Porter's Five Forces Analysis PDF

PORTER’S PORTER’S FIVE FIVE FORCES FORCES  Porter’s five forces model is one of the most complete business tools for analyzing the competitive environment where a company performs. The five external forces are: 1. Threat of New Entrants/ Entry 2. Bargaining Power...

PORTER’S PORTER’S FIVE FIVE FORCES FORCES  Porter’s five forces model is one of the most complete business tools for analyzing the competitive environment where a company performs. The five external forces are: 1. Threat of New Entrants/ Entry 2. Bargaining Power of Buyer 3. Bargaining Power of Suppliers 4. Threat of Substitutes/ Substitution 5. Rivalry Among Competitors  Five Competitive Forces 1. Threat to entrants (Barriers to Entry )– factors that would help reduce threat of new entrants Product differentiation Capital requirements Efficient distribution system Economies of scale (as the level of production increases, the average cost of producing each individual unit declines.) Switching costs (costs incurred by a consumer when they switch brands, products, services, or suppliers) Five Competitive Forces contd. 2. Bargaining Power of Buyers – the amount of influence of buyers (consumer or business) have on price – If this is high, it is negatively related to the industry attractiveness Five Competitive Forces contd. Bargaining power of buyers is high when: Product bought is a large percentage of the buyer’s costs Product bought is undifferentiated Buyer threatens to backward integrate Substitutes exist  Five Competitive Forces contd. 3. Bargaining Power of Suppliers – the degree of influence suppliers have on price. High supplier power is not attractive. This is high when: There are no substitutes for the product supplied. Suppliers are highly concentrated (Companies are making making most of its purchases from a few key suppliers.) Supplier has differentiated its product. Supply is limited. Five Competitive Forces contd. 4. Current Category Rivalry - the amount and intensity of competition in a category. Product categories with intense competition are not attractive. The following are the characteristics of categories with intense rivalry: Many or balance competition Slow growth High fixed costs Lack of product differentiation Personal rivalries Five Competitive Forces contd. 5. Pressure from Substitutes – the number of substitutes available in a category. Categories with larger number of substitutes are lesser attractive than those that deliver unique products.  Scoring Method for Porter’s 5F The scoring method in Porter's 5 Forces analysis involves assigning a score to each force based on its intensity or impact on the industry. Scoring Scale: Low: 1-2 points (weak force) Moderate: 3-4 points (neutral force) High: 5-6 points (strong force) Total Score: Add the scores for each force to get a total score (out of 30).  Interpretation of Scoring for Industry Attractiveness 10 - 15 16 - 20 21 - 30 Low total Moderate High score total score total score Industry is Industry Industry relatively is neutral. is relatively attractive. unattractive.  Interpretation of Scoring for Industry Attractiveness 1-2 1.Threat of new entrants (TNE): Low barriers, many new entrants 2. Bargaining Power of Suppliers (BPS) - Suppliers Low score have limited bargaining power. –(1 – 2) 3. Bargaining Power of Buyers (BPB) : Buyers have limited bargaining power. 4. Threat of Substitute Products/Services (TSPS) Few substitutes, low threat. 5. Competitive Rivalry Among Existing Competitors (CRAEC) Low competition, high profitability.  Interpretation of Scoring for Industry Attractiveness 3-4 1.Threat of new entrants (TNE): Moderate barriers, some new entrants 2. Bargaining Power of Suppliers (BPS) - ): Moderate Suppliers have moderate bargaining power. score (3 – 4) 3. Bargaining Power of Buyers (BPB) : Buyers have moderate bargaining power. 4. Threat of Substitute Products/Services (TSPS) ): Some substitutes, moderate threat 5. Competitive Rivalry Among Existing Competitors (CRAEC) Moderate competition, neutral profitability  Interpretation of Scoring for Industry Attractiveness 5-6 1.Threat of new entrants (TNE): Low barriers, many new entrants 2. Bargaining Power of Suppliers (BPS) - ): High score Suppliers have significant bargaining power. (5 – 6) 3. Bargaining Power of Buyers (BPB) : Buyers have significant bargaining power. 4. Threat of Substitute Products/Services (TSPS) ): Many substitutes, high threat 5. Competitive Rivalry Among Existing Competitors (CRAEC): High competition, low profitability  Example of Porter’s Five Forces: Convenience Retail Industry 1- Threat of New Entrants/Potential Competitors: Average Score: 3.33 (3+5+2/3) Moderate pressure – A. Capital requirements : Score – 3 Cost of franchise is relatively low. - 7-Eleven – PhP 3.5 – 5 M - Lawson: Php460,000 (franchise fee) - FunHan Mart: Php 700K (franchise fee) - Easy Day Shop: P250,000 + VAT (franchise fee) - Alfa Mart – 300 M rupees (PhP1.16M franchise fee) Grocers could potentially enter into the retail side. B. Distribution systems – Score - 5 Entry barriers are relatively high as 7-Eleven and Alfamart have outstanding distribution systems, locations, brand name, and financial capital to fend off competitors. C. Ease of establishing- Score - 2 The industry has simple government licensing requirements. It uses franchise model where ready made operations manual are provided.  Porter’s Five Forces 2- The Bargaining Power of Buyers: Moderate pressure – Average Score: 4.5 (4+ 5/2) A. Price sensitivity Score : 4 Filipino consumers are price- conscious, especially in more competitive urban areas where there are multiple convenience store options within close proximity. B. Switching Costs are low (Availability of substitutes):Score- 5 Consumers can easily switch between convenience stores, supermarkets, or small retail shops, giving them more bargaining power, with little difference in costs.  Porter’s Five Forces of Competition contd. 3 Bargaining Power of Suppliers: Low pressure Average Score – 2.0 (2 + 2/ 2) Scare Tactic: Score 2: Some convenience stores offer a lot of business to manufacturers and wholesalers. This gives 7-Eleven and other stores a lot of power because by threatening to switch to a different supplier would create a scare tactic to the suppliers. Vertical Integration: Score- 2: Suppliers can possibly produce own supplies (backward integration). (Forward integration can increase supplier bargaining power.)  Porter’s Five Forces 45Threat of Substitutes : High pressure (Ave. Score – 5, 5 + + 5/ 3) A. Food delivery services, Score: 5: With the rise of digital platforms like GrabFood, Foodpanda, and Lalamove, consumers have increasingly turned to these services for quick meal deliveries, creating an indirect threat to traditional convenience stores. B. Sari-sari stores: Score 5- In rural and suburban areas, traditional neighborhood convenience stores, known as sari-sari stores, remain a significant substitute. They offer similar convenience but with lower prices, often at the expense of limited product range. C. Supermarkets and online shopping, Score 5 - : Supermarkets and online retail platforms (e.g., Lazada, Shopee) are alternatives for consumers, particularly for bulk purchases and grocery needs.  Porter’s Five Forces of Competition contd. 5-  Rivalry Among Established Companies: High Pressure: Average Score -5.6 (5 + 5 + 6/3) A. Number of Players : Score 5 Currently, 7-Eleven, as the largest convenience store chain in the Philippines, dominates the market with a significant share in total sales. Alfamart is the second-largest convenience store chain, but its market share is lower than 7- Eleven’s. Family Mart, Uncle John’s and Lawson have a smaller market share compared to 7-Eleven and Alfamart. B. Number of Stores and Products: Score 5 – 7-Eleven - 3, 829 stores, serving snacks, drinks, and meals Alfamart: over 1,000 stores in the Philippines, offering affordable products and a loyalty program Family Mart: over 1,000 stores, known for Japanese-inspired products. Uncle John’s – over 500 stores, serving local favorites like fried chicken and siopao Lawson: over 500 stores, serving snacks, drinks, school and household items. C. Industry/Product life cycle, Score -6 Competition is most intense in maturity stage. Proliferation of of modern trade outlets and local sari-sari stores - This intensifies competition.  Total Scoring for Industry Attractiveness of Convenience Retail Industry Low- High- High- Mod - 4.50 2.00 5.00 5.00  Total Scoring for Industry Attractiveness of Convenience Retail Industry Mod - Mod -4.50 Low- High- High- 3.33 2.00 5.00 5.00 To t a l A v e r a g e S c o r e = ( 3. 3 3 + 4. 5 0 + 2. 0 0 + 5. 0 0 + 5. 0 0 ) / 5 = 4.00/ Moderate Industry Attractiveness of Convenience Retail Industry Other Factors in the P5F Porter’s 5 Forces of Operating Systems Industry Market Share of OS