Porter's Five Forces Analysis

ACCA - F1   ACCOUNTANT  IN  BUSINESS

In global perfect competition market, companies always seek new techniques to exploit resources economically in order to outperform their competitors. Porter's Five Forces Framework identifies causes of competitive pressure within industry to analyse how sustainable competitive advantage is achievable. Porter identified five factors, which attract/distract investors in specific industry. They are threats to new entrants, threat of substitute produces, bargaining power of suppliers, bargaining power of customers and competition/rivalry. The effect of these forces to a potential investment or divestment is summarised in the table below.

Threats to new entrants Ø  Economies of scale - low production cost mass production Ø  Brand identity - customer values the product quality Ø  Capital requirement - initial and subsequent input Ø  Access to distribution - control over distribution network Ø  Absolute cost advantages - learning curve, low cost production design

Threats of substitute products Ø  Relative price - products with similar features  and tax policy(VAT and Im/Ex Duty) Ø  Relative performance - standard of the features Ø  Buying propensity - buyers attitude, culture and nature of product Ø  Technology change - obsolete vs fashionable/trending

Bargaining power of suppliers Ø  Differentiation of inputs - supply of quality product Ø  Presence of substitute inputs - changing product mix and target costing Ø  Supplier concentration - competition within suppliers Ø  Importance of volume to supplier - where supplier has economic of scale Ø  Cost relative to total purchases in the industry Ø  Threat of forward integration relative to threat of backward integration

Bargaining power of customers Ø  Buyer concentration vs firm concentration - higher concentration has advantage Ø  Volume - possible discount in purchase Ø  Buyer information - easy comparing substitute products Ø  Ability to integrate backward - companies benefit from retaining customer Ø  Purchase price - controls demand and supply Ø  Impact on quality performance - creates satisfaction to customers Ø  Buyers profits - value delivered by the product

Competition Ø  Industry growth - change in composition of competition Ø  Fixed costs/value added - companies gearing changes Ø  Concentration and balance - increases competition Ø  Informational complexity - language barrier or coding Ø  Corporate stakes - mutual interest of firms - syndicate Ø  Exit barriers - cost leaving market is high

Government Interference, Brand Identity, Differentiation and Switching Costs easily fit within all forces.