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PORTER’S SIX FORCES MODEL

Porter’s Six Forces Model

Porter's six forces" is a framework for the industry analysis and business strategy development

developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developing

Industrial Organization economics to derive five forces that determine the competitive intensity

and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry

profitability. An "unattractive" industry is one where the combination of forces acts to drive down

overall profitability. A very unattractive industry would be one approaching "pure competition”.

Porter’s six forces include three forces from 'horizontal' competition: threat of substitute products,

the threat of established rivals, and the threat of new entrants; and two forces from 'vertical'

competition: the bargaining power of suppliers and the bargaining power of customers and also

Government which is the sixth force.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

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PORTER’S SIX FORCES MODEL 1. Threat of Rivalry

Concentration ratio is low in our industry due to few companies in this industry.

Highly competitive industries generally earn low returns because the cost of competition is

high.

The auto industry is considered to be an oligopoly, which helps to minimize the effects of

price based competition.

Market growth is slow so companies fight fiercely to gain or prevent losses in market share.

Concentration includes brand image, number of units and market share of the companies.

In brand image, Honda is considered to be a number brand in quality in across Pakistan, the

second one is Toyota and Suzuki on third level.

But on the other hand the sale of Suzuki is higher than Toyota and Honda and Suzuki has

also higher market share.

In Automobile Industry Fixed cost is higher due to heavy machinery and assembling plant.

Variable cost depends is dependent on taxes, auto parts and other raw materials like steel

and other accessories.

But the overall cost of car is not higher in Pakistan but due to taxes and the profit prices of

cars are very higher than other countries.

Differentiation capacity is not as higher as compare to other countries, because in Pakistan,

people are price sensitive as well as brand sensitive.

They make the decision of buying the car on the image of the brand in their mind as well as

in the market.

Price behavior is high ,the prices of cars increasing day by day and due to increase in prices

most of the people moving towards second hand cars rather than the new one.

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PORTER’S SIX FORCES MODEL 2. Power of Buyers

Customer may easily and with a normal cost switch to another product.

Switching to an alternative product is relatively simple and is not related to high costs

Consumers are very price sensitive.

Now with more choice with models, premium affecting the buyers is limited to certain

models out of which maximum premium is of Rs 60,000 is on Corolla Xli.

Thus the power of buyers in Pakistan our auto sector is does not play a significant part in

determining how policy is determined.

In Pakistan the people are brand conscious, there are some buyers in the market who will

emphasize on the brand name, image rather than price.

Switching Cost is high.

Backward integration is also low.

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PORTER’S SIX FORCES MODEL 3. Power of Suppliers

Market is dominated by a few large suppliers

There are no substitutes for the particular input.

The suppliers customers are fragmented, so their bargaining power is low

Medium switching cost.

There is the possibility of the supplier integrating forwards in order to obtain

higher prices and margins.

Forward integration provides economies of scale for the supplier

Suppliers can influence the industry by deciding on the price at which the raw

materials can be sold. This is done in order to capture profits from the market.

Steel is a major input in this industry and so steel prices have a sharp and immediate

impact on the product price.

Many suppliers rely on one or two automakers to buy a majority of their products.

Supplier concentration ratio is high in Pakistan, the cars assembled in the plants and

rest of the materials is purchased from the local vendors. So whole of the business

are relying on the automaker plant.

Substitutes supply is low, because there are very expensive for automaker for

purchasing raw material whole from overseas, due to high duties.

Buyer information is medium because every vendor has some of information about

their buyers because the buyers buy a huge amount of material from the vendors.

4. Threat of Substitutes

There are available alternatives of four wheelers like motorcycles, three wheeler rickshaws

but these are not suitable for those people who use to travel in four wheelers. The consumer

will not go for these alternatives because of his/her status, personality.

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PORTER’S SIX FORCES MODEL Switching cost is high because the cost of motorcycle and three wheelers are low

In Pakistan, the main problem is that alternatives are available but the customer of four

wheeler cars will not go for these alternatives the main reason is in Pakistan the people are

status conscious.

In Pakistan people is price sensitive.

The price of petrol has a large effect on consumer’s decision to buy vehicles.

The new technologies available also affect the demand of the product

5. Threat of New Entrants

Scope of economies is high due to status difference, Innovation, Commercialization,

Imported vehicle etc.

Lack of supplier and distributors can create problem for new entrants

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PORTER’S SIX FORCES MODEL Brand equity is also high because Honda, Toyota and Pak-Suzuki have a good reputation in

the market.

Switching costs depends on the new entrants that what it will charge and what are its cost

determinants.

Capital requirement is very high because of the infrastructure, purchasing high equipment

etc. and specially assembling plant or manufacturing plant is the main investment area

which requires a huge investment.

It is very difficult for new entrants to capture the market and use their resources because

current competitor will be utilizing at maximum level

In Pakistan people are brand conscious so switching towards another brand is low.

Price factor can help the new entrants to access the market easily.

6. Government

The development of automobile industry like other industries is too depending on

consistent government policies.

Any sudden change in the official priorities certainly affects the long-term investment

patterns.

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PORTER’S SIX FORCES MODEL Inconsistent government policies and uncertain decisions not only discourage the foreign

investment but also create insecurity among local manufacturers.

Government policies have played an important role in the auto sector based primarily on

the effects of duties and deletion level policies.

Even though this has remained core policy, due to unprecedented increase in demand has

made the government rethink its policy.

AIDP (AUTO INDUSTRIAL DEVELOPMENT PLAN) was launch by government of Pakistan

after 2005.

AIDP

Following objectives were agreed;

Long term investment

Encourage growth

Promote domestic competition

Enhance competitiveness

Stimulate innovation

Facilitate auto industry’s

integration into the global

supply chain

The used vehicles import policy

will be regulated so as not to

impede the growth of the local

industry while protecting

consumer interest.

Setting up two Auto Cluster /SEZ near Pakistan Steel mill, Port Bin-Qasim, Karachi and the

other near Motorway at Lahore.

AIDC (Establishment of Auto Industry Development Council): Institutional Mechanism

including industry representatives for regular assessment and Review of progress under

the policy.

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PORTER’S SIX FORCES MODEL AIDP encourages the companies to corporatize its affairs and to make their accounts

transparent as certain incentives would be allowed only if the investment or technology

acquisition has been duly capitalized in their financial statements.

In the modern world, open companies attract more investment, strategic partners and

global customers for its products.

ANALYSIS OF PAKISTAN INDUSTRY (9099)