 The next force is that of the supplier the bargaining power of the supplier now any business requires inputs could be in the form of a labour or some components parts raw materials or some services and the cost of the input has a very significant impact on the profitability of the business and if this input comes from a vendor outside then the vendor is always you know ready to sell it at the highest price possible or provide with no more services than actually is necessary. Now if a vendor is a critical part of your business ecosystem the extent to which he has bargaining power is something that we need to understand now if you feel that the suppliers force is very weak then I as a business would be able to negotiate a better deal and on the contrary if the supplier force is very strong then I am in a very weak position and might even have to end up paying more or even and get some low level of quality or service because the bargaining power of the supplier is more. So the supplier is a very critical force in the business ecosystem and the buyer the supplier will have a higher bargaining power if the input that he gives to the business is very unique and differentiated for example let us say I am in the in the business of some food manufacturing and that I am getting some enzymes from a supplier and my equipment my machinery is all tuned to process only such type of enzymes that that particular supplier is giving me then it is very difficult for me to change the supplier because I am not only just changing the enzyme that I am purchasing I might even end up changing the host of machinery and equipment that was originally suited only for a particular type of enzyme. So a suppliers bargaining power will be more if the input that the supplier gives to the business is very unique or differentiated or probably they are the market leaders for example Intel chips so Intel will have a better bargaining power over the its buyers namely the PC or the laptop manufacturers a suppliers bargaining power will also be high when there is huge switching cost for example I have an ERP in place and let us say I have an oracles ERP so the systems that are in place are best suited to only execute the ERP through oracle and tomorrow if I decide to switch from oracle to let us say a SAP remember this is a little different from the uniqueness or differentiation example that I gave before the product the supplies input need not be differentiated or unique itself but then it could have built in some switching cost which means suppose I switch over from oracle to SAP then let us say I have to change a set of my IT infrastructure or Bloomberg especially in the stock trading business suppose I switch over from Bloomberg to any other service then I will have to change the entire support infrastructure which originally was supporting only trading through Bloomberg system so the switching cost is going to be very high then the suppliers bargaining power is more or if the supplier is very closely located or in fact co-located with its customers and this is very typical and characteristic especially in the automobile industry where the auto ancillaries the ones that who provides these auto components are closely located to the original automobile manufacturers this is because they need to reduce the lead time for delivery so when they are very closely located it is giving more value for the OEM so the bargaining power of such customers is also more because it takes a lot of time if this supplier is being replaced by somebody else who is far off so there again the bargaining power of a supplier who is located at a very close proximity to the OEM then there is room for higher bargaining power now just as we had the threat of backward integration in the case of bios there is also great threat of forward integration a supplier will have a higher bargaining power if it has a definite threat to forward integrate let us I am in the business of selling bottle water while I just make the bottles I mean the plastic bottles and so water from outside all that I do is get the water put it in my bottle just label it and sell it in my brand name the suppliers bargaining power will be more if he is able to just forward integrate meaning that instead of giving the water to me the supplier himself you know is able to make bottle package it in a different brand name and start selling it in that case the suppliers bargaining power is more because he has a threat to forward integrate the suppliers bargaining power is definitely more when there are no substitutes for the product the pilot unions is a very classic example nobody can you know let us say they are the ones who supply pilots to the aircraft industry and nobody other than a pilot can you know operate an aircraft so the bargaining power of the pilot union is very strong and the extent to which the suppliers input is very critical to your business that also determines the bargaining power of the supplier if the suppliers input is very critical let us for example say the case of Intel for the desktop manufacturing then Intel has a better bargaining power as against the suppliers input if it is not that very critical then the bargaining power of that particular supplier is very very low the suppliers bargaining power will also be very high if he can directly sell to the end customer removing his immediate customer from the supply chain itself a classic example is the online sales I mean you go to a bookstore the biggest threat for physical bookstores today is that it is not getting books from publishers and selling it to the end customer nowadays customers are able to buy books online so the need for a bookstore itself is getting diminished so the suppliers bargaining power will be more if there are channels by which direct selling can be made to customers so these are different ways by which the bargaining power the reasons the different reasons to understand whether a bargaining power of the supplier is high or low the next force is the threat from substitutes some simple examples the glass bottles and plastic containers could be replaced by aluminum and this is a big threat for the glass bottling industry for the let us say they are the ones who supply to the beverage industry or cotton nowadays competes with polyester for the petroleum industry the the Bonson noble the same example that I gave before a Higginbothams retail bookstore competes with the internet retailer Amazon or video conferencing today is a big threat for the airlines business email is a big threat for the postal business of the FedEx so these are substitutes now when is a substitute threat high now a substitute threat will be high if there is an attractive price performance tradeoff which means I find that there is an alternate service or product that is available at a lower price and moving to that alternate I am not making a big tradeoff for example today long distance call is getting replaced by Skype the physical video rental shops is getting replaced replaced by online video rentals Netflix the substitutes threat is also high if the switching cost is very low a grocer can easily switch from you know a paperback to a plastic bag for its customers but that is not the case with a bottler who may have to reconfigure his entire manufacturing process the equipment and retrain his workers if it has to switch from aluminum cans to plastic bottles so the switching cost as long as it is high or low then the sub the threat from the substitutes low or high and the customer loyalty also is a very important parameter to judge gauge the threat from substitutes now when the price is the primary motivator the threat of substitute is greater because there is no customer loyalty anything that is available for the any other substitute that is available for the same price or a lesser price then I have every reason to move over to a substitute product so the substitute threat is high or low based on all these parameters the next force is the intense of the existing rivalry within an industry now there are different sources for that actually provides the intensity for the rivalry now let us say we are in an industry which where the growth rate is very slow it is a matured industry so it is fierce competition because it is just within the same pie now people the those who are in the industry want to get more market share now those are the industries where the intensity of rivalry is very high if the profit margin pressure is very high then again the intensity of rivalry is very high now let us say if we are in an industry where the fixed cost is very high which means I need more volumes to spread the fixed cost so more volumes need to be sold to recover fixed cost and those types of industries the rivalry intensity will be very very high and if it is an industry where the shelf life of the product is very low perishable goods then there is pressure to sell it and those cases the rivalry intensity is very high if the product itself is undifferentiated and since the choice for the customers is plenty because it is undifferentiated that is intense rivalry amongst those existing players and same is the case when the switching cost is low if the exit barriers are very high again the intensity of rivalry is very high because it it is very difficult to come out of the business and when it is very difficult to come out of the business you have to stay in the business and if it is the same for everybody in this industry then the the rivalry intensity becomes very high and in some cases for reasons of prestige and other non-economic factors businesses stay in the industry and because of that the rivalry is very intense a classic example is when PSUs public sector undertakings are are just existing for just for a prestige sake and no a non-economic purpose then the rivalry is so intense because existing other private players have to match the price offerings that the public sector undertaking give now other than these five forces there are also other forces that characterize the industry structure the government which I usually call the sixth sense through its regulatory framework and policy decisions also influence the way in which the industry is characterized there are a lot of changes that happen in the technology space and sometimes it is actually it actually pays off to remain low tech because those at times are the ones that are highly profitable than internet or high tech because that attracts a lot of competition and that is why you find you know daycare centers or gymnasia which are you know not not online or high tech but low tech but extremely profitable product interventions and services also change the way in which the industry is characterized classic example is the automobile industry today gasoline stations because the more and more cars come to the petrol stations you find convenient shops in the petrol stations so no longer is a retail petrol out at just selling petrol but also has a convenience store in it so the automobile industry the front end of the automobile industry is also getting changed apples has changed the music industry so such complementary interventions change the very industry structure itself another example is the online education which is actually changing the formal education system so when we actually talk about competitive strategies by doing an industry analysis we would get an understanding of what actually drives the competition in the industry that I am currently in or the industry in which I want to get into and if the it is the industry that I am currently in it is more a self assessment exercise and when I do the industry analysis I would also like to know what are my current or future competitors would likely to do and how I need to respond so it is more an external assessment and by doing this how can I position myself to sustain a competitive advantage so the primary strategies as I said before is differentiation by creating a unique value or provide the same comparable value at least cost and how do you do this through innovation growth alliance there may be a lot of support strategies to do that now this class for you is to basically understand that any industry is characterized by a set of five forces and if you are part of the industry then you will have to make a self assessment to see the extent to which you are influenced by each of these forces whether you are positively re influenced or negatively influenced or if you want to enter into a new industry you can also look at the industry from an outside perspective to understand the characteristic of the industry now this is very useful because it is the characteristic of the industry which actually measures the attractiveness which is actually a good measure of the attractiveness of the industry the way in which the industry structured is a good measure of the attractiveness of the industry both from somebody who wants to enter the industry or somebody who wants to make a self assessment being within the industry so I just leave the class with just this example for you to make an assessment of the two wheeler industry I will just give you some of those key issues in each of these forces for you to do an analysis to see whether it is structurally attractive to enter into this industry or if you are somebody who is already into the industry to see how you you are relatively placed when compared to others in the industry the intra industry rivalry for and this is let us say it is a two wheeler automobile industry you know the rivals the intra industry rivalry is because of Bajaj TVS Suzuki Yamaha Honda so host of such two wheeler automobile manufacturers now the potential new entrant into this business could be a foreign manufacturer or could be an established Indian business house that wants to enter into a new market segment or could be a new startup a new Indian startup itself the bargaining power of buyers the buyers are the young adults could be the government through its law enforcement agencies could be the rural area market for mopeds racers could also be buyers outside India so it is an export market the suppliers are the auto component suppliers part manufacturers electronic components specialty metal suppliers machine tool vendors labour unions IT vendors so these are all the suppliers the substitute for this is probably another four wheeler or public transportation or bicycles now let us say these are the different ingredients for each of these four what you should be doing is to see how each of these four is influencing an existing player in the industry for example this industry is a capital intensive industry and suppose I am already in this industry how much is the threat perception from a new entrant is it easy for a new entrant to get into this business and since it is a capital intensive business and economies of scale is very large to a certain extent I can say that the potential threat from a new entrant is minimum I am not ruling it out because anybody can enter into a business however capital intensive it is as long as there is enough growth potential but since it is capital intensive it takes a little time for them to enter and by the time businesses already in this industry would try to strategize their other alternate options but then if you are able to provide some structure of this form by identifying five critical forces the new entrant threat from new entrant the suppliers the buyers the substitutes and the intra industry rivalry there is some discipline by which you are able to estimate the structural attractiveness of the industry so that you are able to assess the relative position of your own firm within the industry or if you are somebody who wants to enter into the industry you would able to come to a conclusion whether this industry is structurally attractive or not. So it is only for this very broad purpose this porters five forces industry analysis is so popular that many of us use it to measure the structural attractiveness of the industry so when we meet next we will probably start with other models that are used for various other analysis purposes both internal as well as external the other models could be the BCG matrix the pest analysis SWAT analysis the balance scorecard so various other different models that are used for different purposes for both an internal analysis and an external analysis thank you.