TERM PAPER

ON

Porters five forces model

Submitted to
DR ANITHA

Submitted by
DARSHANKUMAR GARAG USN 1PI11MBA46

Acknowledgements

I am thankful to Dr Anitha for providing me the task of preparing the Term Paper. We at Pesit believe in taking challenges and the term paper provided me the opportunity to tackle a practical challenge in the subject of management. This term paper tested my patience at every step of preparation but the courage provided by my teachers helped me to swim against the tide and move against the wind.

1.1 Abstract
Strategic Analysis and Planning is a field in which expertise and experience are key factors. In order to decide on strategic matters such as the competitive position of a company experts heavily lean on their ability to reason with uncertain or incomplete knowledge, or in other words on their experience and expertise. An important aspect is to assess a company's profit potential in the industry for which Porter's competitive Forces Model is by far the most widely used framework. Porter's five forces analysis is a framework for industry analysis and business strategy development formed 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 to normal profit.

Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that guides the organization for making decisions regarding the mergers and acquisitions. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry or make decisions regarding M&A.

An important part of the Strategic Analysis and Planning concerns Porter's Competitive Forces Model and it is interesting to see how this well-defined part can be modeled so that the knowledge that it contains can be used in an expert system for various technicalities in the field of mergers and acquisitions for the companies to make reliable decisions. Knowledge in the field of strategic analysis is either uncertain or incomplete. An expert in the field generally will not have all data at his disposal. In particular, many data concerning the environment (external & internal) of the enterprise, such as data of competitors and suppliers, will sometimes be missing or is difficult to uncover and thus cannot be taken into account. But also data from within the own enterprise is not always readily available. Whatever the reason for this lack of data may be, the expert is expected to generate an analysis the best he can based on data that is available. Naturally, the more relevant data he can use, the better the quality of the analysis will be. In other words, if the input data is not sufficiently available, conclusions drawn will be correspondingly less certain. This is one of the most striking characteristics of an expert. He is able to come to conclusions based on a limited number of data that - in addition - may also be uncertain. For this purpose he will use his experience.

Literature review
Three of Porter's five forces refer to competition from external sources. The remaining are internal 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 as well as to make ideal decisions regarding M&A. 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 by ways of merger among various companies.

Components of Porters competitive forces

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 Porter developed his Five Forces analysis in reaction to the thenpopular SWOT analysis, which he found un-rigorous and ad hoc. Porter's five forces is based on the Structure-Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries. The Porter model is also useful in examining the future configuration of strategic strength and attractiveness of markets which the firm wishes to enter. It is this configuration which will determine the strategic choice that the firm makes.

 Unsystematic Risk

Unsystematic Risk

Bargainig power of customer

Bargaining power of suppliers Threat from Substiture Products

Systematic Risk

Threat of new Entrants

Systematic Risk

Each of these five forces is based on structural features (dimensions) which collectively impact the profit potential. All five forces jointly determine the intensity of the industry competition and profitability. The strongest forces become crucial from the point of view of decisions regarding M&A strategy formulation.

Main aspects of porters five forces model

The original competitive forces model, as proposed by Porter,

identified five forces which would impact on an organizations behavior in a competitive market. These include the following:

The rivalry between existing sellers in the market. The power exerted by the customers in the market. The impact of the suppliers on the sellers. The potential threat of new sellers entering the market. The threat of substitute products becoming available in the market.

1.1.1

Primary Dimensions of Porter's Five Forces Model

The primary dimensions of the competitive forces model consists of five forces that significantly impacts on an organization's behavior in a competitive market and should be consistent for a particular industry. These include the rivalry between current vendors in the market, the muscle wielded by the customers in the market, the impact of suppliers on the trader, the impending threat of additional merchants entering the market and the threat of substitute products developing into a viable alternative in the market. According to Porter the intensity of competition is determined by the comparative strengths of these forces.

Barriers to entry
These are the important structural components with an industry to limit or prohibit the entrance of new competitors. The major components are scale economies (advantage of experience, learning and volume), differentiation (brand image and loyalty), capital requirements (new entrants will face a risk premium), switching cost involved by the customer, access to distribution channels and cost disadvantages (patents, location, subsidies).

Rivalry among existing competitors

In most industries, especially when there are only a few major competitors, competition will very closely match the offering of others. Aggressiveness will depend mainly on factors like number of competitors, industry growth, high fixed costs, lack of differentiation, capacity augmented in large increments, diversity in type of competitors and strategic importance of the business unit.

Substitutes
These are products or solutions that basically perform the same function but are often based on a different technology. Depending on the level of abstraction nearly everything can be a substitution. In general the only factor that really matters is a shift in technology.

Power of Buyers

Through their bargaining power buyers can force the competitors to lower their prices or force higher quality or better service. The major factors which determine the bargaining power are volume (relative to seller sales), does the product represent a major fraction of the buyers costs or purchases, differentiation or standard product, switching costs, buyer profitability (hence their price sensitivity), threat of backward integration, importance to the quality of the final product, and level of knowledge and information of the buyer of industry demand, actual market prices and supplier cost.

Power of Suppliers
Suppliers can exert their bargaining power over participants by threatening to raise prices or reduce the quality. A supplier group is powerful if they are more concentrated than the industry they sell to, or if the customer group is not important for the suppliers, if the product is an important input to the buyers business, or they have built up switching costs, or the supplier group poses a threat of forward integration. Through addressing these dimensions which make up the Five Forces we have outlined factors which will be taken into account in our expert system. It will still be the experts insight who will assert the value of impact of each individual variable.

Advantages of Utilizing the Porter Five Forces Model

Porter's five forces model (1980) is based on the premise that a competitive advantage can only be achieved once a capacity to generate a better than industry average return on investment can be maintained. When the model is correctly implemented it can provide companies with a simple picture that can be used to assess and analyze the business or organization's competitive position and practical strengths that can be capitalized on to achieve the allusive sustainable competitive advantage. In order to use the model, according to its designer, involves establishing the relationship between the five competitive forces that shape the industry and the market segment selected for the product. Analyzing the relationship between all potential competitors, suppliers and buyers provides a platform for generating alternative solutions to problems that need resolving for success.

Limitations of porters five forces model

Porters model is a strategic tool used to identify whether new products, services or businesses have the potential to be profitable. However it can also be very illuminating when used to understand the balance of power in other situations. Porter argues that five forces determine the profitability of an industry. At the heart of industry are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he contends, it is important to look beyond ones immediate competitors as there are other determinates of profitability. Specifically, there might be competition from substitute products or services. These alternatives may be perceived as substitutes by buyers even though they are part of a different industry. It is important to appreciate that companys purchase from suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away through reduced margins, by forcing either cost increases or price decreases. This relates to the strategic option of vertical integration, when the company acquires, or merges with, a supplier or customer and thereby gains greater control over the chain of activities which leads from basic materials through to final consumption. It is important to be aware that this model has further limitations in today's market environment; as it assumes relatively static market structures. Based originally on the economic situation in

the eighties with its strong competition and relatively stable market structures, it is not able to take into account new business models and the dynamism of the industries, such as technological innovations and dynamic market entrants from start-ups that will completely change business models within short times. For instance, the computer and software industry is often considered as being highly competitive. The industry structure is constantly being revolutionized by innovation that indicates Five Forces model being of limited value since it represents no more than snapshots of a moving picture. Therefore, it is not advisable to develop a strategy solely on the basis of Porters models (Kippenberger, 1998; Haberberg and Rieple, 2001), but to examine it in addition to other strategic frameworks of SWOT and PEST analysis. Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and

sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic

recommendations for the action a company should take in order to develop barriers to competition.

Conclusion
In order to understand the five forces model that Porter's recommends one need to establish and understand the relationship between the five forces first. The primary objective of a successful corporate strategy that is based on the porter five forces model should be to identify and take advantage of the existing competitive forces in a manner that will enhance the competitive position of the company by deciding on the merger or acquisition. One of the main advantages of using the Porter five forces model as a basis of industry analysis is that the model provides an objective framework for conducting an analysis of the primary constrains and driving forces that may be present in the industry within which the company operates. The information that can be obtained by using the Five Forces Analysis model is normally utilized by the management team to determine how to manipulate or take advantage of identifiable characteristics of the industry being analyzed.

References
Valuation for mergers buyouts & restructuring- Azak Wiley India (P) Ltd http://en.wikipedia.org/wiki/Porter_five_forces_analysis http://www.quickmba.com/strategy/porter.shtml http://www.tutor2u.net/business/strategy/porter_five_forces.htm http://www.businessballs.com/portersfiveforcesofcompetition.htm http://www.managementstudyguide.com/porters-model-ofcompetetion.htm

http://wiki.telfer.uottawa.ca/ciwiki/index.php/Mergers_And_Acquisitions

http://mis.postech.ac.kr/class/MEIE780_AdvMIS/2012%20paper/Part4
%20(Pack8)/Strategic%20Management%20of%20Technological%20Inn ovation/87)%20Rethinking%20and%20reinventing%20Michael%20Porter's%20fi ve%20forces%20model.pdf

http://theinternationalcouncil.blogspot.in/2005/08/michael-porter-fiveforces-model.html