Today I have been...
Reading about Industry Structure in Unit 2 (Analysing the external environment) Section 3
Why?
Par for the course?
So What?
Porter's 5 F model is a tool to assess industry attractiveness (p19). The structure of an industry can change, and non-structural features can affect the type and level of competition.
The 5F
Threat of New Entrants
Rivalry among existing firms
Bargaining Power of buyers
Bargaining Power of suppliers
Threat of substitute products or services.
(porter 1980)
Porter's Market Positioning view is industry structure is most important external factor.
Tends to correspond to operating model (suppliers, customers, current & potential competitors, products).
Very simple model to use. The greater the strength of the five forces, the less attractive the industry.
What is important is to be able to draw out the strategic implications for the organisation concerned. Industry profitability can be influenced by prices, costs and required investment and the 5f model is a way to visualise this.
See diagram p20 or powerpoint slide.
The force of the Threat of New Entrants:-
Factors affecting this include the level of capital requirements, economies of scale, absolute cost advantages, product differentiation, access to distribution channels, legal/regulatory issues and whether existing players will take a new entrant's arrival "lying down".
The force of Competitive rivalry:-
Influences here include product/service differentiation (again), ease/cost of exit (size of exit barriers), industry maturity, type and concentration of competition.
The force of Buyer Power:-
Factors here include price sensitivity (Price elasticity of demand), market size, concentration of buyers, level of information buyers posess, ability of buyers to self-substitute (backwards-integrate - do it themselves). Product/service differentiation arises again as low differentiation increases price sensitivity (commoditisation). It is also affected by price relative to income and where quality is not important.
The force of Supplier power:-
This is increased by a high concentration of suppliers (eg fewer of them spread thinly) relative to concentration of buyers that are sold to. The fewer options a buyer has the higher the supplier power. It's also affected by the number of possible substitutes, differentiation (again) and relative interdependence (symbiosis) of buyers and suppliers.
The force of potential substitutes:-
This is dependent on the number of identifiable options (the more there are the greater this force) as well as their relative price/quality to your own product/service.
How will I use it?
Take away useful info.
When considering new entrants, consider quality of product, patents, access to better resources or lower cost finance, and economies of scale. With economies of scale, new entrants have to enter either on a large scale or at a cost disadvantage. Product differentiation can include brand. Porter's 6 specific barriers to entry are:-
Economies of Scale
Product Differentiation
Capital Requirements
Cost disadvantages independent of size
Access to distribution channels
Government policy/regulation
Patents fall in the last category as does other IP.
A possible 7th is the reaction of existing competitor, eg predatory pricing, far-sighted new product announcements.
Threats from existing competitive rivalry include structure and concentration of the industry. Grant's industry structures table is useful.
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