porter 5 force analysis

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PORTER FIVE FORCE ANALYSIS

ANIKET KULKARNI (MT14IND003)

& MAYANK AGRAWAL (MT14IND012)

INDUSTRIAL ENGINEERIG (2014 – 15)

DEPARTMENT OF MECHANICAL ENGG.

VNIT, NAGPUR

ANIKET KULKARNI & MAYANK AGRAWALPORTER FIVE FORCE ANALYSIS

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Introduction

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market.


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What is Porter 5 Force Analysis?

• Porter five forces analysis is a framework to analyse level of competition within an industry and to develop business strategy accordingly.

• The framework allows a business to identify and analyse the important forces that determine the profitability of an industry.


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5 Forces

Porter identified five factors that act together to determine the nature of competition within an industry. These are the:

1. Threat of new entrants to a market

2. Bargaining power of suppliers

3. Bargaining power of customers (“buyers”)

4. Threat of substitute products

5. Degree of competitive rivalry


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1.Threat of new entrants to an Industry

• The competitive threat to a company’s business may not only be from existing players in the market but also from potential new entrants into the market place.

• If it costs little in time or money to enter your market, then new competitors can quickly enter your market and weaken your position and if your product is strong enough then it will be threat for new entrants.


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The following factors can have an effect on how much of a threat new entrants may pose:

• When entrance barriers are high and exit are low.

• Regulatory and legal restrictions.

• Capital requirement.

• Customer loyalty to established brands.


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• Industry profitability (the more profitable the industry the more attractive it will be to new competitors).

• Access to suppliers and distribution channels.

• Retaliation by established products.


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2. Bargaining power of suppliers

• The bargaining power of suppliers is also described as the market of inputs.

• Suppliers of raw materials, components, labour, and services to the firm.

• Supplier can have supreme power over the firm when there are few substitutes.

• For ex: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them.


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Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

If a firm’s suppliers have bargaining power they will:

• Exercise that power.

• Sell their products at a higher price.

• Squeeze industry profits


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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 to an alternative supplier is high.

• The supplier can threaten to integrate vertically.

• There are no or few substitute resources available.

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3.Bargaining power of customers

• The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

• Firms can take measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many alternatives.


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Several factors determine the bargaining power of customers, including:

• Number of buyers.

• The importance of each individual buyer to your business.

• Buyer switching costs relative to firm switching costs.

• Availability of existing substitute products.


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4. Threat of substitution

• A substitute product can be regarded something that meets the same need.

• Substitute products are produced in a different industry but crucially satisfy the same customer need.

• If there are many credible substitutes to a firm’s product, they will limit the price that can be charged and will reduce industry profits.


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The extent of the threat depends upon:

• The extent to which the price and performance of the substitute can match the industry’s product.

• The willingness of customers to switch.

• Customer loyalty and switching costs.


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5. Rivalry

• What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you.

• On the other hand, if no one else can do what you do, then you can often have tremendous strength.


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Several factors determine the degree of competitive rivalry; the main ones are:

• Number of competitors in the market.• Market size and growth prospects.• Product differentiation and brand loyalty.• The power of buyers and the availability of

substitutes.• Exit barriers: If it is difficult or expensive to exit an

industry, firms will remain thus adding to the intensity of competition.


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A Porter's 5 forces analysis on Nokia


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• Nokia was founded over 140 years ago in Finland, and since then has become a global organisation that operates in over 120 countries worldwide.

• Nokia has also become a market leader in the mobile telecommunications industry and is most known for their mobile phones and Smartphone’s.

• Although recent competition has affected the market share that Nokia has in the telecommunication industry they still hold a strong 29%(2011) of the market share in a forever changing industry.


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1. Threat of new entrants to Nokia

• The Nokia mobile phone industry is already a well established market and the threat of a new entrant is quite low, as the technology needed to rival the devices already available is quite advance if they want to differentiate from them.

• The barriers to entry in the mobile phone industry is high because any new entrants will need high investments in R&D, technology and marketing in order to compete with the Nokia mobile phone.


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• Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program .Ex: automobile manufacturer to develop cars especially for people whose height is greater than seven feet.

• Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If men and women respond similarly to marketing efforts for soft drinks, they do not constitute separate segments.


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Nokia currently(2011) hold a 26.8% of the entire mobile phone market worldwide and for a new competitor to obtain some of their market will take either a very long term plan or something that is truly innovative and unseen before. This is because realistically the new entrant will need very high investment for R&D and marketing.

The following are common effect by Nokia that provide successful barriers to new entry :

i) High initial investment needed.


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• Measurable: The size, purchasing power, and profiles of the segments can be measured. there are 30.5 million left handed people in the United States, Yet few products are targeted toward this left-handed segment.

• Accessible: The market segments can be effectively reached and served. Fragrance company finds that heavy users of its brand are men.


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2. Economies of scale available: Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively.

3. Patents and proprietary knowledge.

4. Product differentiation: Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share.


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5. Access to suppliers and distribution channels: A lack of access will make it difficult for newcomers to enter the market.

6. Retaliation by established products: E.g. the threat of price war will act to discourage new entrants.

Say:- Price wars between Nokia & Samsung.

In conclusion, there is a low threat from the new entrants to Nokia


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2. Power of suppliers in case of Nokia

• Although Nokia rely on its suppliers to supply equipment for their advanced mobile phones, there are actually a number of large equipment makers, which Nokia could switch to.

• Nokia’s main argument would be the fact that they are a global organisation that has the highest market share in the industry, so the suppliers would not want to lose such an illustrious organisation.


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How much power the supplier have is determined by factors such as:

1. Uniqueness of the input supplied:

If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position.

e.g. Uniqueness of the software's provided by the Microsoft to Nokia.


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2. Cost of switching to alternative sources:

Nokia have large numbers of hardware suppliers so cost of switching alternative sources is might be lesser for it.

On the other hand, Nokia have recently created an alliance with Microsoft for their software which would be considered a major benefit for Nokia more than Microsoft, so cost of loosing Microsoft would be much higher for Nokia.


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3. Number and size of firms supplying the resources:

Nokia are in the position where they can bargain and negotiate with any mobile phone hardware maker because there is a high number of equipment suppliers that are readily available to them.

Microsoft will have a lot of power when negotiating a price and share because the deal is more beneficial to Nokia than Microsoft.


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• In conclusion, there is a moderate threat from the powers of suppliers to Nokia, because although the hardware suppliers have a very low power, Microsoft’s power over the software is very high because they’re very few other organisations who have the expertise and skills to rival Microsoft.


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The power that customers have is rising because of the increasing number of choices in the mobile telecommunication industry.

Several factors determine the bargaining power of customers, including

1. Increased price sensitivity: Price differentiation is getting lower and lower as device manufacturers are facing fast changes in designs, technical and data capabilities leading the buyers to price sensitive in their buying decision. With lot of Nokia’s competitors offering similar packages, the buyers are seeking out best value for their money.


3. Powers of buyers in case of Nokia

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2. Low Product differentiation: In the cut-throat mobile industry, the product differentiation factors are getting lower. If when player comes up with a new feature or technology improvement, it is taken by competitive player very soon e.g. dual-core processors, wide-screen, LTE, etc.

Nokia are especially very weak in hardware components differentiation (except for camera)


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3. Low threat of backward integration: Some mobile operators have started building their own mobile phones under their brand (e.g. Videocon in India) but still have not been hugely popular. So the threat is still low. Most of the mobile phone manufacturers have their own stores to directly sell to consumers, Nokia is still behind in this area too.

4. Increasing Buyer volume: Consumers (end buyers) volume is continuously increasing globally despite recession in recent years in some regions and saturation in some.


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• In conclusion, the buyers have a high amount of power because of the other handsets they can purchase instead of Nokia.


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Nokia operate in an industry where the competition is extremely fierce with high investment in R&D and marketing to compete with some of the biggest organisations in the world.

This year Nokia’s market share has dropped to 29% and it is forecast to continue to fall because of the rising popularity of the Apple IPhone.


4. Rivalry between competitors

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Several factors determine the degree of competitive rivalry; the main ones are:

1. Intense competition from large companies such as; Apple, HTC, Blackberry, Sony Ericson and LG, to Nokia.

2. There is also very little differentiation between the competitors which means any new smart phones in the market, like Nokia Lumia, will find it difficult to tempt existing iPhone and HTC customers to switch


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3.Brand identity: Brand identity is vital for long term success in mobile phones market. But there is still growing competition e.g. from Chinese 'micro-brands' and grey market (mainly in the emerging regions like India)

4. High diversity of rivals: Over 2011 Nokia’s sales were down 18% in China, 27% in Europe and 61% in North America. Nokia has faced increased competition from low-cost phone manufacturers such as ZTE and Huawei (mostly in China and Europe).


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5. High margins: The smartphone segment offers the largest returns for many in the mobile value chain, and it has therefore become the most competitive – attracting all the major vendors competing across various operating systems and price tiers.

Huawei has set an ambitious goal for itself: to ship 60 million smartphones in 2012, an increase of 200% year-on-year. So that may that may proof dangerous for Nokia.


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• In conclusion, competitive rivalry is very high and Nokia must be aware of the threat that competitors have on their business especially with the growing popularity of the Apple iPhone and RIM blackberry


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1. Low Buyer inclination to substitute:

Mobile phones have become necessity for everyday lives of people and its hard to replace with any substitute products especially when they are away from home.

2. High switching costs:

There exist multiple substitute products e.g. for contacting people, usage of social media, emails, digital cameras for photography, TV/radio/iPod for listening music, tablets for internet browsing, reading books, emailing etc. needless to say each substitute product might cost more than the mobile phone and need to be carried all the time.


5. Threat of substitute products to Nokia mobile phones

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3. High price-performance ration (value): No other substitute product has the ability to make phone calls, send messages, surf the web, reading a book, listening to music, use GPS services, communicating via social media and many more in one device. The idea of being in constant communication with someone at anytime and anywhere makes the mobile phone a very important device to people and the perceived value by user (price-performance) ratio is very high).

In conclusion, Nokia mobile phones do not have a threat of a substitute or have a very low threat of substitute.


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ATTITUDE :

ii. Benefit sought :• NIVEA Sun recognised consumers with special skin types as a

separate segment, who require a more specialised product. • Hence, NIVEA Sun has formulated sensitive skin products for

special segment.

• Continual segmentation is vital to fully understand consumer needs and changing habits.


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• http://www.slideshare.net/hooda_27/porters-5-forces-analysis-nokia

• http://tfliu90.hubpages.com/hub/A-Porters-5-forces-analysis-on-Nokia

• http://www.investopedia.com/terms/p/porter.asp

• http://www.quickmba.com/strategy/porter.shtmlANIKET KULKARNI & MAYANK AGRAWALPORTER FIVE FORCE ANALYSIS

References

http://www.slideshare.net/hooda_27/porters-5-forces-analysis-nokia



http://tfliu90.hubpages.com/hub/A-Porters-5-forces-analysis-on-Nokia



http://www.investopedia.com/terms/p/porter.asp

http://www.investopedia.com/terms/p/porter.asp

http://www.quickmba.com/strategy/porter.shtml

http://www.quickmba.com/strategy/porter.shtml

45ANIKET KULKARNI & MAYANK AGRAWALPORTER FIVE FORCE ANALYSIS

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