Five Forces

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 (1)THREAT ON NEW ENTRANTS:

• New entrants bring new capacity.
• Have desire for market share.:
• Can bring in heavy cash flows and shake up competition.Eg.Pepsi,Microsoft.
• it can put cap on profitability.
• Incumbents hold down prices or boost investments to deter new entrants.
• Brings reaction from incumbents.

BARRIERS OF ENTRY:

Supply side economies of scale: larger volume enjoys lower cost eg.intel.

Demand side benefits of scale:buyer patronize the company products.(networking effects)

Customer switching cost: larger the swiching cost harder it will be for entrants to gain customer.

Capital requirement:large capital investment can deter new entrantsif particular capital requirement is unrecoverable likehigher to finance expenditure likeadvertisin and R&D.

Incumbency advantages independent of sizes: incumbents have quality advantages over new entrants like propriety technology, best raw material sources, established brand entities and cumulative experience. All in turn contribute to efficiency.

Unequal access to distribution channels: wholesalers and retailers so committed to incumbent that new entrant have to bypass distribution or create his own.

Restrictive government policy: government can encourage new entrants through subsidies or hinder them by imposing ban or licensing requirements.

Expected retaliation: public statement from incumbent’s reaction to new entrant can act as barrier.

(2)POWER OF SUPPLIER:

• Powerful suppliers capture more value for themselves by charging higher prices, limiting quality or services and shift costs towards industry participants.
• They squeeze out profitability of industry. Eg.supplier of labor.

                                SUPPLIER GROUP IS POWERFUL IF:

Supplier is more concentrated than industry: eg Microsoft’s monopoly in operating systems.

Supplier group doesn’t rely on industry for its revenues: supplier serving much industry will try to extract profit from all sides but will reasonable discount if one is large volume buyer.

Switching costs: If switching cost from buyer is high then it is difficult to play supplier against one another.

Supplier which offers differentiated product: There is no substitute for suppliers product pharmaceutical companies over hospitals and pilots union.

Forward integration threat: When industry participants make too much profit.

(3) POWER OF BUYER:

• Powerful buyer is flipside of powerful supplier by forcing down prices, demanding better quality or more services.
• They play industry participants against one another.
• They are powerful if they have negotiating leverage.
• They their clout to pressure price reductions.

Buyer has negotiating leverage if

1. Few buyer &large relative purchase wrt single vendor: eg.bulk chemicals
2. Standardized products or undifferentiated: then buyer play against one another.
3. Switching costs: if less buyers change vendors.
4. Backward integration threaten Pepsi threaten to make bottles.
5. Intermediate buyer: when they can influence end customer purchasing decision.

Buyer group is price sensitive if:

1. Product has significant fraction in costs structure: Then buyer bargain hard &shop around.
2. The buyer group earns low profits: BUYER UNDER PRESSURE TO TRIM COSTS.
3. Quality of buyer is little affected by products or services: If quality is affected by industry then buyer is not price sensitive.
4. Buyer is price insensitive if:

1. If product or services pay many times over by improving performance.
2.  If product is more undifferentiated.

(4)THREAT OF NEW SUBSTITUTE:

• A  substitute  per- forms the same or a similar  function as an industry’s product by a different means

E.g.-mail is a substitute for express mail.

• Substitutes are always present, but they are easy to overlook because they may appear to be very different from the industry’s product. When the threat of substitutes is high, industry profitability suffers.
• They also reduce  the bonanza an industry can reap in good times.eg In emerging  economies,  for  example,  the  surge  in  demand for wired   telephone lines has been capped as many  consumers opt  to make  a mobile  tele- phone  their first and only phone  line.

The threat of a substitute is high if:

1. The better the relative value of the substitute, the tighter is the lid on an industry’s profit potential eg.skype has overcome long distance calling being in expensive.