Porter’s Five Forces Model Essay
Porter five forces model is basically a framework for industry analysis. It helps in business strategy development. It was presented by Micheal Porter. According to this framework, there are 5 forces that determine the competitiveness of a market and its attractiveness and profitability. These forces are threat of substitute products, bargaining power of buyers, bargaining power of sellers, threat of new entrants, competitive rivalry within an industry. Any industry can be taken as an example of this model. Take for example, the Pakistani Textile industry. The threat of substitutes is high, the bargaining power of buyers is high, the bargaining power of seller is low because there are many of them, the threat of new entrants is high because it is easy to set up a textile mill. So the competitive rivalry in the industry is high because the set up cost is low and there are a number of substitutes available to the customers.
The Indian textile industry is one of the oldest and most significant industries in the country. It accounts for around 4 per cent of the gross domestic product (GDP), 14 per cent of industrial production and over 13 per cent of the country’s total export earnings.
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Textile industry provides one of the most fundamental necessities of the people. It is an independent industry, from the basic requirement of raw materials to the final products, with huge value-addition at every stage of processing . Infact , it is estimated that one out of every six households in the country directly or indirectly depend on this sector.
Here we analyze the sector’s dynamics through Porter’s five-factor model.
1)Threat of New entrants
Indian Textile Industry is very dependent on personal contacts and experience. The new actors would have to bring some kind of client base along with the new establishment. Product differentiation may constitute a barrier of entry as manufacturers are heavily dependent on references and word of mouth. Without any established client portfolio it is difficult to attract, endure increased costs in creating sample collections to show potential customers. Hence, in startup phase costs are not only associated with the manufacturing required but also with the costs for designers and creating samples. In the sense of reference dependency, barriers of entry are considered as very strong.
As the new entrant has limited experience in textile manufacturing and there are no built up relationships with customers, they might experience disadvantages relative to the established competitors.
Governmental policies do affect the business environment to some extent. An example of this is subsidies, which are offered to companies establishing production in certain regional areas.
In addition to these potential barriers of entrance, new entrants may have second thoughts about entering the new market, if existing manufacturers may retaliate on new entrants. The Indian textile industry though, has such a large population of manufacturers so any new actors may hardly be noticed by the competition, which minimizes the risk for retaliation.
2)Bargaining power of customers (demand scenario)
Global textile & clothing industry is currently pegged at around US$ 440 bn. US and European markets dominate the global textile trade accounting for 64% of clothing and 39% of textile market. With the dismantling of quotas, global textile trade is expected to grow (as per Mc Kinsey estimates) to US$ 650 bn by 2012 (5 year CAGR of 10%). Although China is likely to become the ‘supplier of choice’, other low cost producers like India would also benefit as the overseas importers would try to mitigate their risk of sourcing from only one country. The two-fold increase in global textile trade is also likely to drive India’s exports growth. India’s textile export (at US$ 15 bn in 2005) is expected to grow to US$ 40 bn, capturing a market share of close to 8% by
2012. India, in particular, is likely to benefit from the rising demand in the home textiles and apparels segment, wherein it has competitive edge against its neighbors.
Hence, the bargaining power of customers is strong. For that reason, it is of importance for a producer of apparel to differentiate their products or production so it will not compete with price as primary mean.
Differentiation is accomplished either by quality or service. Differentiation can be considered as especially important in the Indian textile industry since contracts are usually set on short-term basis and are rarely set more than six months ahead. Hence, there is a need to tie the customer to manufacturers without the need of explicit contracts. And Thus, the bargaining power for the Customer is improved.
3)Bargaining power of suppliers (supply scenario)
India is a country where we have numerous players in textile industry which all are varied in terms of size and power. There has been increase in production and supply of textile products in last few decades globally, mainly due to rapidly changing social and economic structure of the countries worldwide. In past few years, especially after the removal the trade related tariffs and non tariff barriers in 2005, Asian countries such as India, china, Hong Kong and Japan have emerged as major players in this particular industry, mainly due to their changes on economic front and infrastructure developments.
The large number of available suppliers in India gives an initial indication of a weak bargaining position for the supplier group.
Additionally, the supplier group lacks switching costs and has a low level of product differentiation. This leads to great possibilities for textile manufacturers to scout the supplier group for best terms and prices for production. As a result, manufacturers can contact a large number of suppliers and play suppliers against each other. Such behavior weakens the bargaining power for suppliers and as a result pushes prices down and makes prices similar among suppliers.
An advantage which the Indian Suppliers group have capitalized on is, Due to their ability to integrate forward in value added chain, they have achieved a better bargaining position towards textile manufacturing.
As previously seen, companies in the textile and apparel sector have established forward to create vertically integrated company groups.
Deep relationships between manufacturers and suppliers illustrate how important the textile manufacturing industry is for the supplier group. An example of this is how suppliers and manufactures interact in activities such as research and development (R&D). By this process the supplier obtains knowledge on what customers downstream in the value added chain demands.
4)Threat of substitute products
When using such a broad term as Textile, there are obvious reasons for identifying substitute product groups proves difficult. Of course, there are variations in types of clothing and material. Variations in textile segment can also be identified as trends in fashion and styles. Hence products within the apparel segment can act as substitutes but the general conclusion still stands; there’s no substitute to apparel.
5)Competitive rivalry within the industry
The textile manufacturing segment in India is made out of numerous manufacturers which all are varied in terms of size and power. It is a massive sector with thousands of companies producing apparel. The apparent high growth rate of total textile exports indicates that the rivalry between manufacturers is low. The growth rate is high in some product segments but even negative in others. Hence, the rivalry between apparel manufacturers is diverse since they enjoy different growth rates.
Additionally, textile as a perishable product group is in the risk of temptations to cut prices when demand slackens. For example, when there are recessions in the business cycle apparel prices will drop significantly in price. Both these factors exemplify and indicate that the rivalry between manufacturers is high.
As Indian apparel manufacturers are pressured to lower prices in order to stay competitive with companies abroad, the overall rivalry within the industry gets companies to expand their customer base in order to keep profits up. It is therefore reasonable to believe that such expansions may occur on the behalf of competitors if possible, and thereby increase the rivalry in the industry.
India Textile Industry is one of the leading textile industries in the world. Though was predominantly unorganized industry even a few years back, but the scenario started changing after the economic liberalization of Indian economy in 1991. The opening up of economy gave the much-needed thrust to the Indian textile industry, which has now successfully become one of the largest in the world. India textile industry largely depends upon the textile manufacturing and export. It also plays a major role in the economy of the country.
India earns about 27% of its total foreign exchange through textile exports. Further, the textile industry of India also contributes nearly 14% of the total industrial production of the country. It also contributes around 3% to the GDP of the country. India textile industry is also the largest in the country in terms of employment generation. It not only generates jobs in its own industry, but also opens up scopes for the other ancillary sectors. India textile industry currently generates employment to more than 35 million people. It is also estimated that, the industry will generate 12 million new jobs by the year 2010.