Porters 5 forces model
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Porters 5 Forces Model identifies 5 competitive forces that shape an industry: (1) threat of new entrants, (2) bargaining power of suppliers, (3) bargaining power of customers, (4) threat of substitute products, and (5) competitive rivalry. This model helps analyze an industry's weaknesses and strengths. For IKEA, rivalry is intense but barriers to entry are high. Customer bargaining power is strong while supplier power is low. Substitute threats are also low. For Coca-Cola Enterprises, economies of scale are a barrier to entry while supplier relationships are strong. Customer switching costs are low and competitive rivalry is high.
Porters 5 forces model
- 1. Porters 5 Forces Model
- 2. What is it? Porter’s 5 forces is a model that identifies and analyses 5 competitive forces that shape an industry. It help determines an industry's weakness and strengths.
- 3. Threat of new entrants to an industry Gain market share Existing firms are stronger if there are barriers for new entrants. Barriers Investment Cost High capital requirement Economies of scale Low unit costs Legal restrictions Patents can provide the holder with protection Product Differentiation Strong USP’s/customers loyalty Access to suppliers and distribution channels A Lack of access will make it harder for newcomers to enter Retaliation by established products The threat of a price war Competition law outlaws actions like predatory pricing
- 4. Bargaining Power of Suppliers If a firms suppliers have bargaining power they will sell their products at a higher price. Suppliers find themselves in a powerful position when: There are only a few large suppliers The resource they supply is scarce The cost of switching supplier is high There are no or few substitute resources available
- 5. Bargaining Powers of Customers Powerful customers are able to use pressure to drive down the prices or increase the level of quality for the same price. The factors that determine the bargaining power of the customer includes: Factor Number of customers The smaller the number of customers, the greater the power Economies of scale The larger the volume, the greater the power Number of firms supplying the product Less alternative suppliers means less opportunity for customers Threat of integrating backwards If customers pose a threat of integrating background, they will have increased power Cost of Switching Customers tied to a supplier are less likely to switch
- 6. Threat of Substitute Products This can be a product that meets the same need. For example, the substitutes that consumers now have to buying newspapers for their news. The extent of the threat depends on: - The extent to which the price and performance of the substitute can match the industry’s product - The willingness of customers to switch - Customers loyalty and switching costs
- 7. Degree of Competitive rivalry Intense rivalry in the industry will encourage businesses to engage in price wars, Investment in innovation and new products and intensive promotion. The main factors that determine the rivalry are: Factor Number of competitors in the market Rivalry will be more intense with more competitors Product differentiation and brand loyalty Grater customer loyalty = less intense competition Lower product differentiation = greater price competition Cost structure of the industry If fixed costs are high percentage of costs then profits will be dependent on volume Market size and growth prospects Competition Is always most intense in stagnating markets Exit Barriers It is difficult and expensive to exit an industry
- 8. Porter’s 5 Forces Model HOW DO BUSINESSES USE THIS MODEL?
- 9. How is it useful to firms? Based on the concept that there are 5 forces that determine the competitive intensity and attractiveness of a market. Five forces analysis helps organisations to understand the factors affecting profitability in a specific industry, and can help to inform decisions relating to: - whether to enter a specific industry whether to increase capacity in a specific industry and developing competitive strategies
- 10. HOW DOES IKEA APPLY TO THE 5 FORCE MODEL? 1) Rivalry among existing firms is intense in the global market of discount furniture and the major players in the industry include Euromarket Designs Inc, Galiform plc, Wal-Mart Stores Inc, Argos and others. However, currently IKEA is the undisputed market leader in the industry of discounted furniture in the global scale. 2) The threat of new entrants into the industry is low, and the chances of emergence of new competition for IKEA is insubstantial as the current market is saturated
- 11. The bargaining power of IKEA customers is strong, as the competition is intense and the customers have a wide choice of alternative options offered by global furniture retailers However, the threat of substitute products and services is low as there are no too many products and services available that can substitute the demand products offered by IKEA. IKEA suppliers do not possess substantial bargaining power as there are numerous factories around the globe with the capabilities and resources to form partnership with IKEA.
- 13. New Market Entrants Economies of scale due to high use of technology and efficient transport and distribution methods. Eg use of expandable small bottles. This can help the company by operating at low costs and possibly being price competitive Coca-Cola shows incumbents resistance releasing new products like Smart Water to expand the company and increase profits giving them a larger market share. It is unlikely that there would be more companies entering this market because huge expenditures on capital are needed which puts off some potential competitors.
- 14. Supplier Power The company is a franchise of the Coca-Cola Company. It has bargaining power as it is the biggest company that buys its raw materials from the Coca-Cola Company. They have a close relationship with their suppliers as they share their profits.
- 15. Buyer Power The market is competitive with other companies like Pepsi and Britvic. Customers would not incur high costs from switching from one player to another but customers can easily switch to substitutes. Choice of buyers may depend on price and the reputation of the business which may be the reason why the company is trying to reduce the size of its carbon footprint.
- 16. Product and technology development The company keeps on coming up with new innovative products like Smart Water and Dr Pepper to compete in other markets and be competitive to companies like Evian. There are also investments in technology to increase efficiency, productivity and reduce costs.
- 17. Competitive Rivalry Competition from Pepsi and Britvic. There is brand loyalty and recognition among customers. Competition is relatively high. Customers would not incur high costs from switching from one player to another. The company has a variety of products including cola, Fanta and water. They try to differentiate the taste of their product and they also differentiate through branding.