Porter's five forces model

Summary

The video explains Porter's Five Forces model, a strategic tool for assessing the competitive landscape of an industry. The model identifies five key forces: rivalry among existing firms, the threat of substitute products, the threat of new entrants, supplier power, and buyer power. Each force is detailed, showing how they influence a company’s competitive position. The script highlights how these factors shape industries like online grocery markets, discussing challenges such as high competition, buyer power, and potential barriers for new entrants. It's a useful guide for understanding business strategy and industry attractiveness.

Takeaways

• 🔍 Porter's Five Forces is a strategic tool for analyzing industry attractiveness and competitive power within a business situation.
• 🛡️ The Threat of Substitute Products is high when there are many alternatives available, easy switching, and better quality from competitors.
• 🚀 The Threat of New Entrants is influenced by industry entry and exit barriers; low capital requirements and low switching costs increase this threat.
• ⚔️ Industry Rivalry is intensified by a large number of competitors, low switching costs, and high fixed costs leading to price wars and differentiation efforts.
• 🛒 The Bargaining Power of Suppliers is high when they are few, concentrated, and offer unique or essential inputs with high switching costs.
• 💼 The Bargaining Power of Buyers is high when there are many suppliers, few buyers, and the product is undifferentiated with low switching costs.
• 🌐 In the online grocery market, high competition, high buyer power, and low supplier power are observed, making it a challenging yet lucrative industry.
• 💡 Entrepreneurs with innovative business models and strong operational management can succeed in the online grocery market despite the challenges.
• 🚧 The online grocery market's attractiveness for new entrants is significant due to its potential, but barriers like high initial capital and intense competition exist.
• ⏪ Low or no switching costs and the availability of offline stores as substitutes make brand loyalty a challenge in the online grocery sector.

Q & A

What is Porter's Five Forces Model?

Porter's Five Forces Model is a business strategy tool developed by Michael Porter that helps companies understand the competitive power within a business situation by analyzing the attractiveness of an industry.

What are the five competitive forces identified by Michael Porter?

The five competitive forces identified by Michael Porter are: rivalry among existing firms, threat of substitute products, threat of new entrants, bargaining power of suppliers, and bargaining power of buyers.

How does the threat of substitute products affect a company's competitiveness?

A high threat of substitute products makes a company's products less attractive as customers can easily switch to competitors' products, especially if they are available at the same or lower price with better quality.

What factors indicate a high threat of new entrants in an industry?

A high threat of new entrants is indicated by low capital requirements, low switching costs, non-differentiated products, and easy availability of required technology, which reduce entry and exit barriers.

Why is industry rivalry considered a significant force in the Five Forces Model?

Industry rivalry is significant because it reflects the intensity of competition among existing players, which can lead to price wars, advertising wars, and differentiation, ultimately affecting profitability.

What situations lead to high bargaining power of suppliers?

Suppliers have high bargaining power when they are concentrated, well-organized, and offer few substitute products, especially when the inputs are essential, unique, and have high switching costs.

How can a company reduce the bargaining power of buyers?

A company can reduce the bargaining power of buyers by offering differentiated products, which create a unique value proposition and reduce the likelihood of buyers switching to competitors.

What is the current state of the online grocery market in terms of bargaining power of suppliers?

In the online grocery market, supplier power is low because online grocers have many procurement options and engage in bulk procurement, which benefits suppliers by increasing their sales.

How does the threat of new entrants impact the online grocery market?

The threat of new entrants in the online grocery market is medium due to high market potential attracting new players, but high initial capital requirements, low margins, and intense competition serve as barriers to entry.

What is the level of threat from substitute products in the online grocery market?

The threat of substitute products in the online grocery market is medium to high, with offline stores being the main substitutes. Low or no switching costs allow customers to easily switch to offline stores or other online grocery platforms.

What conclusion can be drawn about the online grocery market from the Five Forces analysis?

The online grocery market is lucrative for entrepreneurs with innovative business models and good operational management, offering considerable scope for success despite the competitive landscape.

Outlines

00:00

📈 Understanding Porter's Five Forces Model

This paragraph introduces Porter's Five Forces Model, a strategic tool used by companies to analyze industry attractiveness and competitive power. The model identifies five key forces: rivalry among existing firms, threat of substitute products, threat of new entrants, supplier power, and buyer power. Each force is explained with examples of situations where they are considered high or low. For instance, a high threat of substitute products occurs when many alternatives are available, and customers can easily switch to competitors' products with similar or lower prices and better quality. High threat of new entrants is seen when entry barriers are low, leading to more competition and reduced profitability. Intense industry rivalry leads to price wars and increased costs. High supplier power can occur when there are few suppliers with unique inputs, while high buyer power is present when buyers have many options and low switching costs. The paragraph also provides a specific example of the online grocery market in India, illustrating how these forces play out in a real-world context.

05:02

🛒 Online Grocery Market Analysis

The second paragraph focuses on the online grocery market, using Porter's Five Forces Model to analyze its competitive landscape. It discusses the high competition among existing players, including both new and established companies like Amazon Fresh, Flipkart, and Google Express. The bargaining power of buyers is also high due to the abundance of online grocery options, leading to intense competition for customer loyalty. On the other hand, supplier power is low because online grocers have many procurement options, and suppliers can increase sales by partnering with them. The threat of new entrants is medium due to the market's potential, but also due to significant barriers like high initial capital requirements and intense competition. The threat of substitute products is medium to high, as customers can easily switch to offline stores with low or no switching costs. The paragraph concludes by suggesting that the online grocery market is a promising industry for entrepreneurs with innovative business models and strong operational management skills.

Keywords

💡Porter's Five Forces Model

Porter's Five Forces Model is a strategic framework introduced by Michael E. Porter that helps businesses analyze the competitive environment in which they operate. It identifies the key factors that determine the attractiveness and profitability of an industry. In the video, this model is used to dissect the dynamics of the online grocery market, illustrating how each force affects the industry's profitability and competition.

💡Threat of Substitute Products

The threat of substitute products refers to the risk that customers may switch to alternative products or services that fulfill the same need. In the context of the video, it is high in the online grocery market due to the availability of offline stores and the ease with which customers can switch between online platforms, affecting the industry's competitive landscape.

💡Threat of New Entrants

This concept describes the potential for new competitors to enter the market, which can affect existing players' market share and profitability. The video mentions that the online grocery market is attractive for new entrants due to its market potential, but high initial capital requirements and intense competition serve as barriers.

💡Industry Rivalry

Industry rivalry pertains to the intensity of competition among existing firms within an industry. The video highlights high competition in the online grocery sector, with both established players like Amazon Fresh and Flipkart and new entrants vying for market share, leading to price wars and differentiation strategies.

💡Bargaining Power of Suppliers

This force reflects the influence that suppliers have over the prices of inputs. In the video, it is noted that suppliers in the online grocery market have relatively low power because of the numerous procurement options available to online grocers, which can lead to bulk purchases and increased sales for suppliers.

💡Bargaining Power of Buyers

The bargaining power of buyers indicates the ability of customers to negotiate lower prices or better terms from sellers. The video explains that in the online grocery market, buyers have high bargaining power due to the abundance of options, leading companies to focus on providing the best value and shopping experience.

💡Economies of Scale

Economies of scale refer to the cost advantages that a business obtains due to expansion. It is mentioned in the video that in industries with high fixed costs, companies aim to achieve economies of scale by increasing production to reduce prices and improve profitability.

💡Differentiation

Differentiation in the context of the video refers to the strategies companies use to make their products or services distinct from competitors. It is suggested as a way to reduce the bargaining power of buyers by offering unique products that customers are willing to pay a premium for.

💡Switching Costs

Switching costs are the costs or inconveniences faced by customers when they switch from one product or service to another. The video notes that low switching costs in the online grocery market contribute to the high threat of substitute products, as customers can easily switch to offline stores or other online platforms.

💡Market Attractiveness

Market attractiveness is a measure of how appealing a market is for a company to enter or compete in. The video uses the online grocery market as an example, discussing how its potential for growth and the presence of large players make it an attractive market, despite the challenges it presents.

💡Operational Management

Operational management involves the planning, organizing, and supervising of the production activities of an enterprise. The video concludes by emphasizing the importance of operational management for success in the online grocery market, suggesting that effective management can help businesses navigate the competitive forces at play.

Highlights

Porter's five forces model is a business strategy tool that helps analyze industry attractiveness.

The model identifies five forces that determine a company's competitive power in a business situation.

The threat of substitute products refers to the ease with which customers can switch to competitors' offerings.

A high threat of substitutes can make a company's products less attractive, necessitating close monitoring of price trends.

The threat of new entrants is determined by industry entry and exit barriers, impacting market share.

Low capital requirements and low switching costs increase the threat of new entrants in an industry.

Industry rivalry is the intensity of competition among existing players, influenced by factors like the number of competitors and switching costs.

High industry rivalry can lead to advertising wars and price wars, affecting profitability.

Bargaining power of suppliers is high when there are few substitutes and suppliers are concentrated.

Having multiple suppliers can mitigate the bargaining power of suppliers.

Bargaining power of buyers is high when there are many suppliers and few buyers, or when products are undifferentiated.

Differentiated products can reduce the bargaining power of buyers.

The online grocery market in India exemplifies high buyer power and low supplier power.

The threat of new entrants in the online grocery market is medium due to high initial capital requirements and intense competition.

The threat of substitute products in the online grocery market is medium to high, with offline stores being the main substitutes.

Online grocery is a lucrative industry for entrepreneurs with innovative business models and good operational management.

Stay tuned for more videos on marketing for further insights.

Transcripts

hello and welcome to marketing 91 comm

Porter's five forces model helps

companies understand where the power

lies in a business situation it is a

business strategy tool that helps

analyze the attractiveness of an

industry the model assumes that there

are five forces that determine the

competitive power of a company in a

business situation the five competitive

forces identified by Michael Porter are

as followers rivalry among existing

firms threat of substitute products

threat of new entrant bio power and

supplier power let's understand each of

these forces in detail the threat of

substitute products it refers to how

easily a company's customers can switch

to its competitors products rated on a

scale from high to low the threat of

substitute products is high in the

following situations many substitute

products are available in the market

customers can easily find the product or

service at the same or lower price

compared to the company's product or

service the quality of competitors

product is better than that of the

company if the threat of substitute

products is high products offered by a

company become less attractive and the

company needs to closely monitor price

trends to avoid any significant impact

on its revenue and profits threat of new

entrants it refers to the entry of new

players into the market reducing the

company's market share the threat of new

entrants primarily depends on the

industry's entry and exit barriers rated

on a scale from high to low the threat

of new entrants is high in the following

situations the capital requirement to

start a business in the industry is low

economies of scale products have a low

switching cost products are non

differentiated and there is easy

availability of the required technology

in the market when both entry and exit

barriers are high the profit margin is

also high however companies face more

risk because poorly performing companies

stay in the industry and try to improve

performance when these barriers are low

firms easily enter and exit the industry

and profitability is low industry

rivalry it refers to the intensity of

competition

among the existing players in an

industry rated on a scale of high to low

industry rivalry is high on the

following situations there are large

number of competitors switching costs

are low the industry is growing exit

barriers are high and industry rivals

stay in the industry and compete fixed

costs are high resulting in higher

production to achieve economies of scale

and reduce prices high industry rivalry

results in advertising Wars price wars

and differentiation which ultimately

increases costs and makes it difficult

to sustain profits bargaining power of

suppliers it refers to the degree of

power suppliers have over rising the

price of inputs rated on a scale from

high to low the bargaining power of

suppliers is high in the following

situations suppliers are concentrated

and well-organized few substitute

products inputs are available the

existing product input is effective or

unique and switching cost is high when

suppliers have more control over inputs

and their prices the market segment

becomes less attractive it is best to

have a mutually beneficial relationship

with suppliers and also have multiple

suppliers bargaining power of buyers it

refers to the degree of power buyers

have to bring down the prices of

products rated on a scale of high to low

bargaining power of buyers is high in

the following situations too many

suppliers offer the same product at

similar prices there are few buyers

seeking to purchase a large number of

goods bulk purchases are involved the

product is not differentiated and

switching cost is low the bargaining

power of buyers can be brought down by

offering differentiated products example

online grocery market in India Porter's

five forces model competitive rivalry

high high competition in the industry

with both new smaller players and big

companies such as Amazon fresh Flipkart

Google Express etc vying for a larger

share of the market bargaining power of

buyers high customers have a large

number of online grocers to choose from

all companies in the industry are trying

to give the best value and shopping

experience to customers

bargaining power of suppliers Oh

supplier power is low because online

grocers have a large number of

procurement options and involve bulk

procurement providing suppliers with

extra business by taking them online

vendors can increase their sales by

simply partnering with online grocers

threat of new entrants medium the online

grocery market is becoming highly

attractive for new entrants owing to its

huge market potential investors are

bullish about the hyper local segment

however high initial capital requirement

low margin and intense competition are

the main barriers to entry threat of

substitute products medium to high only

substitution available is offline stores

and their delivery systems low or no

switching costs as customers can easily

switch to offline stores and other

online grocery stores there is no brand

loyalty for any particular player

conclusion online grocery is a lucrative

industry to enter if one is an

enthusiastic entrepreneur with an

innovative business model and good

operational management there is

considerable scope for success in the

industry stay tuned for more videos on

marketing thank you