COMPETITION ANALYSISIn analyzing an industry, two types of analysis are required which includes;

1. Force shaping competition2. Competitor analysis

1. FORCES SHAPING COMPETITION / PORTER’S FIVE FORCES MODEL:

The best-known model for analysing a competitive environment is Michael Porter's Five Forces model. Porter classifies the five forces that give shape to competition as;

1. Threat of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Threat of substitute products or services

5. Rivalry among existing competitors.

1. THREAT OF NEW ENTRANTS – There shall always be more competition whenever competitors find it easy to enter in any industry. Whenever new competitors enter into any industry, then they would be a threat for the existing companies in that industry.

There are some factors which can stop new companies to enter into a particular industry. These factors are known as ENTRY BARRIERS. These trade barriers are listed below;

a. Economies of scaleWhen a company starts producing any product on a large scale, then it gets certain advantages. Because of this, the cost per product decreases. This is known as economies of scale. Whenever there is an economies of scale in any industry, then it becomes difficult for new companies to

enter in that industry because a new company cannot start its production on a very large scale in the beginning. Hence the cost of production of new company increases. As a result of this, new companies do not try to enter in that industry.

b. Product differentiationIf there is heavy product differentiation in any industry then it will be a barrier for a new company to enter in that industry. This is because new companies may not have anything special to differentiate. Hence they cannot enter in that particular industry. When customers have high brand loyalty, then also new companies find difficult to enter in that industry. Example: soaps, soft drinks, cosmetics and other personal products.

c. Capital requirementsIn certain industry, it requires very large capital to start business. For a new company it is difficult to bring such a large capital. Hence it acts as a barrier for new company. For example, if a company wants to enter in fertilizer business, then it has to invest minimum 1000 Crores to start the project.

d. Cost disadvantage The existing companies in any industry may have cost advantage because of their experience. New companies cannot get this advantage because they do not have any experience. Hence new companies are at cost disadvantage. This is a barrier for them.

e. Access to distribution channelsThe new companies may not have access to distribution channels because distribution channels are often tied up by existing large companies. For example, Reliance Industries ties up with its distributers and does not allow their distributors to sell competitors products. Hence new companies find difficult to get distributors to sell their products

f. Government policyGovernment policy plays a major role as entry barrier. The Government can stop new companies in entering into any industry. Government can create this barrier in the form of license.

2. POWER OF SUPPLIERS – Many times suppliers (sellers) have more power as compared to buyers(industries). Under following circumstances, sellers have more bargaining power;

There are very few suppliers of a particular product There are no substitutes There is a chance of forward integration It is costly for the buyer to get another supplier (i.e. switchover cost) The product is extremely important to buyers - can't do without it The supplying industry has a higher profitability than the buying industry

3. POWER OF BUYERS - Many times buyers have more power as compared to sellers. Under following circumstances, buyers have more bargaining power;

a. There are small number of buyers. Hence sellers are under pressure.b. Buyers Purchase in large quantity. Hence seller has to give discountc. It is not costly for the buyer to get another supplier.d. There is a chance of backward integratione. The product is not very important to buyers; they can do without the

product for a period of timef. Buyers are price sensitive

4. SUBSTITUTE PRODUCTS – Substitute products are always a problem to any product. They can act as a force which can control the price of any product. For example tea and coffee are

substitute products. If the price of tea starts increasing too much, then people will start buying coffee. Hence it is very difficult for the tea companies to increase their price as they are under pressure of substitute product coffee. There is another example of substitute product, i.e. JUTE manufacturers. Earlier companies use to pack their groceries in jute bags but now jute bags are substituted by plastic bags. Hence jute manufacturers found a problem due to substitute product - plastic bags.

5. COMPETITIVE RIVALRY – Competitive rivalry means the amount of competition among existing firms in an industry. If there is a very high competitive rivalry, it means that the competition is very strong in a particular industry. Hence in such type of industry, profits will be less for all the companies because of high competition. If there is low competitive rivalry, it means that the competition is not very strong in that industry. High competition in any industry is because of the following factors;

a. There are many companies of SAME SIZE

b. There is very less DIFFERENTIATION in the product

c. Industry is at a maturity stage. That means there is no sales increase.

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