6th” But government should be considered through impact on one or other of the 5 forces,Comments,5 forces determine overall industry profitabilit
18、y, not the individual firms In any industry profitable firms work alongside much weaker firms In airlines the environment is very unfavourable but some airlines still do well,Does Industry Matter?,Source: Grant, 6th Ed,Comments,Porter on change: A static approach? But Porter emphasis on the search f
19、or change in environment the new weaknessesthe new sources of strength Eg: change in road recovery services,Road Recovery Services,Break down services, once dominated by AA and RAC The Past: Nationwide network of recovery vehicles using own communications system Very high entry barriers No close sub
20、stitute Little price competition between suppliers Buyers had measure of membership loyalty No significant forces amongst suppliers,Changes in the road recovery market,A new look at the AA and RAC Strategy of supplementing own recovery fleet with local independent subcontractors Technology: the deve
21、lopment of open mobile phone networks Result: development of a nation-wide network of independent subcontractors, using mobile phone networks to communicate,Changes in the 5 forces,Essentially vertically integrated businesses performing two functions Running an breakdown insurance plan Running the f
22、leet of breakdown recovery vehicles Strategy changed industry structure: Created two separate industries in place of one,Unwitting consequences?,Use of subcontractors dismantled the vertical integration on the margins of the industry Crucially it brought down the entry barriers on the breakdown insu
23、rance function Many entrants without a recovery network of their own: Green Flag, Direct Line, Aviva, Crowded market, very price competitive,Conclusions,The “5 forces” remains after 30 years the most widely used tool of industry analysis It is the first step in strategic analysis But the individual enterprises performance depends as much or more on its own particular resources and capabilities,