[SOUND] Hi,
welcome back.
The performance of your firms depend fundamentally on how your
industry's organized and how it will evolve.
The Porter's Five Forces Analysis provides us with the tool
to help us understand the high profitability level of the industry and
help us to identify the most important players.
There are five forces that needs to be understood.
The first force is the level of rivalry in the industry.
Rivalry can be more or less intense depending on factors like,
market growth rate, number of competitors, cost structure,
emotional convection of the players, cost of changing the suppliers.
You will see the details in the reading material.
The second force is the bargaining power of customers.
Customers can force your company to lower prices, according to how
easily they can replace your product with the competitors, or with an alternative
way to achieve the same result, such as a new process of assistive technology.
If your product is a commodity, your bargaining power will be very small.
On the other hand, if your product is unique, very difficult or
expensive to be replaced, you will be able to charge more for them.
The third force is the bargaining power of suppliers.
Suppliers can charge more or less for their products,
depending on what options you have to replace their products.
If you have multiple suppliers, you will be able to push the prices down.
It is important not to abuse your bargaining power
because you may force your supplier out of business.
That will create a discontinuity risk and
you will be needing to find other suppliers.
The fourth force is the threat of new entrants.
The problem with new entrants is that they increase the supply of
products similar to yours, increasing the bargaining power of your customers, and
at the same time, they may compete for the same suppliers that you use.
Thus, increasing the bargaining power of your suppliers.
Also, since they were not in our radar,
you probably do not understand their behavior.
The fifth force is the threat of substitution.
This is the force that has caused some of Codex problems.
If there are ways to make your product irrelevant, like a process change,
a product that started being used to replace your product,
and now is interfere with your business.
For example, smartphones have GPS apps.
Demands utilization of smartphones cause the demand for
dedicated devices used for GPS to drop.
Five forces analysis is very important to allow
holistic view of the market when properly used.
Each of the forces I have described is dynamic and may change quickly and
unpredictably.
Therefore, you must understand and monitor them constantly.
In addition, different phenomenon behave differently.
For example, the adoption of digital technology discussed in the Codex case,
generated result exponentially, very quickly.
The problem with changes that occur in this way is that,
at the beginning, there is mall is often neglected.
This behavior happens because we have a natural tendency
to repeat behaviors that work in the past.
In Codex case,
the company use the business model that worked very well for several decades.
And it was difficult to replace it in favor of a new technology
that could destroy the company and the whole business model.
The five forces analysis helps you to understand how industries works.
However, it is important to remember the interesting work within the larger
context, it is what we call the microenvironment.
In our next video, I will show you how to analyze the microenvironment.
Thank you for watching, I will see you in our next video.
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