Here is an explanation of the 7
drivers of market attractiveness currently used in the Porter
analysis model:
(Note – it is important that the analyst adopt an external
perspective when carrying out Porter analysis. Look at the market
objectively, just as if you were a potential new entrant evaluating
it from the outside.)
The Porter tool you will use requires driver inputs between
0 and 9 – 5 is ‘average’
MARKET ATTRACTIVENESS DRIVERS
Market Growth
Market growth is a driver of market attractiveness. Fast growing
markets are more attractive than mature or declining markets.
e.g. Input 5 if the market is growing at around inflation,
3 if the market is declining at more than 10% per year and 7
to 9 if the market is growing at more than 20% per year. Interpolate
for other conditions as you see fit.
Competitor Rivalry
Competitor rivalry is significantly the result of a number of
other drivers, however, in Porter analysis, it is treated as
an independent driver, because it can also be influenced by
other external factors
Remember, a certain amount of competitor rivalry is present
in most markets. Don’t naturally assume that your market
is necessarily higher than average.
e.g. Input 1 if there is no rivalry at all. Input 9
if you believe that your competitors are adopting an almost
irrational level of rivalry activity. i.e. severe price competition,
advertising wars, etc. Again, if you believe rivalry to be average,
input 5.
Customer Power –
Is high when there exists:
- High price elasticity (price up, they buy less)
- High buyer concentration (few of them)
- High significance of purchases to buyers – perhaps
key points
- Lack of differentiation between suppliers
- Low switching costs to other suppliers
- Quality is relatively unimportant to buyers
- Buyers operate on low profit margins - need costs reduced
- Buyers have good information about suppliers cost structures
- Threat of backward integration – buyer enters your
business
Threat of substitutes
– Is high when there is:
- New technology
- New materials
- New processes
Threat of new entrants
– Is high when:
- There are low economies of scale
- There is little product differentiation
- There are low capital requirements
- Customer switching costs are low
- There is easy access to distribution
- Government policy encourages new entrants
Supplier Power–
Is high when:
- There is a high concentration of suppliers (few of them)
- There is a lack of substitutes/alternatives
- It is expensive to switch suppliers
- There is a threat of forward integration – supplier
enters your business
- Your industry is not that important to suppliers
Regulatory pressure –
Is high when:
- There are Government or other regulatory bodies (legitimate
or otherwise) intervening in a way that makes the market
less attractive.
RELATIVE
ADVANTAGE DRIVERS
Here is a description of the two drivers used to establish
a product’s relative competitive advantage (its advantage
or disadvantage compared to competitor’s products):
Market shares
Market shares a good proxy in a steady state situation as
measures of relative Competitive advantage/disadvantage.
Virtuality
Virtuality occurs when economies of scale become negative
in markets. That is, when the external supplier markets become
more efficient than the organisation itself and the company
can procure and serve customers more efficiently using external
sources. (e.g. Outsourcing). Organisations tend to improve
incrementally, whilst some supplier markets are improving
exponentially. Virtual organisations tend to monitor supplier
markets and network/outsource to exploit savings in both invested
assets and expenses.
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