Porter's Five Forces: How to identiy attractive markets
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Transcript of Porter's Five Forces: How to identiy attractive markets
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Some markets are more attractive than
others…
…but how do you tell them apart?
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Leave it to gut feel?
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Leave it to gut feel?
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Get stuck in to some analysis?
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13,450 27
89 990
7.50
91
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Get stuck in to some analysis?
strategywrap.com @strategywrap
1
13,450 27
89 990
7.50
91
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Whether you are…
Working on a plan for a new
business
Contemplating the launch of a
new product
Reviewing the strength of your
own marketplace
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…Porter’s Five Forces model can help
you understand your situation.
This model was developed more than
30 years ago by Michael Porter, a
Harvard academic. However, it
remains as relevant today as it was
when it was developed.
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Porter’s Five Forces model
Competitive
rivalry
Buyer
power
Supplier
power
Threat of new entrant
Threat of substitutes
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Let’s take each of the five elements…
buyer power
How much power is held by the customer?
How many customers are there and how
many customers does a typical player
have?
How much market share do the largest
customers account for?
What alternatives do customers have?
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Let’s take each of the five elements…
supplier power
How much power do suppliers hold?
How many suppliers are there and what
market share do the largest suppliers hold?
How distinctive are each supplier’s
products?
How straightforward is it for the customer
to switch to another supplier?
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Let’s take each of the five elements…
competitive rivalry
How much competition is there in the market?
How many competitors are there?
How much market share does each
competitor hold and how strong are
competitor brands?
How easy is it to win new customers?
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Let’s take each of the five elements…
threat of new
entrants
How likely is it that competition will increase
with new entrants?
What are the barriers to entry? Knowledge,
technology, distribution network, brand?
How much would it cost a new entrant to
enter market and how quickly would this
investment pay back?
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Let’s take each of the five elements…
threat of substitutes
What is threat that customers will switch to
different products?
What are substitute products and how
effective are they?
How straightforward is it for customers to
switch products?
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Now, let’s look at an example…
clear water
Mike, an entrepreneur, is thinking about
launching a new bottled water company. Is it a
good move?
He uses Porter’s Five Forces model to structure
some analysis.
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Now, let’s look at an example…
clear water
BUYER POWER:
First, Mike identifies the buyer. In this case, not
the ultimate drinker, but the retailer.
He finds that in his home country, 80% of sales
by value are through one of four supermarket
chains. The remaining 20% of sales are through
hundreds of independent outlets. The buyer
power is therefore STRONG.
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Now, let’s look at an example…
clear water
SUPPLIER POWER:
Mike’s suppliers would include his workers, plastic
bottle manufacturer and transport company. As a
small operator, Mike quickly realises that he is
likely to have little power with most suppliers, all
of which are part of multinational companies.
However, he could achieve strong power over his
workers by choosing a location where
unemployment is high.
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Now, let’s look at an example…
clear water
COMPETITIVE RIVALRY:
The bottled water market is very competitive, with
more than 30 suppliers in the UK alone. Mike finds
that 60% of the market is held by the three
largest companies. However he also finds that the
big retailers will stock smaller suppliers. The
nature of the product means that consumers will
switch very easily. Rivalry is therefore HIGH.
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Now, let’s look at an example…
clear water
THREAT OF NEW ENTRANTS:
The level of competition suggests entry is
relatively easy. However the launch costs are
relatively high and suppliers need to find a spring
source for the product. The threat is currently
HIGH but could lessen as sources are claimed.
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Now, let’s look at an example…
clear water
THREAT OF SUBSTITUTES:
Mike does a study of supermarket shelves and
finds that the average store selling 500ml bottles
of water sells 25 other drinks of a similar size
that could substitute for water. This is higher than
Mike realised. Water is by far the cheaper option,
but some extra research shows that shoppers
frequently substitute other drinks for water.
Threat is HIGH.
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So, what did Mike learn?
clear water
This analysis highlights for Mike what a tough job
he is going to have making his company a
success. He could find it difficult getting his
product into big stores and, when he does,
shoppers may readily choose to buy other drinks
instead. If he does go ahead, Mike now realises
that if he chooses his location carefully he can
minimise wage costs.
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What now?
clear water
Mike’s analysis prompts a series of questions:
Why am I well placed to launch a water
brand?
Would it be more beneficial to act as a
supplier to or buyer from water companies?
(eg open a retail chain)
How fragile is the market lead enjoyed by the
largest water companies?
The answer to these questions will determine
what Mike does next.
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What now?
Learn more about Porter’s Five Forces here.
We have more information on this and other strategy tools and
themes at strategywrap.com. Why not take a look today?
Follow us on Twitter @strategywrap or sign up for our mailing list.
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