STRATEGIC MANAGEMENT PROJECT

MICHEAL PORTERS 5 FORCES

SUBMITTED TO: PROF. JOHN PAUL

SUBMITTED BY:
PRATEEK AGARWAL
08D1638
What are the five forces?
Porter's five forces is a framework for the industry analysis and business
strategy development
developed by Michael E. Porter of Harvard Business School in 1979. It draws
upon Industrial
Organization (IO) economics to derive five forces that determine the
competitive intensity and
therefore attractiveness of a market. Attractiveness in this context refers to
the overall industry
profitability. An "unattractive" industry is one in which the combination of
these five forces acts
to drive down overall profitability. A very unattractive industry would be one
approaching "pure
competition", in which available profits for all firms are driven down to zero.
Three of Porter's five forces refer to competition from external sources. The
remainder are
internal threats. It is useful to use Porter's five forces in conjunction with
SWOT
analysis (Strengths, Weaknesses, Opportunities, and Threats).
Porter referred to these forces as the micro environment, to contrast it with
the more general
term macro environment. They consist of those forces close to a company
that affect its ability
to serve its customers and make a profit. A change in any of the forces
normally, requires a
business unit to re-assess the marketplace given the overall change in
industry information. The
overall industry attractiveness does not imply that every firm in the industry
will return the
same profitability. Firms are able to apply their core competencies, business
model or network
to achieve a profit above the industry average. A clear example of this is the
airline industry. As
an industry, profitability is low and yet individual companies, by applying
unique business
models, have been able to make a return in excess of the industry average.
Porter's five forces include - 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 and the bargaining
power of
customers. This five forces analysis, is just one part of the complete Porter
strategic models.
The other elements are the value chain and the generic strategies
The Five Forces
The threat of the entry of new competitors
Profitable markets that yield high returns will attract new firms. This results
in many new
entrants, which eventually will decrease profitability for all firms in the
industry. Unless the
entry of new firms can be blocked by incumbents, the profit rate will fall
towards zero (perfect
competition).
The existence of barriers to entry (patents, rights, etc.) The most attractive
segment is one
in which entry barriers are high and exit barriers are low. Few new firms can
enter and nonperforming
firms can exit easily.
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Customer loyalty to established brands
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Government policies
Industry profitability; the more profitable the industry the more attractive it
will be to new
competitors
The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major
determinant of the
competitiveness of the industry.
Sustainable competitive advantage through innovation
Competition between online and offline companies; click-and-mortar -v-
slags on a bridge
Level of advertising expense
Powerful competitive strategy
The visibility of proprietary items on the Web
Used by a company this can intensify competitive pressures on their rivals.
How will
competition react to a certain behavior by another firm? Competitive rivalry
is likely to be
based on dimensions such as price, quality, and innovation. Technological
advances protect
companies from competition. This applies to products and services.
Companies that are
successful with introducing new technology are able to charge higher prices
and achieve higher
profits, until competitors imitate them. Examples of recent technology
advantage in have
been mp3 players and mobile telephones. Vertical integration is a strategy to
reduce a business'
own cost and thereby intensify pressure on its rival.
The threat of substitute products or services
The existence of products outside of the realm of the common product
boundaries increases
the propensity of customers to switch to alternatives:
Buyer propensity to substitute
Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market
Ease of substitution. Information-based products are more prone to
substitution, as online
product can easily replace material product.
Substandard product
Quality depreciation
The bargaining power of customers (buyers)
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.
Buyer concentration to firm concentration ratio
Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer volume
Buyer switching costs relative to firm switching costs
Buyer information availability
Ability to backward integrate
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM Analysis
The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs.
Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm
can be a source of
power over the firm, when there are few substitutes. Suppliers may refuse to
work with the
firm, or, e.g., charge excessively high prices for unique resources.
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Employee solidarity (e.g. labor unions)
Supplier competition - ability to forward vertically integrate and cut out the
buyer

Porter’s 5-Forces Analysis:

Porter’s Five Forces Analysis of Industry1

Engro is taken from the company logo "Energy for Growth". Engro Chemical Pakistan
Limited (ECPL) is a Pakistani fertilizer manufacturing and marketing company is a primary target
for an analysis using Michael Porter’s 5-Forces Model (“5-Forces”). We have applied the 5-Forces
analysis into the respective divisions: Supplier Power, Barriers to Entry, Threat of Substitutes,
Buyer Power and Degree of Rivalry. An in-depth analysis of each force within the Engro Chemical
Pakistan Limited (ECPL)

Its production is based in Daharki, Sindh and Karachi. It is included in the KSE 100 stock index at
the Karachi Stock Exchange and also listed on the Lahore and Islamabad Stock exchanges. Engro
Chemical Pakistan Limited, the Company has gone from strength to strength, reflected in its
consistent and enviable financial performance, growth of the core fertilizer business and
successful business diversification into other fields. Its performance & outlook is following the
declared Vision “to be the Premier Pakistani Enterprise with a global reach, passionately
pursuing value creation for all stake holders.”

Supplier Power

Supplier Power is analyzed though supplier concentration, importance of volume to

supplier, differentiation of inputs, switching costs of firms in the industry, etcetera. Suppliers are
powerful if there are only a few suppliers, a large number of purchasers, and significant costs of
switching suppliers. Supplier power is strongly buttressed when a supplier has control over
prices.

Suppliers in this industry are not concentrated. They act as separate groups competing
for the same project through the bid system that is prevalent in chemical Industry. Volume is of
significant concern. The, large chemical industry is not affected in terms of supply volume giving
suppliers any leverage.

The Company’s current manufacturing base includes urea nameplate capacity of 975,000
tons per annum and blended fertilizer (NPK) capacity of 160,000 tons per year.

Buyer Power
 Engro Chemical Pakistan Limited (ECPL) A premier brand and nationwide presence
ensure sellout production to Pakistani and international customers, due to flexible demand
delivery and low down payments. Buyers have power over when they are concentrated,
purchase a significant portion of new production, and pose a credible threat to purchases from
competitors.

Barriers to Entry (Threat of Potential Entry)

Identifying the possibility and probability of new entrants in an industry is critical

because they can intrude on market share and profitability of existing competitors. Economies
of scale, product differentiation, capital requirements, switching costs and government policy all
affect the Industry.

The economies of scale realized by Engro make it almost impossible for new entrants.

The governmental red tape that must be overcome in this industry is paramount to the success
of a prospective Fertilizer Company. Massive ecological and environment surveys must be done
before companies can begin production. The required capital and the ability to work with in the
industry are the two primary barriers to entry to the Market

The government regulates the pricing of natural gas, the most input to the fertilizer industry.
Natural gas is used a fuel and as raw material or feed stick. Previously the government's policy
was to supply fuel gas at rate pegged t high surplus Fuel oil, while feed stick at lower rates.

Threat of Substitutes

The threat of substitutes entails a consideration of such things as switching costs, buyer
inclination to substitute and the price-performance trade-off of substitutes. Most individuals
would like to make a investment with the purchase of a particular product of an organization.
 Many organization do realize that substitutes are there but they must develop such a
product that satisfy their customer. When prices become exorbitantly high, Companies mainly
watch out for a decreased demand.

Degree of Competitive Rivalry

The growth rate of the Chemical market is tremendous; however, it is limited in many
respects. The growth for the demand and the production of Urea is enormous. We believe the
growth in the actual number of competitors is merely a related effect of the costly barriers to
entry. The market is both mature and developing at the same time. The maturity of the market
can be illustrated by the Interventions and helps to carry out a cost benefit analysis of a policy
provided that governments know the tradeoff between efficiency and non efficiency goals.

Michael Porter, the designer of Porter’s Five Forces, gave a speech at Harvard
Business School where he described the competitive rivalry perfectly: “There has
always been lots of companies in the industry and so there has always been an
active situation of rivalry.” But again there was plenty of room.
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