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Porters 5 Forces Analysis

To analyze Marketing Areas we have chosen Porter's 5 forces analysis. It 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 developed in Industrial Organization (IO) economics to derive 5 forces that determine the competitive intensity and therefore attractiveness of a market. Porters model is based on the insight that the competitive strategy of an incumbent or a company should be based on an understanding of industry structure and the way they change. In this section, the industry environment of ceramic sector will analyzed by five recognized competitive forces developed by Michael E. Porter. This analysis presents a picture of industrys growth situation and its attractiveness. It includes 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, bargaining power of customers.

The threat of substitute products:

Medium

As indicated by Porters five forces model, substitute products will cause an indirect threat to existing firms. This threat may not be as crucial as that from direct competitors; however, it can still be considerable. There are many examples from industrial history where a substitute product has completely wiped out industries. The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand). The basic substitute of aluminium in Bangladesh is 1. Composite wood C:\Documents and Settings\aluminium, 2. Steel Buyer propensity to substitute: Customers in some markets are more likely to remain loyal to a product or service. Market players said the advantages of aluminium such as lightweight, strength, corrosion resistance, durability, easy in fabrication, attractive appearance and easy maintenance make it a popular material for use in modern buildings. In other markets customer loyalty is rare. Here buyer propensity to substitute is low, because aluminium is cheaper, more available and long lasting than composite wood and steel. Since end of the day customers are price sensitive, they are supposed to be loyal to our product.

Relative price performance of substitutes: Substitutes of aluminium usually comes in a very high price. So, aluminium industries are facing great opportunity here.

Buyer switching costs: C:\Documents and Settings\aluminium\porter five forces 2.pdf The greater the cost for customers to switch to a substitute product, the less the threat there is of substitution. The switching cost is high because both wood and steel are expensive than aluminium. So, its a good sign for aluminium industry.

Perceived level of product differentiation C:\Documents and Settings\aluminium\porter.pdf: People are less likely to switch to an alternative product if they think that it would be difficult to replicate all of the features of their original product. Aluminium comes in many shapes and many colors customized relating to the requirement of the customers. Moreover, the longevity of aluminium is better than wood and the appearance of aluminium is better than steel. So, aluminium is creating more product differentiation than steel or wood, which is quite difficult to replicate.

The threat of the entry of new competitors:

Medium

Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

The existence of barriers to entry (patents, rights, etc.): The only barrier to enter into aluminium industry is to get permission. So, the threats of potential new competitors are low in this sector.

Economies of product differences: The economies C:\Documents and Settings\aluminium\economic factor of product differences are not high, which enables potential new entrants to start their business smoothly.

Brand equity: Brand equity plays a crucial role in aluminium industry because brand image is an important factor for the new entrant company. For a new unknown company it would be difficult to have customer without any social image. If the new companys owner is socially recognized then the company can able to stables themselves in the industry. Engineers and architect always search for the quality, and thats why they usually dont depend on any new products. So at the earliest stage convincing customers can be a difficult task.

Economies of scale C:\Documents and Settings\aluminium\porter five forces: As far as the sector forces go, scale of operation does matter. Benefits of economies of scale are derived in the form of lower costs and better bargaining power while sourcing raw materials. It may be noted that the minimum economic size of a fully integrated greenfield smelter in Bangladesh is around 6000 tonnes. The aluminium companies, which are integrated, have their own suppliers for key raw materials such as alumina, die and this protects them from the potential threat for new entrants to a significant extent. They also have gas line and electricity line which is now very challenging to have full access in Bangladesh.

Capital requirements: Capital C:\Documents and Settings\aluminium\capital requirement can be a strong entry barrier for potential competitors in this industry. Aluminium industry is a highly capital intensive business. It is estimated that a capital investment of around 150 coror to 180 coror is required to setup an economically viable greenfield project. Capital is sunk into specific extrusion equipment, site specific location and existing producers control critical resource.

Higher gestation period: The gestation period for an economically viable green field plant is over 4years while for a brown field project, (modernization / capacity addition) the gestation period is relatively lower between 1.5 years to 2 years

Access to distribution: Access to distribution might be a tricky job. Because, new entrants has to convince the dealer and capture the supply chain. So, any party interested to engage in aluminium industry, have to think twice before entering to this business.

Market Growth C:\Documents and Settings\aluminium\market growth: The market of aluminium extrusion products used in doors, windows and curtain walls has been growing rapidly as wood is getting scarce by the day. Nearly half a dozen companies have hit the market in the past two years to cash in on the growing market size now estimated at around Tk 600 crore a year. Scarcity of wooden materials has been prompting buyers to go for aluminium extrusion products. Since, the market is growing at a double digit rate its very attractive sector for new investors.

Government policies: The government has a favorable policy towards aluminium manufacturers However, similar to other sectors, there are certain discrepancies involved in importing alumina from other countries and get customs clearance. So, regulatory clearances and other issues are some of the major problems for the new entrants.

The intensity of competitive rivalry:

Medium

For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

Competition C:\Documents and Settings\aluminium\porter five forces is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.

Number of competitors: The Bangladeshi aluminium industry is dominated four to five companies that constitute the majority of Bangladeshs aluminium production. Following are the major players in Bangladeshi Aluminium industry:

1. Kai Aluminium Ltd 2. Bangladesh Thai Aluminium Ltd 3. Chung Hua (former Fu-Wang Aluminum) Aluminium Industries Ltd. 4. Dhaka Thai Aluminium Ltd. 5. ALCO Aluminium Ltd The number of competitors is medium in this area, and any aluminium industry has to overcome a fair amount of pressure and competition from all sides.

Rate of industry growth: The aluminium industry has a steady positive growth. From the trend we can assume that the industry is still in the growth stage. The market is growing at a double digit rate. Scarcity of wooden materials has been prompting buyers to go for aluminium extrusionC:\Documents and Settings\aluminium\aluminium extrusion products. As it has on average more than 10% positive growth rate, which indicates that though new companies are still increasing it has more potential to grow, and almost all companies can do business in a less competitive condition.

Intermittent industry overcapacity: Thats might be a problem for newspaper industries. If they manufacture more aluminium than required, they will face a lot of problem in near future.

Exit barriers: Exit barrier of this industry is high. Because if an aluminium company buy all those equipment, and incur loss. It might be very difficult for them to sell the loosing company, and shut down the business.

Diversity of competitors: Competitors C:\Documents and Settings\aluminium\compitetors are not very diverse; almost all of them act in the same way.

Different customer target segment: The use of aluminium in business and office complexes, buildings, theatres as well as decorative purposes is common. Shops built with lighter materials are also consuming aluminium products. However, the market of aluminium business sector is not very segmented. This segmentation is mainly based on the usage of the aluminiums and the location of the users. The segmented areas are:

1. Corporate House 2. Builders and Architects 3. District level Dealers

Level of advertising expense: The level of advertising expense will be low. As this is a business to business deal newspaper or TVC ads will not do much work the company. They have to depend on billboards or word of mouth. So, the advertising expense is low.

Sustainable competitive advantage through improvisation: There is a lot of space for improvisation in this industry. So, we can take this advantage as a challenge and overcome our competitors.

Brand Image & Experience C:\Documents and Settings\aluminium\porter five forces: Brand image have a moderate impact over the competition within the companies. But it is not just brand image that will give us a sustained competitive advantage. For example, once upon a time Bangladesh Thai Aluminium was the premier brand in aluminium industry. So, they had more exposure than other competitors. But now they are facing a strong competition from other new entrant companies.

There may be some importance of Brand image, as for well known, customer can easily rely on the companies, and their most priority is product quality & price. For example Kai Aluminium Ltd. came in the market later than BTA, but they become one of the most successful companies as for their quality work, customer commitment and huge profile marketing. So brand image is an important factor, but one company cannot continue to have sales only for brand image.

The bargaining power of customers:

Medium

The bargaining power of customers is also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes. Being a commodity, customers enjoy medium bargaining power in Bangladesh as prices are determined on demand and supply. Basically the companies which have brand image & goodwill can have the bargaining power over the customers. On the other side, for new small unknown company the customers have the bargaining power over manufacturer.

Buyer volume: Buyer volume is huge in this sector. Basically aluminium manufacturing companies target all the clients in the construction industry of our country. So, buyers of aluminium are increasing day by day.

Balance of Supply and Demand C:\Documents and Settings\aluminium\Balance of supply and demand: In this case both the customers & the aluminium manufacturing companies have the bargaining power overreach other. As in the marker customer demand is still higher than the supply of aluminium, the aluminium companies gain the bargain power over the customers.

Competitors: On the other hand, as there are number of Thai aluminium manufacturer operating in the business, the customers have more opportunity to switch over, therefore customer gain the bargaining power over the real estate companies.

Availability of existing substitutes: C:\Documents and Settings\aluminium\substitutes Availability of existing substitutes is very scarce. So, buyers are interested in buying aluminium. Market players said the advantages of aluminium such as lightweight, strength, corrosion resistance, durability, easy in fabrication, attractive appearance and easy maintenance make it a popular material for use in modern buildings.

Buyer price sensitivity: Buyers are priceC:\Documents and Settings\aluminium\Price sensitive in Bangladesh, so demanding very high price might affect business negatively. On the other hand, the price of aluminium fixed by the primary producers is generally aligned to the London Metal Exchange (LME) prices. In FY 2009-10, the world aluminium price averaged around $1666/tonne, which was about 16% below the FY 2008-09 average price. The decline in aluminium price in 2009 was the largest annual decline on record, mainly as a result of consumption falling faster than production and stocks increasing to end at over 4.6 million at LME. It is expected that LME price of aluminium will remain between $ 2400 to $ 2600/ tonne in the remaining months of FY 2010-11.

Differential advantage (uniqueness): If we can provide some unique advantages to our customers, definitely they will stick to our product.

The bargaining power of suppliers:

High

The bargaining power of suppliers is also described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

Bangladesh needs to import 100% raw materials for producing aluminium. The raw materials account for 40-50 percent of the total production cost of the ceramic products. The raw materials of aluminium include alumina, primary metal and so on. The core raw material is imported from mainly India, Malaysia, and Australia and so on. Besides that chemicals and die materials are imported from mainly China. However, a non-integrated or semi integrated, (downstream) have to depend upon the upstream producers for alumina or primary metal. While the bargaining power is limited in case of power purchase as it is highly regulated sector and government is the sole supplier most of the times.

Number of Suppliers: The number of suppliers for raw material is relatively high so the raw material market is highly fragmented. Companies can import raw material C:\Documents and Settings\situation analysis\Raw Material from number of companies in India, Malaysia and China. Therefore, the supplier base of aluminium sector is moderately large enough to weaken the supplier power.

Degree of differentiation of inputs: Basically in aluminium industry the differentiations of inputs dont vary too much. So, it becomes easy to bargain with different kinds of suppliers in this industry.

Presence of substitute C:\Documents and Settings\aluminium\substitutes inputs: There are no substitute inputs available for smelting aluminium; companies are dependent on specific upstream inputs. Since in Bangladesh, there is a shortage of raw materials, equipment and machineries for aluminium industry, it gives the supplier some leverage in bargaining the price.

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