- 15 Marks
Question
a) Charis Shoes Ltd has been in existence for 5 years. The Board of Charis Shoes Ltd needs a report on examination of the industry’s attractiveness.
Attractiveness in this context according to the board refers to the overall industry profitability.
Required:
Explain how the Porters Five Forces model can be used to assess the attractiveness of the industry in which Charis Shoes Ltd operates. (15 marks)
Answer
Porter’s Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter’s book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. The model is widely used, worldwide, to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.
- Threat of New Entrants:
- The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company’s competition if they are unable to receive a suitable deal.
- Potential of New Entrants into an Industry:
- A company’s power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company’s market and be an effective competitor, the more a company’s position may be significantly weakened.
- Power of Suppliers:
- This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are, and how much it would cost a company to switch from one supplier to another. The fewer the number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds.
- Power of Customers:
- This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is, and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.
- Threat of Substitutes:
- Competitor substitutions that can be used in place of a company’s products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company’s power can be weakened.
- Tags: Industry Analysis, Market Attractiveness, Porter’s Five Forces
- Level: Level 1
- Topic: Competitive forces and markets
- Series: MAY 2017
- Uploader: Dotse