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      • What is Cluster Analysis
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      • Visualisation and statistics (Political Advertising,Movie Theater and Data Assembly)
      • Excel Analysis of Motion Picture Industry Data
      • Displaying Conditional Distributions
      • Analyzing Qualitative Variables
      • Steps in Constructing Histograms
      • Common Descriptive Statistics for Quantitative Data
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    • Introduction to Managerial Economics >
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        • Demand Concepts and Analysis >
          • Formulation and Solution of Binary Optimization Problems
      • Scope of Managerial Economics
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      • Production Function
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      • Cost Concepts and Analysis I
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        • Adding Optimization to a Spreadsheet Model
      • Market structure and microbes barriers to entry
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  • Untitled
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    • Cluster analysis using excel and excel miner
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    • Adding Uncertainty to a Spreadsheet Model
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Picture

PORTER’S FIVE FORCES MODEL

Porter’s Five Forces
Understanding the dynamics of competitors within an industry is critical for several reasons. First, it can
help to assess the potential opportunities for your venture, particularly important if you are entering this
industry as a new player. It can also be a critical step to better differentiate you from others that offer similar
products and services. One of the most respected models to assist with this analysis is Porter’s Five Forces
Model. This model, created by Michael E. Porter and described in the book “Competitive Strategy:

Techniques for Analyzing Industries and Competitors”, has proven to be a useful tool for both business and
marketing-based planning.

Background
The pure competition model does not present a viable tool to assess an industry. Porter’s Five Forces
attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors
within an industry. This model may be used as a tool to better develop a strategic advantage over
competing firms within an industry in a competitive and healthy environment. It identifies five forces that
determine the long-run profitability of a market or market segment.

1. Suppliers
2. Buyers
3. Entry/Exit Barriers
4. Substitutes
5. Rivalry

1. Supplier Power
  • Supplier concentration
  • Importance of volume to supplier
  • Differentiation of inputs
  • Impact of inputs on cost or differentiation
  • Switching costs of firms in the industry
  • Presence of substitute inputs
  • Threat of forward integration
  • Cost relative to total purchases in industry

2. Buyer Power
  • Bargaining leverage
  • Buyer volume
  • Buyer information
  • Brand identity
  • Price sensitivity
  • Threat of backward integration
  • Product differentiation
  • Buyer concentration vs. industry
  • Substitutes available
  • Buyers' incentives

3. Entry/Exit Barriers
  • Absolute cost advantages
  • Proprietary learning curve
  • Access to inputs
  • Government or other binding policy
  • Economies of scale
  • Capital requirements
  • Brand identity
  • Switching costs
  • Access to distribution
  • Expected retaliation
  • Proprietary products

4. Substitutes
  • Switching costs
  • Buyer inclination to find alternatives
  • Price-performance
  • Trade-off of the available substitute products or services

5. Rivalry
  • Exit barriers
  • Industry concentration
  • Fixed costs
  • Perceived value add
  • Industry growth
  • Overcapacity status
  • Product differences
  • Switching costs
  • Brand identity
  • Diversity of rivals
  • Corporate stakes

6. Service
  • Level of service compared to others
  • Added value perceptions
  • Dynamics with other attributes

Power of Suppliers
An industry that produces goods requires raw materials. This leads to buyer-supplier relationships between
the industry and the firms that provide the raw materials. Depending on where the power lies, suppliers
may be able to exert an influence on the producing industry. They may be able to dictate price and influence
availability. A segment is unattractive when an organization’s suppliers have the ability to:

  • Increase prices without suffering from a decrease in volume
  • Reduce the quantity supplied
  • Organize in a formal or informal manner
  • Compete in an environment with relatively few substitutes
  • Provide a product/material that is a critical part of the end product or service
  • Impose switching costs on their customers when they depart
  • Integrate downstream by purchasing or controlling the distribution channels

One example of this is DeBeers ability to wield influence within the diamond industry. DeBeers’ high level
of control over some of the most productive diamond mines in the world gives them extreme power within
the industry.

The best defence in mitigating the power of suppliers is to build win–win relationships with suppliers or
arrange to use multiple suppliers.

Power of Buyers
The power of buyers describes the impact customers have on an industry. When buyer power is strong, the
relationship to the producing industry becomes closer to what economists term a monopoly. A Monopoly is
a market where there are many suppliers and one buyer. Under these market conditions, the buyer has the
most influence in determining the price. Few pure monopolies actually exist, but there is often a connection
between an industry and buyers that determines where power lies.

The bargaining power of buyers increases when they have the ability to:
  • Be “organized” in some form with others providing similar products and services
  • Purchase a product that represents a significant fraction of the buyer’s costs
  • Buy a product that is undifferentiated
  • Incur low switching costs when they change vendors
  • Be price sensitive, with other options available
  • Integrate upstream, to purchase the providers of the goods.

To mitigate the power of buyers, sellers can seek to select buyers with less power to negotiate, switch
suppliers, or develop superior offers that strong buyers cannot refuse.
Barriers to Entry/Exit
The possibility of new firms entering the industry affects competition. A key is to assess how easy it is for a
new player to enter an industry. The most attractive segment has high entry barriers and low exit barriers.
Although any firm should be able to enter and exit a market, each industry often presents varying levels of
difficulty, commonly driven by economics. Manufacturing-based industries are more difficult to enter than
many service-based industries. The definable characteristics of each industry protect profitable areas for
firms and inhibit additional rivals from entering the market. These inhibitive characteristics are referred to
as barriers to entry.
Barriers to entry are more than the expected ebb and flow that markets typically experience. For example,
when industry profits increase, one would expect firms to enter the market to take advantage of the high
profit levels, which will eventually result in reducing profits.
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  • Home
  • Applied Analytics
    • Analytics for Decision Making >
      • What is Cluster Analysis
      • Data Reduction and Unsupervised Learning
      • Preparing Data and Measuring Dissimilarities
      • Hierarchical and k-Means Clustering
      • Defining Output Variables and Analyzing the Results
      • Using Historical Data to Model Uncertainty
      • Models with Correlated Uncertain Variables
      • Creating and Interpreting Charts
      • Using Average Values versus Simulation
      • Optimization and Decision Making
      • Formulating an Optimization Problem
      • Developing a Spreadsheet Model
      • Adding Optimization to a Spreadsheet Model
      • What-if Analysis and the Sensitivity Report
      • Evaluating Scenarios and Visualizing Results to Gain Practical Insights
      • Digital Marketing Application of Optimization
      • Advanced Models for Better Decisions
      • Business Problems with Yes/No Decisions
      • Formulation and Solution of Binary Optimization Problems
      • Metaheuristic Optimization
      • Chance Constraints and Value At Risk
      • Simulation Optimization
    • Analytics for Marketing >
      • Marketing Analytics and Customer Satisfaction
      • Customer Satisfaction
      • Measurements and Scaling Techniques – Introduction
      • Primary Scales of Measurement
      • Comparative Scaling
      • Non-Comparative Scaling
      • Experiment Design: Controlling for Experimental Errors
      • A/B Testing: Introduction
      • A/B Testing: Types of Tests
      • ANOVA – Introduction
      • Example -Inspect Spray and Tooth Growth
      • Logit Model - Binary Outome and Forecastign linear regression
      • Text Summarization
      • Social media Microscope
      • N-Gram - Frequcy Count and phase mining
      • LDA Topic Modeling
      • Machine-Learned Classification and Semantic Topic Tagging
    • Data Engine >
      • Understanding The Growth Of Data
      • Evaluating Methods Of Data Access
      • Communication journey
      • Data Journey
      • Planning for data visualisation
      • Visualisation Component
      • Content Connection and Chart Legitibility
    • Customer Insights >
      • Introduction
      • What is Descriptive Analytics?
      • Survey Overview
      • Net Promoter Score and Self-Reports
      • Survey Design
      • Passive Data Collection
      • Media Planning
      • Data Visualization
      • Causal Data Collection and Summary
      • Asking Predictive Questions
      • Regression Analysis
      • Data Set Predictions
      • Probability Models
      • Results and Predictions
      • Perspective Analytics (Maximize Revenue and Market Structure Competitions)
    • Analytics for Advance Marketing >
      • Visualisation and statistics (Political Advertising,Movie Theater and Data Assembly)
      • Excel Analysis of Motion Picture Industry Data
      • Displaying Conditional Distributions
      • Analyzing Qualitative Variables
      • Steps in Constructing Histograms
      • Common Descriptive Statistics for Quantitative Data
      • Regression-Based Modeling
      • Customer Analytics
      • Illustrating Customer Analytics in Excel
      • Customer Valuation Excel Demonstration
  • Soft Skills
    • Adaptability
    • Confidence
    • Change Management
    • Unlearning and Learning
    • Collaboration and Teamwork
    • Cultural Sensitivity
  • Marketing
  • Finance
  • Economics
    • Introduction to Managerial Economics >
      • Basic Techniques
      • The firm: Stakeholders, Objectives and Decision Issues
      • Demand and Revenue Analysis >
        • Demand Estimation and Forecasting
        • Demand Elasticity
        • Demand Concepts and Analysis >
          • Formulation and Solution of Binary Optimization Problems
      • Scope of Managerial Economics
    • Prodution and Cost Analysis >
      • Production Function
      • Estimation of Production and Cost Functions
      • Cost Concepts and Analysis I
      • Cost Concepts and Analysis II
    • Pricing Decisions >
      • Pricing strategies >
        • Adding Optimization to a Spreadsheet Model
      • Market structure and microbes barriers to entry
      • Pricing under pure competition and pure monopoly
      • Pricing under monopolistic and oligopolistic competition
    • Narendra Modi Development Model of Gujarat
  • JBDON Golf
    • Digital Marketing Application of Optimization
  • Let's Talk
  • MBA Project Sharing
  • About Us
    • Good Read >
      • IIMC says PepsiCo CEO Indra Nooyi was an average student
      • India’s middle class figures in Fortune’s Top Ten list of those who matter
      • The Start-Up of you.
      • BUYING AND MERCHANDISING
      • HUMAN RESOURCE MANAGEMENT
      • Do You Suffer From Decision Fatigue?
      • New Page
      • About social media and web 2.0
      • Building Your Own Start-up Technology Company, Part 1
      • Building Your Own Start-up Technology Company, Part 2
      • Building Your Own Start-up Technology Company, Part 3
      • Building Your Own Start-up Technology Company, Part 4
      • Renewable energy is no longer alternative energy
      • What Makes an Exceptional Social Media Manager?
      • The Forgotten Book that Helped Shape the Modern Economy
      • Home
      • How to Think Creatively
      • A Lighthearted Looks at Project Management and Sports Analogies
      • Why Trust Matters More Than Ever for Brands
  • CET Knowledge Zone
    • Tips From JBIMS Students >
      • Prasad Sawant
      • Chandan Roy
      • Ram
      • Ashmant Tiwari
      • Rajesh Rikame
      • Ami Kothari
      • Ankeet Adani
      • Sonam Jain
      • Marketing Analytics and Customer Satisfaction
      • Mitesh Thakker
      • Tresa Sankoorikal
    • Speed Techniques
    • CET Workshops
  • Untitled
  • New Page
    • Cluster analysis using excel and excel miner
    • Chance Constraints and Value At Risk
    • Adding Uncertainty to a Spreadsheet Model
  • Adidas