P o r t e r 5 F o r c e s analysis a nalysis
is an excellent framework that could help managers, entrepreneurs and
investors to evaluate whether whether a business is operating operating in a profitable industry. industry. From the results of this analysis, strategies could be formulated to help companies identify opportuniti es and avoid threats.
Here is a
P o r t e r 5 F o r c e s framework:
Source: page 40, Strategic Management An integrated Ap pr oa c h wr it t en by Ch ar le s W. L. Hi ll an d Ga re th R. J on es
Each force in this this framework could be categorized as strong, medium, or or weak. Strong forces are perceived as threats to the enterprise. Strong forces have strong bargaining power thus limit limit the enterprise’s ability to increase price or lower cost. On the other hand, weak forces are perceived as
opportunities. Weak forces have low low bargaining power thus the enterprise enterprise could increase price price or lower cost to sustain more profit.
Here is a list of the five forces. Answer the questions on the right-hand column and you you will be able identify whether the forces should be categorized as opportu nities or threats.
The five forces in this framework include the followings:
Potential Competitors/ Barrier of Entry(Companies currently not
1. How loyal are the end users in this industry? 2. How troublesome or hard is it for the end users to switch and use another product? 3. Does it require a large seed capital to enter this industry?
competing in the industry but have the necessary resources to do so)
4. Do entries to this industry regulated by government? 5. How hard is it to gain access to the distribution channels? 6. How long does it take for new staff to acquire the necessary skills to do the work?
Threat of Substitutes(Products in another industry that satisfy similar needs)
1. How many close substitutes are available? 2. How pricy are the substitutes? 3. What is the perceived quality of the substitutes?
Intensity of rivalry among established firms (Direct competitors competing for market share)
Bargaining power of buyers (Customers)
1. How many close competitors exist in the industry? 2. What are the sizes of your close competitors? 3. What is the industry structure? Is it a fragmented, consolidated, oligopoly or monopoly industry? 4. What is the current industry growth rate? 5. How high are the exit barriers? Do your competitors have a high committed fixed cost thus they have to operate even at a loss? 6. How diversified are your competitors? 7. How extensively do your direct competitors advertise?
How large are your buyers’ company? How many companies are there for the buyer to choose from? Are the buyers buying a huge volume? Do you depend only on a few buyers to sustain your sales? How hard is it for the buyers to switch and use a competing product? 6. Are the buyers purchasing from you as well as your competitors? 7. Do the buyers have the capacity to enter your business and produce the goods themselves? 1. 2. 3. 4. 5.
Bargaining power of suppliers
1. Are there substitutes for your suppliers’ products? 2. Do your suppliers serve multiple industries? Does the total industry revenue accounting for only a small portion of the supplier’s total revenue? 3. Do you have high switching cost to use another supplier? 4. Do suppliers have the capacity to enter your business? 5. Does your company capable to enter the supplier’s business?
Intensity of Existing Rivalry Government limits competition (General Electric) Government policies and regulations can dictate the level of competition within the industry. When they limit competition, this is a positive forGeneral Electric. … Relatively few competitors (General Electric) Few competitors mean fewer firms are competing for the same customers and resources, which is a positive for General Electric. Large industry size (General Electric) Large industries allow multiple firms and produces to prosper without having to steal market share from each other. Large industry size is a positive for General Electric. …
Bargaining Power of Suppliers Threat of Substitutes Substitute has lower performance (General Electric) A lower performance product means a customer is less likely to switch from General Electric to another product or service Substitute is lower quality (General Electric) A lower quality product means a customer is less likely to switch from General Electric to another product or service Substitute product is inferior (General Electric) An inferior product means a customer is less likely to switch from General Electric to another product or service. High cost of switching to substitutes (General Electric) Limited number of substitutes means that customers cannot easily switch to other products or services of similar price and still receive the same benefits. High switching costs positively affect General Electric. Limited number of substitutes (General Electric) A limited number of substitutes mean that customers cannot easily find other products or services that fulfil their needs. Limited substitutes are a positive for General Electric.
Bargaining Power of Customers
Buyers require special customization (General Electric) When customers require special customizations, they are less likely to switch to producers who have difficulty meeting their demands. Buyer customization positivel y affects General Electric . … Large number of customers (General Electric) When there are large numbers of customers, no one customer tends to have bargaining leverage. Limited bargaining leverage helps General Electric. …
Threat of New Competitors High capital requirements (General Electric) High capital requirements mean a company must spend a lot of money in order to compete in the market. High capital requirements positively affect General Electric. High sunk costs limit competition (General Electric)
High sunk costs make it difficult for a competitor to enter a new market, because they have to commit money up front with no guarantee of returns in the end. High sunk costs positively affect General Electric Advanced technologies are required (General Electric) Advanced technologies make it difficult for new competitors to enter the market because they have to develop those technologies before effectively competing. The requirement for advanced technologies positively affects General Electric. Industry requires economies of scale (General Electric) Economies of scale help producers to lower their cost by producing the next unit of output at lower costs. When new competitors enter the market, they will have a higher cost of production, because they have smaller economies of scale. Economies of scale positively affect General Electric. Patents limit new competition (General Electric) Patents that cover vital technologies make it difficult for new competitors, because the best methods are patented. Patents positively affect General Electric. Customers are loyal to existing brands (General Electric) It takes time and money to build a brand. When companies need to spend resources building a brand, they have fewer resources to compete in the marketplace. These costs positively affect General Electric. High learning curve (General Electric) When the learning curve is high, new competitors must spend time and money studying the market before they can effectively compete. High learning curves positively affect profits for General Electric.
Entry barriers are high (General Electric)
When barriers are high, it is more di fficult for new competitors to enter the market. High entry barriers positively affect profits for
Five Forces Model • Current Competitors
General Electric .
General electric is one of the world's largest and most diversified companies. With eleven different segments of the company, ranging from Advanced Materials to NBC Universal, General electric has a strong hold on many separate markets. As a whole, General Electrics' main competitor on a conglomerate level consists of Siemens. Siemens AG (SI) is a leading diversified company offering products and ser vices in information and communications, automation and control, power, transportation, medical, water and wastewater treatment, lighting, financing, real estate, and home appliances. Siemens' is one of the largest markets in the world, with thirteen worldwide businesses and annual sales of $97 billion. Siemens companies in the U.S. employ approximately 70,000 people and 430,000 people globally. Siemens’ most closely mirrors General Electric’s size and structure, making it their largest competitor.
Breaking GE down into individual segments reveals a more accurate depiction of the company’s competition. Each separate venture of GE has its own degree of competition. While all eleven segments of the company are important, the largest and most profitable areas of business are GE’s finance, media, and technology businesses. GE’s Consumer Finance and Commercial Finance are GE’s most lucrative businesses producing
39 billion dollars in revenue for 2004. These financial institutes offer a wide array of services and products such as commercial loans, home loans, bank cards, auto loans, le asing and financing inventory, debt consolidation loans, and home equity loans. Citigroup, a GE competitor, provides financial services for more than 200 million people in over 100 countries with revenues of over 66 billion. Citigroup competes with General Electric’s financial service business segment with their four business groups in
the financial services. These segments consist of Global Consumer Group, G lobal Corporate & Investment Banking Group, Global Investment Management, and Global Wealth Management. The competition in this area is high between GE and Citigroup. GE NBC Universal is one of the worlds leading media and entertainment companies owning a television network, world-renowned theme parks, motion picture company and other various media outlets. While GE NBC produces a lower revenue than its competitors, such as Disney and Time Warner Inc., GE maintains a relatively competitive profit. Another large competitor GE faces is Koninklijke Philips Electronics competing on more of a technological battlefield. Phillips is a global company that generates more than 39 billion in sales and employees 161,000 people in over 60 countries. Phillips is one of General Electric’s smaller competitors though Philips Medical Systems is increasingly creating more competition in that business segment of General Electric. General electrics main advantage is the fact that they are so diversified. The competition is steep in each of their individual companies, but there are few companies that can compete with General Electric as a whole. • New Entrants
The threat of new entrants for General Electric is small due to the vast size of the company. Many of GE's companies require a great deal of brand recognition to stay successful. The scale of economy that GE operates in places a hardship on new entrants to any of the three major segments of GE. The financial services industry would require an extremely large amount of start up cost and capital making it difficult for small companies to compete. The finance industry also hinges on an established and trusted name for success. The threat of new entrants to the finance industry competing on the scale that GE competes in is very small. GE NBC also has little threat of new entrants imposing competition. In the world of broadcast and entertainment there is also a great deal of monetary value that must be expended in order to even have hopes of competing with such networks as NBC. New entrants must also face the legal barriers licensing regulations created by the government to limit entry into the broadcast industry. Not only must new entrants have a mass amount of capital and legal issues but they must also compete with the NBC name. Technology is yet another industry that requires large capital and expense. It would be difficult for new entrants to obtain the cash and development that is essential in this industry. Also, new companies must take into realized the channels of distribution for the production of technologies are difficult to achieve without an already established relationship. The threat of new entrants in all aspects of GE is low due to the repeating trends of the market requirements that GE employs. People already have a solid relationship with the brand name GE, and it would be very expensive for a new company to try and compete with it. It would require a great deal of capital in advertising to get a new companies brand name out to the public. All of GE's companies are in very large-scale economies, which are difficult to break into. • Threat of Substitute Products
Every company has to worry about the threat of new products being created which would make their product obsolete. GE is no exception. Just about every product that General Electric creates has the threat of substitute products. The financial segment of GE is not as susceptible to a threat of substitutes as other units of GE. A consumer is not as likely to switch their financial provider, as they are their light bulb brand. GE NBC is one segment that could be prone to substitutes. Substitution for GE NBC is as easy as viewers switching a channel and advertisers switching networks. This creates a high level of competition that promotes companies to continually have the edge over their competitors. The technology industry is also an at-risk industry to threats of substitutions. From their consumer products to their healthcare technologies, everything has the ability to be taken over by a newer technology or a more efficient product.
General electrics advantage in this field is their strength of brand name. With new products coming out all of the time, consumers may be reluctant to switch due to their loyalty to the GE brand name. • Bargaining Power of Buyers
Due to the size of General electric, they have considerable bargaining power for most of their products. For many of their companies, the switching cost for buyer is extremely high. This is true with the financial, broadcasting and technology industry. For many companies, such as GE Healthcare, the volume per buyer is very large in both quantity of goods and cost of goods. This makes the switching cost for buyers high, giving GE yet another advantage over their buyers. This is true for most of their companies, but not all. Some of General Electric’s companies, such as GE Consumer and Industrial, the
switching cost of buying a different product is m inimal. In these few scenarios, GE must stay competitive in the price wars with their competition. • Bargaining Power of Suppliers
The bargaining power of suppliers is relatively low for General Electrics many industries. Due to the shear volume of goods that GE buys from their suppliers, the suppliers have no ability to bargain with GE. Most of GE's suppliers could not survive if they lost GE's business. General Electric is also very flexible in who they choose to be their suppliers. This gives them the advantage of having suppliers fight for their business.
