International Business –

Porter's Five Forces Model

September 29, 2018

 Environmental analysis
 External analysis can be carried out
at different levels. There are a
number of strategic management
tools that can assist in this process.
These included the PEST(EL)
framework which helps in the
analysis of the macro or general
environment and Porter's five forces
model which can be used to analyse
the industry or micro environment.

 As well as the macro environmental

factors, part of external analysis
also requires an understanding of
the industry level, or competitive
environment and what are likely to
be the major competitive forces in
the future.
Porter's Five Forces Model
The model was created by Harvard Business School professor Michael
Porter to analyze an industry's attractiveness and likely profitability.
Since its publication in 1979, it has become one of the most popular
and highly regarded business strategy tools.

Porter recognized that organizations keep a close watch on their

rivals, but he encouraged them to look beyond the actions of their
competitors and examine what other factors could impact the
business environment. He identified five forces that make up the
competitive environment, and which can erode your profitability.
Porter's Five Forces Model
Porter's Five Forces Model
The Model looks at the firm's competitive environment by analyzing
five forces. These forces determine the profit potential of the industry.

1. Rivalry amongst competitors – Existing competition & its

intensity
2. Power of buyers – powerful buyers can force price cuts and/or
quality improvements
3. Power of suppliers – to charge higher prices
4. Threat of new entrants – new entrants into a market will bring
extra capacity and intensify competition
5. Threat of substitutes – This threat is across industries (e.g. rail
travel vs bus travel vs private car)
Porter's Five Forces Model
 Competitive Rivalry:
This looks at the number and strength of your competitors. How
many rivals do you have? Who are they and how does the quality of
their products and services compare with yours?

Where rivalry is intense, companies can attract customers with

aggressive price cuts and high-impact marketing campaigns. Also, in
markets with lots of rivals, your suppliers and buyers can go
elsewhere if they feel that they're not getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one

else is doing what you do, then you'll likely have tremendous strength
and healthy profits.
Porter's Five Forces Model
 Buyer Power:
Here, you ask yourself how easy it is for buyers to drive your prices
down. How many buyers are there and how big are their orders? How
much would it cost them to switch from your products and services to
those of a rival? Are your buyers strong enough to dictate terms to
you?

When you deal with only a few savvy customers, they have more
power, but your power increases if you have many customers.
Porter's Five Forces Model
 Supplier Power:
This is determined by how easy it is for your suppliers to increase
their prices. How many potential suppliers do you have? How unique
is the product or service that they provide and how expensive would it
be to switch from one supplier to another?

The more you have to choose from, the easier it will be to switch to a
cheaper alternative. But the fewer suppliers there are and the more
you need their help, the stronger their position and their ability to
charge you more. That can impact your profit.
Porter's Five Forces Model
 Threat of New Entry:
Your position can be affected by people's ability to enter your market.
So, think about how easily this could be done. How easy is it to get a
foothold in your industry or market? How much would it cost and how
tightly is your sector regulated?

If it takes little money and effort to enter your market and compete
effectively, or if you have little protection for your key technologies,
then rivals can quickly enter your market and weaken your position.
If you have strong and durable barriers to entry, then you can
preserve a favorable position and take fair advantage of it.
Porter's Five Forces Model
 Threat of Substitutes:
This refers to the likelihood of your customers finding a different way
of doing what you do. For example, if you supply a unique software
product that automates an important process, people may substitute
it by doing the process manually or by outsourcing it.

A substitution that is easy and cheap to make, can weaken your

position and threaten your profitability.
Porter's Five Forces Model
 The model can be used in several ways:
1. To help management decide whether to enter a particular
industry. Presumably, they would only wish to enter the ones
where the forces are weak and potential returns high.
2. To influence whether to invest more in an industry. A firm
already in an industry and thinking of expanding capacity, it
is important to know whether the investments will be
recouped.
3. To identify what competitive strategy is needed. The model
provides a way of establishing the factors driving profitability
in the industry. For an individual firm, to improve its
profitability above that of its peers, it will need to deal with
these forces better.
CASE STUDY –

Porter's Five Forces Model

September 29, 2018

Case Study
The directors of JPC, a well-established manufacturer of cardboard
boxes, are considering entering the cardboard tube market. Tubes are
required in various sizes. While large tubes are used for carpets,
small are used for films and paper products. The tubes are usually
purchased in large quantities by customers. On an average, tubes
comprise between 1% and 2% of the total cost of the customers’
finished product.

• The lowest cost machine which could be used to manufacture the

tubes is priced at $30,000 and requires only one operative for its
operation. A one-day training course would be required for him.

• The cardboard tubes are made from specially formulated paper

which, at times during recent years, has been in short supply
Case Study
• At present, four major manufacturers of cardboard tubes have an
aggregate market share of 80%. The current market leader has a
26% market share. The market shares of the other three
manufacturers are equal in size. The product ranges offered by
the four major manufacturers are similar in terms of size and
quality. The market has grown by 2%p.a. during recent years.

• A recent report on the activities of a foreign-based multinational

company revealed that consideration was being given to
expanding operations in their packaging division overseas. The
division possesses large-scale automated machinery for the
manufacture of cardboard tubes of any size.
Case Study
• Another company, PTC produces a narrow, but increasing, range
of plastic tubes which are capable of housing small products such
as film and paper-based products. At present, these tubes are on
average 30% more expensive than the equivalent sized cardboard
tubes sold in the marketplace.

Required:
Write a report to the board of JPC assessing the attractiveness
of the option to enter the market for cardboard tubes as an
improved strategy for JPC. The report should make reference to
Porter's five forces model
CASE STUDY – Solution

Porter's Five Forces Model

September 29, 2018

Case Study – Solution
REPORT

To: Board of JPC

From: Management accountant
Date: dd-mmm-yyyy
Report on the attractiveness of the cardboard tube market

Introduction
In order to assess the attractiveness of the option to enter the market
for spirally wound paper tubes, the directors of JPC could make use of
Michael Porter’s five forces model. This model assesses the
attractiveness of an industry using five factors. Each factor is
discussed in turn in this report.
Case Study – Solution
New Entrants
In applying this model to the given scenario one might conclude that
the relatively low cost of the machine together with the fact that an
unskilled person would only require one day’s training in order to be
able to operate a machine, constitute relatively low costs of entry to
the market. Therefore, one might reasonably conclude that the threat
of new entrants might be high. This is especially the case where the
market is highly fragmented. The fact that a foreign-based
multinational company is considering entering this market represents
a significant threat from a potential new entrant as it would appear
that the multinational company might well be able to derive
economies of scale from large scale automated machinery and has
manufacturing flexibility.
Case Study – Solution
Buyer Power:
The fact that products are usually purchased in very large quantities
by customers and that there is little real difference between the
products of alternative suppliers suggests that buyer power might
well be very high. The fact that the paper tubes on average only
comprise between 1% and 2% of the total cost of the buyer’s finished
product also suggests that buyer power may well be very high.
Supplier Power:
The threat from suppliers could be high due to the fact that the
specially formulated paper from which the tubes are made is
sometimes in short supply. Hence suppliers might increase their
prices with consequential diminution in gross margin of the firms in
the marketplace.
Case Study – Solution
Rivalry:
The threat from competitive rivals will be strong as the four major
players in the market are of similar size and that the market is a slow
growing market. The market leader currently has 26% of the market
and the three nearest competitors hold approximately 18% of the
market.

Substitutes:
The fact that PTC produces a narrow range of plastic tubes
constitutes a threat from a substitute product. This threat will
increase if the product range of PTC is extended and the price of
plastic tubes is reduced.
Case Study – Conclusion
Conclusion:
Low capital barriers to entry might appeal to JPC but they would also
appeal to other potential entrants. The low growth market, the ease of
entry, the existence of established competitors, a credible threat of
backward vertical integration by suppliers, the imminent entry by a
multi-national, a struggling established competitor and the difficulty
of differentiating an industrial commodity should call into question
the potential of JPC to achieve any sort of competitive advantage. If
JPC can achieve the position of lowest cost producer within the
industry, then entry into the market might be a good move. In order
to assess whether this is possible JPC must consider any potential
synergies that would exist between its cardboard business and that of
the tubes operation.
Case Study – Conclusion

From the information available, the option to enter the

market for cardboard tubes appears to be unattractive. The
directors of JPC should seek alternative performance
improvement strategies.
International Business –

Country risk Analysis

September 29, 2018

Country Risk
Country risk is the risk arising from operating or investing in a
particular country with risks relating to matters such as:
• Political interference e.g. currency controls
• Political stability
• The social and economic infrastructure
• The culture of the country and its attitude to foreign business.

Country risk is a much more general term than political risk and
relates to all of the risks of operating or investing in a particular
country.
Country Risk Analysis
Country Evaluation & Selection
Selection of Manufacturing Centers:
• Cost as the basis
• Availability of inputs as the basis
• Proximity to Conglomeration of markets
• Environmental Scanning

Selection of Market Centers:

• Market Size
• Market Growth Rate
• Market Consumption Capacity
• Other Factors
THANK YOU