ANALYSIS OF MICHAEL PORTER’S FIVE FORCES MODEL IN VARIOUS INDUSTRIES (Assignment towards the fulfilment of the assessment in the subject of Managerial Economics)
NATIONAL LAW UNIVERSITY, JODHPUR SUMMER SESSION- 2014-2015
Submitted To: Dr. Rituparna Das Faculty of Management National Law University Jodhpur
Submitted By:Aarushi Nargas 1053 Rohil Bansal 1068 Krati Chouhan 1061 Semester III BBA L.L.B
INTRODUCTION: PORTER’S FIVE FORCES The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.1 Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.
Supplier Power
Barriers to Entry
Degree of Rivalry
PORTERS FIVE FORCES
Threat of substitutes
Buyer Power
Through this assignment, the researchers seek to analyse the applicability of Porters model in three industries- namely, Hotel, Jute and Aluminium and compare and contrast the profitability and growth of a firm in these three industries.
1
Porter’s Five Forces: A Model for Industrial Analysis, http://www.quickmba.com/strategy/porter.shtml.
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I. Rivalry In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. Economists measure rivalry by indicators of industry concentration. The Concentration Ratio (CR) is one such measure. A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive.
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If rivalry among firms in an industry is low, the industry is considered to be disciplined. When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage. In pursuing an advantage over its rivals, a firm can choose from several competitive moves, such as: • Changing prices - raising or lowering prices to gain a temporary advantage. • Improving product differentiation - improving features, implementing innovations in the manufacturing process and in the product itself. • Creatively using channels of distribution - using vertical integration or using a distribution channel that is novel to the industry. • Exploiting relationships with suppliers The intensity of rivalry is influenced by the following industry characteristics: 1. A larger number of firms increase rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership. 2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. 3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. 4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.
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5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. 6. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. 7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry. 8. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry. 9. A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. 10. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures. II. Threat of Substitutes In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute
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products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices. The competition engendered by a Threat of Substitute comes from products outside the industry. III. Buyer Power The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. Buyers are Powerful if:
Buyers are concentrated
Buyers purchase a significant proportion of output
Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival
Buyers are Weak if:
Producers threaten forward integration
Significant buyer switching costs
Buyers are fragmented (many, different)
IV. Supplier Power A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an 6
influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. Suppliers are Powerful if:
Credible forward integration threat by suppliers
Significant cost to switch suppliers
Suppliers are Weak if:
Many competitive suppliers
Credible backward integration threat by purchasers
Concentrated purchasers
V. Barriers to Entry / Threat of Entry It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry. Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring market equilibrium. Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. Barriers to entry arise from several sources:
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1. Government creates barriers. Although the principal role of the government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation 2. Patents and proprietary knowledge serve to restrict entry into an industry. Ideas and knowledge that provide competitive advantages are treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry. 3. Asset specificity inhibits entry into an industry. Asset specificity is the extent to which the firm's assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. Asset specificity provides a barrier to entry for two reasons: First, when firms already hold specialized assets they fiercely resist efforts by others from taking their market share. New entrants can anticipate aggressive rivalry. These assets are both large and industry specific. The second reason is that potential entrants are reluctant to make investments in highly specialized assets. 4. Organizational (Internal) Economies of Scale. The most cost efficient level of production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum - i.e., the most cost efficient level of production. If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. The greater the difference between industry MES and entry unit costs, the greater the barrier to entry.
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HOTEL INDUSTRY INTRODUCTION Business strategy can be defined as an integrated set of acts aimed at securing a sustainable competitive advantage over competitors. The Five Competitive Forces of Industry will influence prices, costs and investment. The feasibility and potential profitability of a hotel can be determined by answering the following questions.2 Significant developments in field of transportation, sophistication in communications, growing importance of sophisticated information technologies in the business world, engineering of a strong foundation for industrialisation and urbanisation, increasing domination of corporate sector on the national and international economies, emerging corporate culture and changing lifestyles paved copious avenues for the development of hotel industry the world over. The officials on deputation, the business magnets on trade promotion mission, the foreign representative on peace mission, and the domestic or foreign tourists interested in visiting a place for pleasure or for enriching the knowledge bank, the international events etc. are some of the important reasons for the development of hotel industry. Restaurants, cafeterias and hotels offer and lodging services to him/her, person/persons who develop the habit of eating and staying out of home. This principle necessitated application of management principles in the hotel industry and the hotel professionals realised the instrumentality of marketing principles in managing the hotel industry. The growing significance of managerial proficiency in the hotel industry made possible innovation in the marketing decisions. Today the services are planned, controlled, automated, and audited for maintaining and controlling the quality. The concept of total quality management is found getting an important place in the marketing management of hotels. The inclusion of modern 2
Ankit Pandey et. al, Portfolio Analysis of Hotel Industry, http://www.slideshare.net/bikers123/group-11seccportfolio-analysis-hotelsindustry.
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amenities and facilities in the hotel services is made possible by the leading hotel chains which have been opening new doors for innovation and competition. It is against this background that hotel companies need world class excellence. THE HOTEL INDUSTRY AND THE FIVE COMPETITIVE FORCES3 1.
THREAT OF NEW ENTRANTS:
The Hotel Industry on a global basis is characterized by high capital costs and a high proportion of fixed costs to total costs. There are considerable economies of scale in the local Hotel Industry. The high capital costs require that from the outset the hotel project must be managed to achieve the most cost effective use of resources applied to construction, furnishing and equipment, pre-operational expenses and finance. The optimum size for a hotel in metropolitan cities is around 500 rooms. It may also be a marketing advantage to belong to a “chain of hotels” to benefit from brand image or loyalty. Hotels must also aim to fill their rooms as profitably as possible, both through room occupancy levels and the relative tariffs applied. The two crucial factors that enable hotels to differentiate themselves are good location for the relative target market and quality of service. This latter issue is dependent upon good management and trained and motivated staff. The Hotel Industry in most metropolitan cities in the world provides considerable opportunity to cross-sell profitable products such as Food and Beverage. Tariffs are determined according to the level of differentiation achieved through location, management, staff and guest ratios and any other miscellaneous factors such as the quality of architecture or decoration. A hotel operator will need either to sell the hotel project before completion or to acquire hotel management expertise by a management agreement or some form of acquisition. 3
Warner Almeida, Porters Five Forces Analysis of Hotel Industry, http://www.scribd.com/doc/50458203/Porters-5-forces-analysis-for-hotel-industry.
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The industry generally exhibits high product differentiation in this respect. Capital requirements for hotel projects are high. Hotels cannot be easily traded, but must be retained on a long-term basis for investment purposes. The industry is subject to considerable cost advantages or disadvantages independent of size. The success of a hotel project is very sensitive to location, management and the quality and experience of staff. The growth of the Hotel Industry in most metropolitan cities is limited by the availability of suitable locations. Access to distribution channels can be a problem, but this factor can be mitigated by a connection with an international hotel chain. Government policy in most metropolitan cities, in itself, is not hostile to new hotels. Likely reaction from existing competitors is likely to be quite acute, but varies according to the particular market segment and strategic group. The industry exhibits high entry barriers restricting new entrants, particularly because of the combined factors of economies of scale and high capital cost of entry, together with the limited supply of suitable locations.
2. THREAT OF SUBSTITUTE PRODUCTS: The Hotel Industry in all major cities is not threatened by substitute products except that in times of recession domestic travel might replace international or overseas travel and certain destinations replace more expensive ones on cost grounds. In theory, substitute products perform same function, reduce costs, and/or provide higher quality performance with better service due to technological advancement. In the “lower” strategic groups for tourist traffic, hostels, motels and staying with relatives might replace cheaper hotels. This market is either low-income or cost-conscious, but in any event, it is quite price-sensitive. A hotel operator in anywhere can compete on a low cost basis in a niche segment. It can also compete on the basis of a modern, comfortable but not luxurious hotel situated in a
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popular and convenient location appearing to offer good value to the cost-conscious visitors. Whether this strategy is sustainable in the long term is uncertain, given that in an area with good communications and cost conscious travelers may be prepared to suffer slight inconvenience for cost savings. The importance of location to the target market may be over-rated. The hotel operator may not be able to rely solely on location to retain its market share in a situation of oversupply and consequently intense rivalry. There is no major threat of substitute products specific to a hotel’s product and service. A hotel will be subject to powerful buyers only if its marketing strategy concentrates on attracting tour groups, provided no oversupply for the hotel’s target market develops. A hotel may not appear to be particularly vulnerable to intense rivalry because of the fragmented nature of the competition in its strategic group and the potential growth rate of its target market. In the “upper” strategic groups, for example, those particularly catering for business traveler, or the upper middle aged and old aged bracket, there is little opportunity for substitute products. Substitute products are not a major present or likely threat to Hotel Industry as a whole. 3. BARGAINING POWER OF SUPPLIERS There is a great demand for enhanced global information and booking capabilities in the hospitality industry.4 However, the only supplier which might exercise power over any company would be labour and experienced trained personnel, which is in great demand in the Hotel Industry all over the world. In relation to other industries, hotels are not significantly subject to the bargaining power of their suppliers and suffer low levels of indirect pressure on their competitiveness from this source. For a sustainable business strategy over the long term a hotel will have to maintain a permanent cost advantage over
4
Kotler et. al 761, 1998,
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potential competitors in higher strategic groups, say in the four or even five star categories hotels, as well as further differentiating itself within its own strategic group. 4. BARGAINING POWER OF BUYERS: Certain buyer groups exercise bargaining power as a result of their concentration or bulk purchases of hotel rooms. These groups would include tour operators, domestic or international airlines and large customers, such as convention organizers. This factor is more acute in the lower tier strategic groups which cater more to travel groups than the independent leisure or business traveller. Differentiation is a significant factor in respect of the business travellers and for certain categories of independent leisure travellers, but it declines in importance in the strategic groups catering to budget leisure travellers and groups. Users of hotels are not likely to buy them, with the possible exception of airlines, because of the high level of investment required. Even many international hotel chain companies themselves function as operators or managers instead of owners. There is, therefore, only a minor threat of backward integration. With regard to business travel, buyers will tend not to be price-sensitive if the purchase of a hotel room represents only an insignificant item relative to the underlying business transaction. Otherwise, large scale buyers of hotel rooms for business purposes will tend to “shop around” for special rates. Buyers of hotel rooms are often, as a group, rather fragmented on a worldwide basis. Where buyer groups become more concentrated, for example, tour groups, the prevalence of low profit margins will tend to raise the buyer group’s price-sensitivity. In this context a hotel’s choice of buyer group becomes crucial and hotels which target tour groups or other categories of concentrated buyers will be more subject to the bargaining power of buyers. Within that class its strategic group is further defined by its target market, namely,
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medium-pocket in the upper age bracket. Purchases of hotel rooms are important to certain categories of leisure traveller, and to most categories of business traveller. The bargaining power of buyers varies significantly within the industry, depending upon a hotel’s target buyer group, but this factor becomes acute in a situation of oversupply or where buyers of hotel rooms are concentrated. 5. INTENSITY OF RIVALRY: Rivalry becomes more intense in fixed costs particularly in high preservation/carrying cost industries such as the Hotel Industry in most metropolitan cities. There are strong pressures to sell capacity by price-cutting except weekends and holiday seasons. Capacity augmentation exists as large additions to capacity can disrupt the demand and supply balance and leads to intense rivalry. Exit barriers happen due to economic, strategic and economic factors which retain competitors in an industry. Despite low or negative profitability and diversity, companies and industries may have different origins, goals and strategies and an overlap in target customers.
KEYS TO PROFITABILITY IN THE INDUSTRY: The Hotel Industry in most metropolitan cities in the world is characterized by high capital costs and a high proportion of fixed costs to total costs. The high capital costs require that from the outset the project must be managed to achieve the most cost-effective use of resources applied to construction, furnishing and equipment, pre-operational expenses and finance. Hotels also been built to an optimum size, approximately 500 rooms, in order to benefit from the economies of scale. Hotels must also aim to fill their rooms as profitably as possible, both through room occupancy levels and the relative tariffs applied.
COMPETITIVE EDGE OF HOTEL:
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Competition in the Hotel Industry anywhere in the world is intense within strategic groups subject to the level of industry growth. Industry growth in major cities, capitals or financial centres is high at present partly due to the travellers from tourist groups, business and independent leisure travellers, resulting in low levels of jockeying. Competitive position involves Cost and Differentiation. There are no switching costs, which could increase potential jockeying. Product differentiation can be high ranging from budget hotels to deluxe hotels. Hotel operators wish to exploit to establish customer loyalty, image and differentiation. Fixed costs are high in the industry and consequently high room occupancy rates are critical. Competition would, therefore, be very fierce in a situation of oversupply of hotel rooms. Capacity is augmented in large increments in recent years due to some major international events such as Olympia Games, Expo or World Cup. Competitors’ reaction is expected to be fragmented, haphazard and insignificant, especially as the common market is forecast to be one of the more buoyant segments among total arrivals in the coming future. The key issue remains that whether there are any further sites in the immediate vicinity of any big cities which may be purchased by other business groups commanding similar capital resources to any hotel operator which will pose significant potential future competition. MAJOR INCOME STREAMS FOR HOTEL OPERATORS: *Income from any hotel project can be safeguarded by six major income streams apart from room sales: (1)Food and Beverage is one of the important income sources. A large restaurant serving Western or local food or a coffee shop serving buffet must be planned for any hotel project. These will attract considerate non-hotel resident business including banquet facilities. By world standards F&B income is a very large component of the total hotel income in the Hotel Industry as a whole.
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(2) Exhibitions and Conventions can provide steady rental and service income for any hotel. (3) Entertainment such as Cinemas, Concerts and Business Function Room Facilities are likely to receive heavy patronage. (4) Commercial and Shopping Complex must be planned. The shopping space with retail shops selling luxury merchandises, watches and jewelry can provide recurrent rental income. (5) Neon-Signage can be planned which will further diversity income. (6) Car-parking Service can be another major income source.
THE HOTEL’S BUSINESS STRATEGY: The Hotel Industry in any major cities in the world contains very high exit barriers. Once in, it is very difficult to get out. There is considerable diversity in the strategy and aims of companies owning hotels. For example, an airline entering the hotel industry may see its hotel operations as ancillary to its core business of selling air travel. Similarly, a property developer engaged primarily in property development and investment, may have a different objective and strategy from a company whose core business is hotel ownership/management. The corporate structure of the company holding the hotel can be designed from the tax planning angle with a view to being able to sell this development at much reduced rates of stamp duty and legal expenses. The company can keep the options open either to sell before completion or to keep the hotel project as a long term investment. CONCLUSION The two crucial factors that enable hotels to differentiate themselves are good location for relative target market and quality of service. This latter issue is dependent upon good
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management and well trained staff. The Hotel Industry can provide considerable opportunity to cross-sell profitable products such as Food and Beverage, Entertainment or Exhibitions and Conventions services. Tariffs are then determined according to the level of differentiation achieved through location, management, staff and guest ratios and any other miscellaneous factors such as quality of architecture, decoration, furniture and fittings, layout or interior design. In the event of a downturn in the world’s economic cycle the hotel’s target market should be more durable than the tourist market because of the different forces and motives driving tourism. That is not, however, to say that a hotel itself is immune to such a downturn. If jockeying for position in a higher strategic group became more intense in a position of oversupply, a hotel’s price advantage might be eroded and business might be diverted to another segment, forcing the hotel to reduce its profit margins further unless it has established sufficient differentiation to maintain its status quo within its respective market segment.
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JUTE INDUSTRY INTRODUCTION The Jute industry occupies an important place in the national economy of India. It is one of the major industries in the eastern region, particularly in West Bengal. Jute, the golden fibre, meets all standards for “safe” packaging in view of being a natural, renewable, biodegradable and eco- friendly product. It is estimated that the jute industry provides direct employment to 0.37 million workers in organised mills and diversified units including tertiary sector and allied activities and supports the livelihood of around 4.0 million farm families. In addition, there are a large number of persons engaged in the trade of jute.5 JUTE INDUSTRY AND THE FIVE COMPETITIVE FORCES6 1. SUPPLIER POWER : The major portion of the marketable surplus of jute is sold by the growers in the villages. This fact has led to the establishment of a chain of middlemen between the growers and the manufacturing mills. In addition to purchasing and selling the raw jute, these middlemen often perform such essential functions as assembling and storing the crop, transporting it to the secondary market, and financing the various transactions. While the power of the farmers cannot be said to be particularly high, that of the middlemen is certainly high. Also, the jute farmers have the incentive to switch to alternative crops like rice which is grown on the same land. This might altogether stop production of jute; the main losers seem to be mill workers and not the farmers if jute declines further. Hence supplier power seems to be reasonably medium to high.
5
GTTES, http://india-itme.com/gttes2015/industry.aspx.
6
Anindita Sampath et. al, Jute Industry Analysis, http://www.scribd.com/doc/36259389/Jute-IndustryAnalysis-Declining-Industry.
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2. BUYER POWER: The buyers’ power is collectively significant as to mostly the price of jute is set depending on the demand. The major buyers of jute as such are organizations like Food Corporation of India which buys the jute sacking for food grains and the sugar, cement and fertilizer industries. This is mainly due to the regulations issued by the government of India, therefore leading to forced buying. But there are a number of political factions pushing for reducing these sanctions, due to the relatively high price of jute packaging compared to other substitutes. Secondly, where jute sellers are following a differentiating strategy is by trying to make jute more of a lifestyle product and therefore establishing some kind of a fashion statement. Here, the buyers are big supermarkets like Shopper Stop, which sell a whole range of products and Jute bags and accessories are just a miniscule part of their total business. Hence it is not as important for them to buy the jute products as it is for the jute industry to sell them. Of thirty major primary commodities traded internationally, only about six have as much price and supply instability as jute. Demand is highly sensitive to price increases, but not nearly as sensitive to decreases; once a portion of the market is lost to synthetics, it is very difficult to win it back through price competition. Apart from these, significant portions of buyers are foreign importers. Overall, the buyer power seems significant. 3. ENTRY BARRIERS Profitability – Low Investment – Not too high, foreign investment available including joint venture options Technology – Not a barrier, no specialized know how. Labour – skilled workers who are available in plenty or can be trained especially in India Except for low profitability and the fact that jute industry as a whole is declining; there are no entry barriers as such. All the major players in the jute industry are reported to have
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planned
fresh
investments,
which
will
not
be
restricted
to
West
Bengal.
However, according to a section of the industry, the jute sector has not grown enough to absorb such huge production capacities. It is more likely that the new units will only replace some of the older ones. Currently, the overall capacity of the jute industry is about 100,000 tonnes per day. The annual turnover is Rs 4,000 crores and there are altogether 73 integrated jute mills, of which 59 are in West Bengal. Fresh capacity to the tune of 25,000 tonnes per day is being currently implemented, creating job opportunities for more than 25, 000 people, both skilled and unskilled. 4. SUBSTITUTES Each category of jute products faces a number of substitutes. The threat of substitutes is very large because jute is mainly used as a fibre in the production of the end product and there are a number of manmade ad-natural fibres that can act as very close substitutes. It is true that jute has a number of characteristics, which should prompt its usage but lack of knowledge of its qualities works in its disfavour. Looking at substitutes in its main categories:
Packaging purposes: Jute is a flexible packaging material. It faces being substituted by other flexible packaging materials like plastic; nylon and other manmade fibres and also forms non-flexible packaging materials – boxes, cartons, and aluminium. Apart from which latest innovations like modified atmosphere packaging cans, which seal in the air to retain freshness, or smart materials that can “breathe” selective gases and keep food unspoilt are being introduced which pose a big threat to using jute as agro product packaging.
Textiles: cotton is the closest substitute having the same “natural” appeal, which is the main marketing plank of jute textiles. Considering that currently all over the world, there is an over capacity of cotton production and falling demand,
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downward trend of cotton prices will tend to lower demand for jute textiles. Besides in this area Indian jute faces stiff competition from Bangladeshi jute – known for its superior quality. The range of colours the dull brown of natural jute can be dyed into – not faced by synthetic materials, which are regularly what is used, restricts Jute usage for furnishings.
Jute bags: Here substitutes come from three areas: a) Plastic – either very low cost or comes free with purchases since it is more economical for companies to use plastic bags for promotional purposes. b) Cloth bags c) Leather bags – makes a stronger fashion statement than jute! Again since the leather industry is going through a slump downward price makes it a lot more difficult to replace. Cotton and Leather are more the more regular mediums of expression as far as fashion goes. Demand for jute from both textiles and bags have depended on fads rather than sustainable trends.
5. COMPETITION In traditional economic model, competition among rival firms drives industrial profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry is influenced by the following industrial characteristics: 1. A large number of firms increase rivalry because large a number of firms compete for same customers and resources. 2. Low market share causes firm to fight for market share; with synthetic fibre eating up the major chunk of the market share competition has intensified amongst the rivals within the industry. 3. Low switching costs increase rivalry. When a customer can easily switch from one product to the other there is a struggle to capture customers; with alternatives to fibre
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products that are available at cheaper rates, switching cost for customers is significantly low and hence, existing industries have to fight for the market share. 4. A growing market and the potential for high profits induce new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors and demand cannot support the new entrants. The eco-friendly wave engulfing the public and government supporting use of jute products investment in this field has become significantly profitable. This has attracted the attention of new players who are willing to invest in this industry and thus increase the competition for existing manufacturers. AFFECT OF GOVERNMENT POLICIES ON JUTE INDUSTRY POSITIVE INITIATIVES
The Jute Corporation of India Limited: JCI was set up in 1971 as an official agency by the Government of India with the aim to provide minimum support price to jute cultivators and also work as a helping hand in raw jute sector. The Government of India fixes the Minimum Support Price (MSP) for the JCI from time to time and the Price Support Operation is being set up to procure raw jute from farmers which is based on MSP fixed by the Government. The Jute Corporation of India Ltd. demands superior quality products and so the raw jute market in JCI receives a premium for its quality value. JCI is obliged to buy whatever quantity of jute is offered at support rates by the growers without any quantitative limit.
National Jute Policy 2005 :
The main objective of the policy is to facilitate the jute sector in India to attain and sustain a pre-eminent global standing in the manufacture and export of jute products by enabling the jute industry to build world-class state-of-the art manufacturing capabilities in 22
conformity with environmental standards. The policy seeks to strengthen R&D activities in agricultural practices with public-private partnership with a vision to ensure remunerative prices to millions of jute farmers by enabling them to produce better quality jute fibre for value added diversified jute products and enhance per hectare yield of raw jute.
Jute Packaging Material (Compulsory Use in Packaging Commodities) Act, 1987-
JPM Act has been enacted to provide for the compulsory use of jute packaging material in the supply and distribution of certain commodities in the interests of production of raw jute and jute packaging material, and of persons engaged in the production thereof, and for matters connected therewith. Based upon the demand & supply position of raw jute and jute Goods, the Government prescribes reservation of commodities to be packed in Jute. The Government attempts to provide as much reservation as possible to utilize the jute crop that is produced in the country, without creating the bottle-neck in the supply-distribution chain of the commodities. NEGATIVE POLICY DECISIONS
Withdrawal of Export Subsidy Assistance (ESA) from 1 April, 2007 has been a setback to the export of Indian Jute industry.
Recent government decision to withdraw 10% import duty on jute and jute products to nil with effect from January 1, 2008, is seen as a threat by the industry
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The Department of Food and Public Distribution (DFPD) has issued orders for packaging paddy and coarse grains in used gunny bags which is a violation of Jute Packaging Material Act, 1987, which is considered as threat by jute industry.
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ALUMINIUM INDUSTRY INTRODUCTION Global Aluminium Industry Primary aluminium production is concentrated in relatively few countries. China alone produces more than 26 % of the world total. The top five producers – China, Russia, Canada, The united States and Australia accounts for more than 59% of the world output. Production is found where energy is cheap because making aluminium uses large quantities of electricity. Growing demand for the lightweight metal is fuelled largely by the booming Chinese economy which already consumes a quarter of the world’s aluminium production. Analysts predict an annual growth rate of 7 to 14% in the Chinese automotive industry up to 2011, a 12% increase in construction expenditure in 2007 and a minimum of plus 16 million annual growths in urban population during the next 8 years. According to analysts these factors will combine to see China consume 36% of world’s aluminium production as early as 2010. Global demand for aluminium is increased by 8% to 43.8 Mt in 2011 and aluminium prices are increased from $2,400 and $2,500/t. China has become a net importer of aluminium in 2011. India Backed by abundant and good quality bauxite reserves and cheap labour costs, Indian aluminium producers have emerged among the lowest cost aluminium producer in the world. India is home to the sixth largest bauxite deposit in the world which makes its world's 5th largest aluminium producer. Aluminium industry in India registered a phenomenal growth during the past few years on the back of robust growth in the economy. Aluminium Industry in India is a highly concentrated industry with the top 5 companies constituting the majority of the country's production. With the growing demand of aluminium in India, the Indian aluminium industry is also growing at an 25
enviable pace. In fact, the production of aluminium in India is currently outpacing the demand. Though India’s per capita consumption of aluminium stands too low (under 1 kg) comparing to the per capita consumption of other countries like US & Europe (range from 25 kg to 30 kgs), Japan (15 kgs), Taiwan (10kgs) and China (3 kgs), the demand is growing gradually. In India, the industries that require aluminium most include power, consumer durables, transportation, construction and packaging etc. The growth of the aluminium industry in India would be sustained by the diversification and exploration of new horizons for the industry. India has huge deposits of natural resources in forms of minerals like copper, chromite, iron ore, manganese, bauxite, gold etc. The Indian Aluminium industry falls under the category of non iron based which include the production of copper, tin, brass, lead, zinc, aluminium and manganese. Aluminium production industry in India is mainly dominated by about five firms that account for the majority of the country’s metal production including Hindust an Aluminium Company (HINDALCO), National Aluminium Company (NALCO), Bharat Aluminium Company (BALCO), MALCO and INDAL. HINDALCO: Hindalco is the largest firm in the Indian aluminium industry holding more than 39% of market share. This is a flagship unit of the Aditya Birla Group with its aluminium plant at located at Renukoot in Uttar Pradesh. The firm manufactures a number of aluminium products making up a market share of 42% in the primary aluminium segment, 20% in extrusions and 63% in rolled products, while 31% of the products are in the wheels and 44% in foils segments. Sterlite Industries is one another giant in the arena comprising two wings namely BALCO and MALCO. BALCO is a partly integrated firm, MALCO is a completely integrated producer of aluminium. Sterlite company holds a market share of about 32%. NALCO is yet another leading producer of the aluminium metal in India. Government of
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India has purchased a stake of about 87.15% in this firm. NALCO’s aluminium refinery unit is situated at Damanjodi. In addition, the firm also has a smelter unit at Angul, Orissa. At present, NALCO is focussed on a capex project aimed at increasing the volume of its production from 345,000 tonnes to 460,000 tonnes. The list of aluminium companies in India includes Hindalco, Hindustan Zinc, Jindal Stainless, Kennametal, India, Nalco, Malco, Ratnamani Metals, Sujana Metal Products, Balco and Indal. In the past, the growth of alumina and aluminium industries was in the range of 2 to 3% per annum. However, the growth rate may remain minimal in developed countries like US, Canada, Europe and Japan. But its growth is bound to be reasonably high in developing economies such as BRIC countries (Brazil, Russia, India and China) and Middle East. ALUMINIUM INDUSTRY AND THE FIVE COMPETITIVE FORCES7 1. BARRIERS TO ENTRY: We believe that the barriers to entry are medium. Following are the factors that vindicate our view.
Economies of scale: As far as the sector forces go, scale of operation does matter. Benefits of economies of scale are derived in the form of lower costs and better bargaining power while sourcing raw materials. It may be noted that the minimum economic size of a fully integrated greenfield smelter is around 250,000 tonnes. The aluminium companies, which are integrated, have their own mines for key raw materials such as bauxite and coal and this protects them from the potential threat for new entrants to a
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Sunildro L.S. Akoijam, Scope and Potential of Indian Aluminum Industry: An Indepth Analysis, European Journal of Business and Management, Vol. 4, No. 3, 2012.
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significant extent. They also have their own power plants as it is a major cost driver.
Capital intensive: Aluminium industry is a highly capital intensive business.
Higher gestation period: The gestation period for an economically viable green field plant is over 4 years while for a Brownfield project, (modernization / capacity addition) the gestation period is relatively lower between 1.5 years to 2 years.
Government policies: The government has a favourable policy towards aluminium manufacturers. In fact to protect the domestic industry, recently, the government has imposed duty on value added products like foils and rolled products from the Chinese markets. However, similar to other sectors, there are certain discrepancies involved in allocation of mines and land acquisitions. Furthermore, regulatory clearances and other issues are some of the major problems for the new entrants.
2. BARGAINING POWER OF SUPPLIERS: The bargaining power of suppliers is low for fully integrated aluminium smelters (upstream) as they have their own mines for key raw material like bauxite. Examples here could be Nalco and Hindalco. However, those who are non-integrated or semi integrated, (downstream) have to depend upon the upstream producers for alumina or primary metal. While the bargaining power is limited in case of power purchase as it is highly regulated sector and government is the sole supplier most of the times, increasing usage of captive power plants are helping the companies to rationalize their costs to certain extent.
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3. BARGAINING POWER
OF
CUSTOMERS: Being a commodity, customers enjoy
relatively high bargaining power as prices are determined on demand and supply. 4. COMPETITION: Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatility witnessed in the industry.
5. THREAT
OF SUBSTITUTES:
On one side, the usage of aluminium is rising
continuously in the automobile and construction sector but steel still remains a main substitute because of its relatively lower cost. On the other side, copper has been slowly substituting aluminium's usage in the power sector due to its higher conductivity. However, with properties like higher strength-to-weight ratio, durability, higher corrosion-resistance and relatively lower cost, aluminium is able to hold its own. Thus the usage of aluminium is likely to increase over a long term period.
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CONCLUSION In course of this assignment we have analyzed how the three industries namely Hotel, Jute and Aluminium are affected by Michael porter’s five forces. The strategic business manager seeking to develop an edge over rival firms must use this model to better understand the industry context in which the firm operates. The rivalry amongst existing firms has a significant impact upon the profitability of a firm because they all seek to capture as much market share as possible. Considering the stagnation in jute industry competition has remained constant for a long time. This is also indicative of a less profitable venture for new entrants as the scope of growth is diminishing. Hospitality sector on the contrary has seen a sudden up rise in competition due to increased purchasing power of the consumers with which they can buy luxury. Government policies have played a vital role in deterring new entrants from venturing into jute and aluminium industries. More environment clearances and related statutory bottlenecks have proved to be barriers to entry of new investors. In case of hospitality industry buyer’s power still plays a vital role primarily because of the alternatives that are accessible by them in open market. In case of aluminium and jute the production is carried on at a large scale as well as it is in the hands of a few therefore, the buyers have fewer alternatives to choose from. The profitability of jute has declined immensely because of the substitutes available in the market at cheaper rate. Copper has been slowly substituting aluminium's usage in the power sector due to its higher conductivity. In theory, substitute products perform same function, reduce costs, and/or provide higher quality performance with better service due to technological advancement.
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Following factors have to considered by the existing as well as prospective players in the industry for a successful entrepreneurship.
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