Industry Analysis - Five Forces Model

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Messori Marketing | Strategy Consultants | Dublin (Ireland)
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INDUSTRY ANALYSIS Developed by Messori Marketing, this spreadsheet has been prepared as a means to help you implement strategic tools within your company. The purpose of this spreadsheet is to help you to perform an INDUSTRY ANALYSIS. This is the vital first step in the process of strategy development. The analysis is based on the renowned five forces framework. The framework was developed and introduced to the field of management by Professor Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors (Free Press, 1980), which is now in its 53rd print and has been translated into 17 languages. Implementation process Small businesses: In the case of small businesses it is possible that all of the company's staff will work together in all of the steps required in the industry analysis. Medium-sized and large businesses: One department for example, the marketing department must be responsible for the whole project. This department will be required to: 1) identify the best person / people, or office, to implement each section of the model; 2) explain the overall model and the implementation process; 3) explain to the members of each department how to use their section of the model and where to collect the data needed; 4) fix a deadline for project deliverables; 5) input all of the collected data in a single excel file. This file will be the (official) spreadsheet containing all of the information needed to start a uniform analysis; Messori Marketing - When It Comes To Strategy
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Technical suggestions: As different people within a company may be involved in the analysis process, care must be taken to avoid the duplication of files. Duplication can hinder the successful completion of the project. If your business does not possess software allowing different members of staff to work on the same files, and the IT department is unable to come up with an ad hoc solution for the purposes of this project, there is a free version of Google Apps that allows users to share Microsoft Office files without any need for their duplication. As Google Apps is a web hosted application, there are some data security issues. Speak to your IT department / advisor for suggestions.
Messori Marketing - When It Comes To Strategy
+353 (0)87 322 27 28
The Five Forces Model

Threat posed by new entrants
Bargaining power of suppliers
Rivalry between existing competitors
Bargaining power of buyers
Threat of substitutes
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Rivalry between existing competitors

Rivalry between existing competitors takes the familiar form of jockeying for position, using tactics like: Price competition Advertising battles New product introductions Increased customer service or warranties Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve their position.
Determinants of rivalry between existing competitors: 1) Industry concentration and balance 2) Industry growth 3) Fixed and storage costs 4) Product differences 5) Intermittent overcapacity 6) Diversity of competitors 7) Corporate stakes 8) Exit barriers 9) Brand identity 10) Switching costs
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1) Industry concentration and balance
Is your industry fragmented or concentrated? Fragmented: industry made up of numerous small and medium-sized firms. Concentrated: industry made up of only one or a few firms; presence of an industry leader. If your industry is fragmented, what is the number equally balanced competitors? If competitors are numerous and similar in size and power, the level of rivalry in the industry is very high.
2) Industry growth
What is the rate of industry growth in your particular sector? A slow growth rate turns competition into a market share game.
3) Fixed and storage What is the level of fixed costs incurred by the firms in your industry? High fixed costs prompt firms to work at full capacity, costs creating an excess of supply in the industry.
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4) Product differences
How is the industry's product perceived by customers? When the product is perceived to be a commodity the choice is based largely on price and service, generating price / service competition.
5) Intermittent overcapacity
Is it possible to bring about a gradual improvement in the quantity of product / service in your industry? Or is it only possible via large investments? Large capacity increases can lead to periods of overcapacity and price cuts.
6) Diversity of competitors
Are there competitors within your industry implementing different strategies? Frequently the presence of competitors pursuing different strategies generates difficulties agreeing on the rules of the game as it is difficult to signal / read each others intentions.
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7) Corporate stakes
What is the number of firms with high strategic stakes in your industry? What is their level of commitment? What is the extent of their aspiration to leadership? A high level of commitment within the companies in the industry amplifies the degree of rivalry.
8) Exit barriers
Is your industry characterised by high exit barriers? Exit barriers are factors that prevent companies leaving their industry, even if they experience low or negative returns on investment in it. Their presence merely fosters industry rivalry.
9) Brand identity
Are consumers loyal to the industry brands? Brand loyalty is a positive factor in industry rivalry, as it shifts rivalry away from price.
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10) Switching costs
Is the consumer confronted by switching costs when changing supplier? The existence of shifting costs creates stability in the industry.
N.B.: Once you have identified the underlying determinants fostering rivalry in your industry, the central point is to define whether your company competes as other businesses do in relation to the same product / service dimensions. If your company is attempting to meet the same needs or attributes as your competitors, you are trapped in a zero sum competition, which generates price / service warfare. Only by developing a unique value proposition (competing for a different target segment by creating your own means of pursuing that target) will you be able to shift rivalry away from price, and create a value-centred approach to competition. This agenda requires the development of different strategic tools within your company, and industry analysis is the first item on the list!
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Threat posed by new entrants

The purpose of this section is to define the level of entry barriers present in your industry. This information is essential to defining the level of pressure that your company is under from possible new entrants to your industry. The threats posed by new entrants depend on: 1) The barriers to entry 2) Reaction the entrant can expect from existing competitors. If barriers are high and/or the newcomer can expect sharp retaliation from entrenched competitors, the threat posed by new entrants is low. Determinants of the threat posed by new entrants: 1) Barriers to entry: 1.1) Economy of scale 1.2) Product differentiation 1.3) Capital requirement 1.4) Switching costs 1.5) Access to distribution channels 1.6) Cost disadvantages independent of scale 1.7) Government policy
2) Reaction of existing competitors: 2.1) History of vigorous retaliation to entrants 2.2) Established firms with substantial resources to fight back 2.3) Established firms with great commitment to the industry 2.4) Slow industry growth
www.messorimarketing.com 1) Barriers to entry:
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1.1) Economy of scale
Describe here if companies in your industry experience cost advantages due to expansion. The existence of economies of scale represents a barrier to entry by new entrants.
1.2) Product differentiation
Outline here whether product differentiation is present in your industry, specifically in relation to brand identification, customer loyalties (which stem from past advertising), customer service, product differences, or simply being first into the industry. Differentiation creates a barrier to entry by forcing new entrants to spend heavily to overcome existing customer loyalties.
1.3) Capital requirement
Outline here whether your industry is characterised by the need to invest significant financial resources in order to compete. This creates a barrier to entry, particularly if capital is required for risky or unrecoverable up-front advertising or research and development (R&D).
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1.4) Switching costs
Outline here whether switching costs are a factor in your industry. These are defined as one-off costs incurred by a consumer when switching from one supplier's product to that of another. The existence of switching costs can be an important entry barrier.
1.5) Access to distribution channels
Outline here whether it is difficult for new entrants to gain access to distribution channels.
1.6) Cost Outline here whether there are established firms within your industry with cost advantages that cannot be replicated by disadvantages potential entrants no matter what their size and the economies of scale attained. The most critical advantages are factors independent of scale such as the following: I) proprietary product technology II) favourable access to raw materials III) favourable locations IV) government subsidies V) learning or experience curve
www.messorimarketing.com 1.7) Government policy
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Outline here whether government policy can limit or even prevent entry into your industry with controls such as licensing requirements and limits placed on access to raw materials (e.g., mines or mountains on which to build ski resorts, etc.).
2) Reaction from existing competitors:
2.1) History of vigorous retaliation to entrants
Outline here whether your industry is characterised by a history of vigorous retaliation to new entrants. A history of strong retaliation deters new entrants.
2.2) Established firms Outline here whether there are established firms in your industry with substantial resources that can be mobilised to fight with substantial back, including excess cash and unused borrowing capacity, adequate excess production capacity to meet all likely future resources to fight needs, or great leverage with distribution channels or customers. back
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2.3) Established firms Outline here whether there are established firms in your industry with a great commitment to the industry and with with great important assets invested in it. The presence of established firms with a great commitment to the industry make it difficult commitment to the for new entrants to obtain a foothold. industry
2.4) Slow industry growth
Outline here whether your industry is characterised by slow growth, which limits the ability of the industry to absorb a new firm without depressing the sales and financial performances of established firms.
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Bargaining power of suppliers
Suppliers may exert their bargaining power over participants in an industry by threatening to raise prices or to reduce the quality of the goods and services provided. Powerful suppliers can, as a consequence, lower the profitability of an industry by limiting the ability of companies to recover increases in costs through their own prices.
Determinants of the bargaining power of suppliers: 1) Differentiation of inputs 2) Presence of substitute products / services 3) Presence of switching costs 4) Supplier concentration 5) Importance of volume to supplier 6) Impact of inputs on cost or differentiation 7) Threat of forward integration
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1) Differentiation of inputs
Does the supplier offer a differentiated product?
2) Presence of Are industry suppliers obliged to contend with other substitute products for sale to the industry? substitute products / services
3) Presence of switching costs
Do industry participants face switching costs in changing suppliers?
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4) Supplier concentration
Is the suppliers' industry dominated by a few companies? Is it more concentrated than your industry?
5) Importance of volume to supplier
Does the supplier group depend heavily on your industry for its revenue?
6) Impact of inputs on cost or differentiation
Is the suppliers product an important input to your business in terms of your ability to pursue your strategy?
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7) Threat of forward Is your industry susceptible to a credible threat of forward integration by a supplier group? integration
Messori Marketing | Strategy Consultant | Dublin (Ireland)
+353 (0)87 322 27 28
Threat of substitutes
Substitute products are alternative products performing the same function as the products of your industry. Substitutes limit the profitability of the industry by placing a ceiling or constraint on the prices that the businesses in the industry can charge. The more attractive the price / performance relationship offered by the substitute products, the more they will affect the profitability of your industry.
Determinants of the threats posed by subsitutes: 1) The price / performance ratio of the substitute product 2) Switching costs 3) Buyer propensity to substitute
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The price / Does the substitute product provide a more attractive price / performance ratio than the product of your industry? performance ratio of the substitute product
2) Switching costs
Are switching costs present in your industry? Are they significant enough to ameliorate the effects of the substitute product?
3) Buyer propensity to substitute
Are your industry's customers inclined towards substitution?
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N.B.: Substitute products that deserve the most attention are those that are: 1) subject to trends improving their price / performance ratio relative to your industry's product 2) produced by industries earning high profits An analysis of such trends can be important when deciding whether to attempt to head off a substitute strategically or whether to adopt a strategy that acknowledges the inevitable establishment of the substitute product as a key force.
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Bargaining power of buyers
Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and by playing competitors against one another, all at the expense of industry profitability.
Determinants of the bargaining power of buyers: Bargaining leverage 1.1) Buyer concentration 1.2) Buyer volume 1.3) Buyer switching costs 1.4) Buyer information 1.5) Capacity for backward integration 1.6) Presence of substitute products
Price sensitivity 2.1) Price / total purchase 2.2) Brand identity 2.3) Impact on quality / performance 2.4) Buyer profits
www.messorimarketing.com 1) Bargaining leverage: 1.1) Buyer concentration
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Is the buyer's industry more concentrated than your industry?
1.2) Buyer volume
Are the industry's buyers purchasing large volumes relative to your industry sales?
1.3) Buyer switching Do buyers incur switching costs when changing vendors? costs
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1.4) Buyer information
Has the buyer access to full information? Buyers with full information regarding demand, actual market prices, and even supplier costs, usually enjoy greater bargaining leverage than when their access to information is poor.
1.5) Capacity for Are buyers able to create a credible threat of backward integration? backward integration
1.6) Presence of substitute products
Are your industry's products standard or undifferentiated? Is it easy for the industry's buyers to get substitute products?
www.messorimarketing.com 2) Price sensitivity: 2.1) Price / total purchase
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Does your industrys product represent a significant fraction of the buyer's cost structure or procurement budget?
2.2) Brand identity
Is your industry's product differentiated? Customers tend to be more price sensitive when purchasing undifferentiated products.
2.3) Impact on quality / performance
Is your industrys product important to the quality of the buyers products or services?
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2.4) Buyer profits
Are your buyers generating low profits? Are they strapped for cash? Are they under pressure to trim their purchasing costs?

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www.messorimarketing.

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

The Five Forces Model

Bargaining power of suppliers

Rivalry between existing competitors

Bargaining power of buyers

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Rivalry between existing competitors

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

1) Industry concentration and balance

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

10) Switching costs

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Threat posed by new entrants

Messori Marketing - When It Comes To Strategy

www.messorimarketing.com 1) Barriers to entry:

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

1.1) Economy of scale

1.2) Product differentiation

1.3) Capital requirement

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

1.4) Switching costs

1.5) Access to distribution channels

Messori Marketing - When It Comes To Strategy

www.messorimarketing.com 1.7) Government policy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

2) Reaction from existing competitors:

2.1) History of vigorous retaliation to entrants

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

2.4) Slow industry growth

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28

Bargaining power of suppliers

Messori Marketing - When It Comes To Strategy

Messori Marketing | Strategy Consultants | Dublin (Ireland)

+353 (0)87 322 27 28