Transcripts
1. 01 Introduction: The first question that
we should be asking, why do we need to understand
the five forces model? The first reason is that this is the fundamental concept
applicable to all businesses. This regard to the scale
or industry domain, only the extent of
analysis and applicability differs subject to the scale or layers of
complexities involved. Although swot has been touted
as the go-to assessment. Once you go through
these lectures, you'll be surprised by the
extent of ground covered as well as by the simplicity
of this fundamental model. Moreover, businesses did
not exist in isolation. In other words, they exist
in the marketplace and have a symbiotic relation with the environment constituting
of other businesses. And this model states how
our business fits into its immediate environment and interacts with other
businesses in the ecosystem. Just as a hot cup of
coffee exchanges heat or thermal energy with the
surrounding environment. So does a business
exchange resources with other entities
in the marketplace. And just as a particular
species competes with its fellow members or
other species for food. So does a business compete with other entities for resources and customers in the marketplace
and in any ecosystem, when multiple entities
participate, forces are generated. Whether it is the
gravitational force between astronomical objects or the frictional force
between two objects. The same applies to businesses operating
in a marketplace. This model helps
us understand how a business is subject
to these market forces. But before jumping
into the lectures, let us quickly do a walk-through of what will
be covered in this module. Let us understand the contents. We will begin with understanding
the five forces model, along with a brief discussion
of each component. Not only to understand
the nature of force, but also its implication
on the business. Next, we will move
on to the details of these components to further develop our understanding
of this model. This part will help you develop a strategic thought
process along with a much deeper understanding
of this model. Finally, similar to
all our other courses, everything will be explained through a practical perspective. Not only to facilitate easy understanding and
conceptual clarity, but also to ensure that you
can put your learnings to use rather than just adding some more arsenal to
your knowledge bank. Now, Sadie, I'm not a
full-time instructor. Although this would be
a really stressful job, I need to have a day job to ensure that what I
bring here is valuable. So I work as a
management consultant. Along with my
part-time involvement in education and research, my academic involvement goes beyond these e-learning courses, as I saw as a visiting
faculty at universities. And in addition, I also have
my research engagement, which is subject to
the free time that I get in my practice. I specialize in business
process design, management, finance,
and business analytics. In simple terms, I
work on designing efficient organizations
and processes to ensure that a few dozen
people work efficiently and deliver the required
output while simultaneously. And also develop complex
financial models to project the financial
consequences of business activities. And also, we analyze the data from the past to
identify the trends in the hindsight and establish metrics or visualize data
for management decisions. Over the years, I worked with different types of businesses, including manufacturers
and retailers, across various industry
domains such as construction, real estate,
engineering, plastics, health and fitness, and retail. Hence, I have quiet, a diversified experience
that helps me connect the dots across
the market economy. Finally, my research engagement, primary concerns with subjects on cost management
and real estate. And if you want to know more, you can visit the publication
speech on my block. The link is available
in the resources.
2. Value Addition: Welcome to this discussion
on the five forces model. But unlike most of the other discussions on
this subject, instead, we're going to discuss this from the perspective
of business strategy. Using this five forces model, we will understand how a
business interacts with its immediate environment to sustain and thrive
in the marketplace. As the name suggests, any business is subject
to five forces. And in this series of lectures, we will understand the
details and dynamics of each force using
different examples. Now that you are curious, let us jump into the lecture. But before understanding
the five forces model, we need to understand the fundamental concept
underlying any business. Any business exists
in the marketplace only because of its ability
to create certain value. In simple words, any
business acquires certain input and produces
certain output In-between. Each business does its own magic and add some value
to the product. This value addition
ensures that the value of the output is greater than the cumulative value of inputs. But why does it have to be so? Because if you buy lemon water, sugar, ice, and glasses, but if you sell the
lemonade at a value or price less than the
cumulative value of all the ingredients, then you will incur a loss. What I mean by the magic is that the efforts that
you make in producing a lemonade should
make it seem far more valuable than the mirror
cumulative cost of ingredients. But even if the
perceived value and associated price tag is equal to the total
cost of inputs, it would be loss-making venture, as you would still
need to pay for overheads such as
salary and rent. Hence, whatever magic a business does needs
to ensure that the perceived value and the associated
price tag needs to be far greater than
the sum of inputs. This makes it important
for companies to innovate constantly and evolve
their value creation. For instance, if you've
written a piece of software that can solve
a complex problem, the value creation is unique to your business until your
competitor does it. Once other people
start doing it, for the layers get added and increase the utility
of the software. For instance, the evolution of the computer and mobile
operating systems over the last three decades. So if you stop adding
features or futility and your competition will process your product in
terms of utility, your product will
no longer create sufficient value to
appeal to the customers. And hence, the cycle of
innovation needs to continue. Move on to new products. This is a crucial characteristic
of capitalist economy that drives performers to the top and pushes out the obsolete. Imagine if all companies
had become complacent with their products and stopped improving or creating
new products. In that case, our life would
have been very different as we would have not achieved the technological advancement
that we witness today, including the debatable
pineapple topping pizza, as well as the crypto
assets and space tourism. Now that you understand
the concept of value, think of this as
an equation with suppliers on one side and
bias on the other side. Whereas the business is the
operator in the middle. Now this operator is
what does the magic? So you can imagine
this as a sort of tug of war with
the businesses, the subject to two forces pulling in the
opposite directions. Can you feel the
forces and how they induce stress on the business? This is the first
dimension of forces. Now let us imagine a business
such as retail or trading, where the value
addition is marginal. In such case, this becomes
a pure arithmetic problem. If you're engaged
in such a business, you will have to
procure goods at the least possible value and convince your customer to pay a markup that generates margin, which is sufficient to cover
the cost of your goods, as well as the cost
of your overheads. For instance, if you
are selling newspapers, your customer should
be you enough to cover the cost of newspapers
plus your man, our cost of Paradigm linked
through the neighborhood. If you want to
scale the business, this margin should be sufficient
to cover up the cost of manpower and motorized vehicle
along with the profits. Hence, if you look at many
mundane businesses today, there's little or
no room to scale. In fact, I can safely say that the next Warren Buffett would
not be starting a skirt. We're selling newspapers. Now that you understand the first and most
critical dimension. In next lecture,
we will proceed to understand the complete
Five Forces model.
3. Porters Five Forces P01: Now, let us proceed with the industry assessment
using the Ports five forces. However, before
proceeding further, we need to keep
one thing in mind throughout this entire
framework assessment. We are going to take
the perspective or point of view of
a company that is already inside the industry and not someone who is trying
to enter the industry. Think of yourself as a
king who has already built the castle and is
within the industry. Think of the walls and modes as protection for you being
inside your castle. That's one thing to be remembered across this
entire framework. Now, starting with
the first force, which is barriers to entry and
also the barriers to exit. These are club together barriers to entry
barriers to exit. But why is it important
to understand these? Well, as per the principle
of microeconomics, if an industry or a market is easy to
enter and easy to exit, in other terms, can companies freely enter
and exit the market? Then it implies, there will be too many companies who would want to get
into the business. What does this imply? Well, the competition
will increase day by day, and the margins will deplete. Higher the barriers to entry and higher the barriers to exit. People will think before
entering the industry, and also it would cause
them to exit the industry. This prevents numerous players from entering the industry. If you're already
within the industry, it's great for you that
stops unwanted competition. Higher the better. Let us start the first one is
obviously know how. Now, this know how is not
only about the product, and the process is
required to develop, manufacture and
deliver the product, but it is also the
domain knowledge, which is about other businesses such as suppliers
within the industry, service providers, and all the nuances that is required to
conduct the business. So if the know how
requirements are higher, then it prevents a lot of people from entering
the businesses. However, if the know how
nuances are lowered, for instance, starting
a retail outlet, then too many people
would want to enter. It's easy, isn't it compared to that for a
manufacturing unit. So higher the know
how requirements, the better it is moving on. Now, this is an extended part of know how
intellectual property. Does it require a
substantial amount of research and development to develop the patents required or necessary to do
business in this domain. Does it have to be
a patented drug or a patented vaccine or
some patented tech? Well, in that case, there's a lot of cost and time that needs
to be invested in research and development even before you can
manufacture the product. That's a significant barrier. Now, the same thing
also implies for brand. Now, if this industry
has products which are sold based on brand names
such as luxury brands, does it take too much
of time effort and investment to develop
copyrights for such brands? Well, then the barrier to entry would be higher. That's
the second part. And the next is the capital and the capital infrastructure. Of course, when we talk
about manufacturing, we understand a lot of
capital investment in form of monetary resources are necessary to establish the
manufacturing facility. However, this
capital requirement is not only for capital
infrastructure, but this also implies or is necessary for
operational scaling. For instance, today,
if you want to start a company such as
Uber or AirBNB, For your operations
to be even relevant, you need to attain
a certain scale, and attaining that
certain scale requires a lot of money to be spent
on operational expenses. So the amount of
capital that you require not only to
set up the business, but also to attain a relevant scale in
terms of operations. So higher the capital
requirement, the better it is, lower the capital requirement, the worse it is
because anyone with some small amount of money
can enter the business. Now moving on further with
the barriers to entry exploring another perspective of what we have already discussed. Now, if we are sitting
in an industry where the industry is characterized by cost leadership,
what it means, all players in the business
have high volumes or scales and have attained high efficiencies
in terms of costs. Moreover, if the
differentiation amongst competitors is primarily
based on price, then cost leadership becomes
even more important. In this case, for new
entrants to enter the industry and
effectively compete or even to be relevant
in the industry, they have to attain
cost leadership. So if it is such an industry, it is great for the incumbent, because it takes
expertise, knowledge, capital, know how, and many other factors to
attain cost leadership, making it even more
difficult for new entrants. Next, we have access to
distribution channels. Now, if we are looking at a market that is
highly saturated, as in the market
growth is not much, but there are already too
many players in the market. In that case, accessing distribution channels
would be difficult because there are already too many products and new
entrants might be crowded out. However, in markets
that are growing, there would be space
for new products or new entrants to be accommodate within the distribution channel. Now, it also depends on
how well managed or well controlled are the
distribution channels by the existing
players in the market. So that's another
thing to keep in mind. And the third point, which is the network effects
or heard mentality. Now, success of some products, such as social media
or even telephone, depends on how many people are there on the platform
or used a solution. For instance, even AirB and V, how many service providers are available on the platform.
The same goes for. There have to be that many
cars available on the platform for us as users to be effectively using the
application or the solution. So in cases where the product success is driven by network effects
or herd mentality, it would be difficult for the new entrant to
replicate that thing. Moreover, there's
something called minimal viable scale
of operations. Unless you attain that
minimum momentum, your product or
solution might not be relevant or viable in terms
of operations or finances. So if that is the case
with the business, then it might be very
difficult for new entrants, and that's good
for the incumbent. Now, as I had already
mentioned earlier, when we look at capital, it is not only about
scaling, sorry, establishing your
capital infrastructure, but also about scaling
your operations. And for platforms to
attain such scale, a lot of operational
expense is required for rapid expansions
towards new geographies, as well as onboarding
participants. Now, moving on. Let us move on to the
barriers of exit. Now, just as we understood, is it easy to exit or how much does it cost
to exit the market? So first of all, is
regulations and restrictions. Is this an industry where the government regulates
or restricts exits because these are business critical or highly
critical activities that can affect the
functioning of the economy, or an infrastructure, sorry, or an entire business market
can be drastically affected. So if these are such
critical activities, then there might
be restrictions by the government to prevent companies from
exiting the market. For instance, let's say you are the port operator for a
country and you have 60, 70% of market share. In that case, if you suddenly decide to
shut down operations, then the economy might come to a standstill for a few
days or weeks perhaps. Are there any regulations? Other than that, are there
any obligations as well? If you're an electronics
manufacturer or let's say an automobile
manufacturer and you want to
exit the country. However, you have
already sold millions of smartphones or
thousands of cars. Well, in that case,
the government might obligate you,
not the government, but rather the policy
might set obligations for us as manufacturers
to provide services, spares and parts for a certain
period into the future. These regulations need
to be considered. Next is the specialization of
the capital infrastructure. We spoke about
capital requirement when we discussed
barriers to entry. Now, if that capital
money is spent in capital infrastructure
that is highly specialized for our
particular product. Well, in that case, if you
decide to exit and want to liquidate the equipment or
the capital infrastructure, it's going to be difficult
for us to find buyers. And if there are alternate
utilization for the equipment, the amount that we would have to write
off would be much much higher because the
buyer would have to repurpose the entire
capital infrastructure. So if it is highly specialized, the cost is going to
be much much higher as the recoveries is going
to be not only difficult, but also lower compared to
what was spent on acquisition. Next is high fixed costs. If the capital infrastructure is a very high proportion of the cumulative amount
invested in the business, then the unrecoverable
portion is much, much higher. Although this
becomes a sunk cost, once you decide that you want to exit the business
or the market as it is no longer relevant to the entire portfolio of
businesses that you own. However, even though
if it is a sunk cost, we tend to consider
sunk costs because that's what the Sunk
cost policy stands for. In that case, if there's
a high proportion of fixed costs which
are unrecoverable, then the cost of exiting
would be much much higher. Now, moving on to the next pose, which is the threat of
substitutes and alternates. Now, we might think that
our product is unique, but that's not always the case. There are always alternates, if not, an apple to
apple substitute. So we need to quantify the threat of substitutes
and alternates. Now, starting with the first
factor to be considered is the availability of
substitutes or alternates, are they easily available, and can they be easily adopted? So what do I mean? Now, if I were to say about
coke and water, well, they are substitutes and
they are easily available, Is it easy to adopt? Well, it might be a bit
difficult on the habitual part, but that's not very difficult. It's quite easy to adopt. Now, compared to this, if I'm talking about
a chemical that is used in manufacturing of certain cosmetics or
pharmaceutical trucks, Replacing the chemical with an alternate of
substitute might require an FDA or a regulator approval for the entire drug formulation. Well, in that case, availability might be easy, but adoption would be difficult. So if adoption is difficult, then it's great
because your product cannot easily be replaced. However, if the
adoption is easy, well, then it's not good. Next, moving on, we have the
effectiveness of alternate. Well, if you're trying
to drink water to quench your thirst versus coke
to quench your thirst, it's a debatable topic because scientifically
water works better, but if it's a placebo, then the other one
might work better. However, coming back
to the chemical, The alternate use
might be cheap, but is it as effective, or does the use of
the alternate or the substitute require or demand a higher consumption
of raw material. So is it effective? Is it
going to cost the same? Well, if it is effective
and costing the same, then it's not good
because that means your product can be easily
be substituted or adopted. However, if the cost
of adoption is high and the effectiveness of
alternate is also low, then it's great for you. Next, moving on to
switching costs. A part of it is already apparent as we have
already covered earlier. Now, you are using an
alternate chemical, but what is the cost to switch? Getting a re approval for
the changed formulation, tuning or calibrating
the machines again, changing the process flow. These are all direct
and indirect costs. What are the direct
and indirect costs involved in adopting
the alternate. That's with the threat
of substitutes. Now that we have
already talked about barriers to entry and
exit as one factor. Then the second factor, which is the threat of substitutes
and alternates. Let us move on to
the third factor, which is internal competition. Now you're already
in the industry and you have other
businesses as well. All of these competition
needs to exist together. However, we need to
understand the nature, intensity, and the type of competition that's
there in the market. Let us begin with
the first factor. We need to understand
what is the market size currently and also the
expected growth rate. But why do we need
to understand both? The first thing is, is there enough market for everyone
to play this game? That's what the current
market size would indicate. However, we also
need to understand if the market is growing
at a healthy rate. If the market is growing, then the companies can grow by acquiring the growing
part or the Delta, the new consumers that enter
the market every year. However, if the
market growth is slow or has saturated, in that case, for companies to grow, they would have to
poach customers or try to snatch away
each other spy. So that's not good. That indicates the
competition or the ferrocity of competition
is going to increase. So you would want to look for a large market with
healthy growth rate. Now, that's something
that's good for you when you inside the
inside the industry. However, if the market is
small and is not growing, or the market is really big. However, the growth
is now saturated, then it might get difficult
for you in the near future. Moving on to the next part, which is the industry or
market share competition. Now we understand there's
a market size and it might grow at a healthy or might
not grow at the healthy rate. Now, coming to the next factor now for any given market size, how is the market
share distributed? Now, imagine this you're
trying to cut a birthday cake. Is it all cut into small
pieces in equal sizes? Well, in that case, there might be too many
players in the market, and everyone has a
smaller piece of Pi. But that also indicates nobody has significant
control on the market. In contrast, if we have a market where two
or three players cumulatively enjoy 60 to 70% of the market share,
what does it imply? Well, they decide
what prices work, they dictate market terms. In that case, everyone
else might become a price staker or follower to whatever
these market leaders do. Now, if you are
inside the industry, and you're thinking, am I among those top three or five players? In that case, great, however, If you're in that long
tail of smaller companies, then it's not quite good for you because
you're a price taker. Also, these larger
companies with large volumes enjoy
economies of scale, which might not be possible
for the smaller players. If you're a smaller player, is it going to work
out? Well, might not. However, if everyone is small, then it's great for everyone
because nobody is exerting, dominating, or dictating terms. So that's with this factor. Moving on, business
model observability. Now, in certain
industries or businesses, the model or the cost structure
is absolutely no brainer, for example, a restaurant
or a retail outlet. However, when it comes to
manufacturing or distribution, the operations, the logistics,
the product development, the manufacturing process might be very proprietary for each of the businesses and might vary or would have certain innovation
that's developed in house. What is the observability like? Can you observe your competitor and adapt to those better
practices, is it observable? Well, in that case, it's great because there
would be some parity. However, if it is not
observable, then what? Then if you are someone
who is innovating, then you might be
enjoying a lead in terms of technology
or efficiencies. However, if you are the
one who is not innovating, then you would be left behind, you would be suffering
from a lag in terms of efficiencies
or innovation. This is another thing
that you look at. Lastly, the
competitive ferocity. Now, as I said, if the market is saturated and it's not growing
at a healthy rate, then everyone would
want to snatch each other's spy
and there would be a high customer churn rate. So if this is the kind of
market that we are looking at, then there would be
competitive ferocity because everyone wants to grow. However, coming back to
this factor in isolation, competitive ferocity What
you have to look at is the intensity of
price competition and the intensity
of advertisement. Are there too many
advertisements? Do these companies have
humongous advertisement budgets? Well, that's not good. If if the competitive
ferocity is high, that's not good for
you as a business because that's digging
into your profits. You'll have to spend a
lot more on advertisement just to stay in the consideration set of
your prospective customer. So that's not good.
Same goes for price. If everyone is competing
on the price point, this brings down the
margins in the industry. So that's not also good. High competitive ferocity is not good for you. So that's with it.
4. Porters Five Forces P02: Now let's stop. Now to
the last two forces in the five forces on
the supply side. This is the supplier bargaining. These factors determine
the ability of the supplier or determine
term in the negotiations. However, however on the contrary the other end of the
spectrum the demand side the buyer bargaining power. These are These are the
factors that determine whether the buyer or it is the business dictates the terms
in the transaction. Now imagine this as. This will help you
figure out how these forces contract
in opposite direction. Moving forward. So
moving forward. Now, unlike the previous
forces in this two cases, we will understand the factors once for the supplier and
once for the buyer side. So beginning with the
supplier bargaining power, the seller market concentration. When we are in the
market to purchase the input goods or
the input items. The market, is it fragmented
or is it concentrated? If there are too many sellers, then it's a fragmented market, and it is great for us
as a buyer because then we can approach any other
party to purchase the product, because there are just
too many sellers. However, if there are few sellers that means it's
a concentrated market, then we have fewer options. In that case, the seller would be able to
dictate the terms. Hence, it's better for them. Now moving on,
understanding this from the buyer bargaining
power perspective, the buyer market concentration. When we are in the market to sell our products or services, how is the market like? Is it concentrated
or is it fragmented? In this case, again, if it is fragmented, then it's again great
for us because if one party or one prospect is unwilling to
give us the price, then there's always a
next possible prospect. However, if it is a
concentrated market with only a few buyers who can purchase our
product or services, then in that case, the buyer would be able
to dictate the terms of the transaction and
negotiate a better price. Now moving on to
the next factor, for the supply bargaining power, we have the percentage
of revenue. What percentage of revenue are we contributing
to the seller? The higher, the better, because if our purchases constitute a substantial part
of the seller's revenue, then we can exercise higher purchasing
power and negotiate the price because the
supplier would be reluctant or afraid of
losing our business. So higher, the better. Now moving on to the next part, which is the buyer
bargaining power. In this case, we have to look at the percentage of cost that our products constitute in the buyer's complete
cost of the product. Our product might be
an input for the pier. But what percentage is the cost of our
product when we look at the cumulative cost or the cumulative product
cost of the pier? Now, if it is marginal or low, then the buyer would not have higher incentives to
negotiate the price further. However, if our product
is responsible for a significant or
substantial part of the product cost
for our buyer, then the buyer has
high incentives to negotiate with us and
reduce the product cost. Hence, the lower the
better in this case. Now moving on to
the next factor, which is the threat
of integration, forward integration
by the supplier and backward integration
by the buyer. What do we mean by forward
and backward integration? Well, we are at the center. We have a supplier at one side and we have
a buyer at the other. Now, if we start manufacturing what our
buyer is manufacturing, in that case, we are
forward integrating. However, if we decide to start manufacturing what our
supplier is supplying to us, then that would be backward integration because
we are taking one step back on this site and one step forward
at this site. Now we are looking at this from the perspective of the seller and the perspective
of the buyer. The first one is the threat of forward integration
by the supplier. Now, whatever the
suppliers manufacturing can have numerous use cases. However, if the use case
that we are using or we are undertaking is majority where the product of the supplier
is being applied at, then the threat or
the incentives of the supplier to forward
integrate would be much higher. However, if our use
case or application is just marginal to the gamut
of possibilities that can be Achieved by using
the buyers in sorry, the supplier's inputs, then the interests would be lowered because the
incentives are lower. We need to assess what is the threat of the supplier
to forward integrate. Moreover, apart from this, apart from the potential
of the opportunity itself, we also have to
understand or assess whether it is strategically making sense for the supplier. That's with the supplier for. If the supplier has high
incentives to forward integrate, then it's not good for us because the supplier
might become a competitor at one day and their input costs would
be far far lower. Now moving on similarly to the buyer bargaining power and their threat of
backward integration. Now, if the value addition
that our business is doing is not much or the capital expenditure or the entire setup that
we need to undertake to manufacture or achieve
the value addition that our buyer is gaining
from our product. Then there is a threat that the buyer may
backward integrate. However, as we understood for suppliers forward
integration, in this case, we also need to understand
whether the buyer has strategic interests
in backward integration. Now, as we had
previously mentioned, if our product is contributing a significant cost to the
buyer's cumulative cost, well, in that case,
for the buyer, it would be more incentivized
to backward integrate. We'll have to understand
whether there is sufficient incentive or whether there is sufficient
strategic alignment for either of the
integrations to happen. So we have to assess the threat of integrations
at both the eight. The lower the threat,
the better it is for us. Now, let us look at the factors that are unique to
each of these two. For supply bargaining power, the first one, we have
the ease or switching. Now, this depends on the nature of product that
we are talking about. If the product is
differentiated or customized, then it would be difficult
for us to find apple to apple substitutes or
alternates in the market. However, if it is a
standard product, then it's quite easy to
find substitutes or sorry, apple to apple substitutes and even alternates in the market. If the ease of
switching is high, it's good for us as a business
and bad for the supplier. However, if the ease
of switching is low, such because it is a product which is customized
or differentiated, then it's great
for the supplier. However, it's bad for
us as a business. The next one is related, which is the switching costs. Now, let us assume an apple to apple substitute or
a possible alternate is available in the market. However, we also need to
understand the availability. Whether such substitute
or alternate product can be availed within the stipulated or
required lead time and within the required
quantities as well, such as lot sizes. Next thing, we also
have to understand the effectiveness of the
substitute or alternate. Is it at least as effective to what we
are using right now? And lastly, we need to understand what are the
challenges to adoption, as well as the indirect
and direct costs resulting from adoption. So higher the switching costs, it is better for the supplier. However, if the
switching costs are low, then it's great for
us as a business. Now, lastly, moving on to the factors that are unique to the buyer bargaining power. The first one is the impact of our product on the buyer's
ultimate product quality, because our product or
service might only be one of the many inputs that
our buyer is utilizing. However, if our product has a significant impact on their product quality
or performance, then it's great for
us because the buyer would not want us to
compromise or cut corners. Otherwise, undertaking
the risk of their product failing to perform or having
performance issues. So the more impact
our product has on their ultimate product
quality or performance, it is great for
us as a business. Now next, moving on, we have custom or
commoditized offering, as we had previously
understood while discussing about suppliers
bargaining power, if the product that we are offering is customized
or differentiated, then it's great for us. Why? Because it will be
difficult for our buyer to find an apple to
apple substitute or an alternate in the market. However, at the opposite
end of the spectrum, if it's a highly
standardized product, and there are just
too many businesses or too many of our competitors are manufacturing or producing exactly or almost
the same goods, then our buyer has the option
to approach any of them. So if it's a standard
offering, it's bad for us. However, if it's customized
or differentiated, it's great for us. Moving on. Last one, as we discussed about
switching costs and ease, from our perspective
negotiating with the supplier, the perspective changes when the buyer is negotiating
with us as their supplier. In this case, if the
switching costs are high, and it is not easy for our buyer to switch from
our product, for instance, a customized or
tailored offering, and it's even going to
cost them a lot to switch, then it's great for
us as a business. Now imagine a specialty
chemical that's specially formulated and
prepared for our buyer. Then it might be difficult
for them to find a supplier and train
them on the formulation. If it's a differentiated
product or a unique product
that is tailored, the switching costs would be far higher and it would also not be easy to
find an alternate. The switching ease
would be lower, which is great for
us as a business. So this concludes our discussion on the Ports five forces.
Avik Munshi, Consultant and University Faculty
