Marketing 91 Lecture Notes: Porter's Five Forces Model

Introduction to Porter's Five Forces Model

• A business strategy tool used to analyze the attractiveness of an industry.
• Helps companies understand the competitive power in a business situation.
• Identifies five forces that determine competition:
  • Rivalry among existing firms
  • Threat of substitute products
  • Threat of new entrants
  • Bargaining power of buyers
  • Bargaining power of suppliers

Detailed Explanation of the Five Forces

1. Threat of Substitute Products

• Refers to how easily customers can switch to competitors' products.
• High threat scenarios:
  • Many substitutes available in the market
  • Products/services available at lower prices
  • Better quality from competitors
• High threat reduces attractiveness of company products, necessitating close price monitoring.

2. Threat of New Entrants

• Involves new players entering the market, affecting market share of existing companies.
• High threat scenarios:
  • Low capital requirement to start a business
  • Low switching costs for customers
  • Non-differentiated products
  • Easy technology access
• High entry/exit barriers usually correlate with higher profit margins but increase market risks.

3. Industry Rivalry

• Indicates the competition intensity among current players.
• High rivalry scenarios:
  • Large number of competitors
  • Low switching costs for customers
  • Industry growth is stagnant
  • High fixed costs leading to price competition
• High rivalry can lead to advertising wars, price wars, and increased operational costs.

4. Bargaining Power of Suppliers

• Refers to the power suppliers have over input prices.
• High power scenarios:
  • Few suppliers with concentrated power
  • Unique or effective product inputs
  • High switching costs for companies
• High supplier power can decrease market attractiveness; maintaining healthy supplier relationships is crucial.

5. Bargaining Power of Buyers

• Indicates how much influence buyers have on reducing product prices.
• High power scenarios:
  • Many suppliers offer similar products
  • Few buyers purchasing in bulk
  • Low switching costs and non-differentiated products
• Differentiated products help lower buyer bargaining power.

Case Study: Online Grocery Market in India

• Competitive Rivalry: High due to competition from both new and established players (e.g., Amazon Fresh, Flipkart).
• Bargaining Power of Buyers: High as customers have numerous options for online grocers.
• Bargaining Power of Suppliers: Low due to many procurement options available to online grocers.
• Threat of New Entrants: Medium, as the market is attractive but has barriers like high capital requirement and intense competition.
• Threat of Substitute Products: Medium to high, with offline stores as main substitutes and low switching costs for customers.

Conclusion

• The online grocery industry is lucrative for entrepreneurial ventures with innovative business models and strong operational management.
• There is significant potential for success in this industry.