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Assignment FIVE FORCE MODEL Introduction Michael Porter (1980) has identifies five forces that determine the intrinsic long run attractiveness of a market or a market segment in other words the competitive structure of an industry can be analysed using Porter’s five forces. Attractiveness in this context refers to the overall industry profitability. The overall industry attractiveness does not imply that every firm in the industry will return same profitability. Firms are able to apply their core competences, business model or network to achieve a profit above the industry average.
The five forces of Porter’s model are as follows: 1. Threat Of Intense Segment Rivalry: This measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry will be higher if: •There are a large number of similar sized firms (rather than a few dominant firms) all competing with each other for customers. •The costs of leaving the industry are high e. g. because of high levels of investment. This means that existing firms will fight hard to survive because they cannot easily transfer their resources elsewhere. The level of capacity utilisation. If there are high levels of capacity being underutilised the existing firms will be very competitive to try and win sales to boost their own demand. •The market is shrinking so firms are fighting for their share of falling sales. •There is little brand loyalty so customer is likely to switch easily between products. 2. Threat Of New Entrants : The extent to which barriers to entry exist. The more difficult it is for other firms to enter a market the more likely it is that existing firms can make relatively high profits.
The likelihood of entering a market would be lower if: •The entry costs are high e. g. if heavy investment is required in marketing or equipment. •There are major advantages to firms that have been operating in the industry already in terms of their experience and understanding of how the market works (this is known as the “learning effect”). •Government policy prevents entry or makes it more difficult. •The existing brands have a high level of loyalty. •The existing firms may react aggressively to any new entrant e. g. with a price war. The existing firms have control of the supplies . e. g. entering the diamond industry might be difficult because the majority of known sources of diamonds are controlled by companies such as De Beers. 3. Threat Of Substitute Products: This measures the ease with which buyers can switch to another product that does the same thing e. g. aluminium cans rather than glass or plastic bottles. The ease of switching depends on what costs would be involved and how similar customers perceive the alternatives to be. 4. Threat Of Buyer’s Growing Bargaining Power:
The stronger the power of buyers in an industry the more likely it is that they will be able to force down prices and reduce the profits of firms that provide the product. Buyer power will be higher if: •There are a few, big buyers so each one is very important to the firm. •The buyers can easily switch to other providers so the provider needs to provide a high quality service at a good price. •The buyers are in position to take over the firm. If they have the resources to buy the provider this threat can lead to a better service because they have real negotiating power. . Threat Of Suppliers Growing Bargaining Power: The stronger the power of suppliers in an industry the more difficult it is for firms within that sector to make a profit because suppliers can determine the terms and conditions on which business is conducted. Suppliers will be more powerful if: •There are relatively few of them (so the buyer has few alternatives). •Switching to another supplier is difficult and/or expensive. •The supplier can threaten to buy the existing firms so is in a strong negotiating position.
INTRODUCTION OF DIAMOND INDUSTRY India has always been center stage in the dramatic history of some of the world’s most famous diamonds. India has been the earliest known source of diamonds. Conversely, today India is pioneer in the gem industry and a world leader in the manufacturing of cut and polished diamonds. Diamonds used in jewelry worldwide, nine out of every ten cut and polished diamond come from India. Diamond industry of the Indian market is mainly involved with cutting, polishing and exporting diamonds.
Diamonds cut and polished in India are universally prized, and India has emerged as the largest diamond-cutting center in the world. Mumbai, Surat, Ahmedabad, Bhavnagar and many small towns in Gujarat are the main polishing centers of the country. The industry employs one million people, accounting for 95 per cent of the workforce of the world’s diamond industry. Mumbai, Surat, Ahmedabad, Bhavnagar and many small towns in Gujarat are the main polishing centers of the country. The industry employs one million people, accounting for 95 per cent of the workforce of the world’s diamond industry.
We will now try and use the above discussed model in reference to the diamond industry. Threat Of Intense Segment Rivalry: High In the jewellery industry companies are divided under the segment of either mass merchandisers or limit line jewelers who generally compete with each other on the basis of price. Another type of companies under the industry is the specialty jewellery companies that have found success focusing on the quality rather than on competing on prices. Thus for these industries brand recognition is most essential. There is a high growth rate in this industry.
As the jewelry industry expands globally, the industries top competitors are opening many stores in order to increase market share and capitalize on competition. This has created a stagnant industry that now competes by taking market share away from the other players and creates price wars among many of the firms in the industry. The switching costs and degrees of differentiation lower as the industry grows. These low degrees of differentiation lead to consumers purchasing items based on price rather than quality. Thus the threat of intense segment rivalry is high in this ndustry and is based on prices wars and brand recognition. Threat of New Entrants: Moderate to Low The jewellery industry has few established players, thus new entrants may find it difficult to contract with these companies, because they lack the financial status. Also new entrants do not have a reputable name which is an important characteristic of this industry that may cause doubt from a diamond distributing companies as well as the consumers. The entry into this market is getting increasingly difficult due to the growth of companies already established in the industry and due to high initial investment costs.
Existing firms experience economies of scale from large investments in research and development, brand advertising, or in physical location of stores. The barriers to entry and to exit are very high in this industry. Large economies of scale make it very difficult for new entrants to compete in an industry. Threat of Substitute Products: High The threat of substitutes depends on the relative price and performance of the competing products and on customers’ willingness to consider substitutes.
In this Industry there are millions of consumers who will not purchase a diamond unless they are absolutely certain it is conflict free due to ethical and social concerns. Since conflict free diamonds are harder and more expensive to obtain, this creates a high level of competition for the jewelry industry. Products price elasticity is also affected by substitute products. For example, as more substitutes become available the demand becomes more elastic because customers have more alternative choices. Therefore a close substitute product constrains the ability of firms in the industry to raise prices.
For the diamond industry semi precious jewelry, zircon gemstones or other gold and silver jewelry are the alternative market as the prices are lower in comparison. Bargaining Power of Customers: Moderate When there is a large market of buyers the industry has the ability to set its price points as high or as low as they choose. Customers have little bargaining power regarding price when they shop at luxury stores and refuse to search for alternatives, because of such a limited selection. However, in cases which in a market there are many suppliers and one buyer the bargaining power of the buyer increases.
Thus in this industry the bargaining power of the consumer may be fluctuating or in other words can be moderate. Bargaining Power of Suppliers: High Since diamonds are scarce, mining companies have absolute control over the selling price. Diamond-mining companies such as DeBeers and Aber control the price of the diamonds that are supplied to several firms in the jewelry industry. Since these precious gems are of great value to the firms, the power of the supplier is even larger. The power of suppliers within the jewelry industry has skyrocketed within the last few years due to natural gemstone scarcity.
Thus as per the above discussion the bargaining power of the supplier is extremely high in this industry because of less number of suppliers of the gemstone. Summary In a nutshell the in the diamond industry, the threat of intense rivalry is high, also the bargaining capacity of the supplier is high and there are various substitutes available in the market, also the buyer bargaining capacity may vary form one market to another and one economic situation to another, yet the threat of new entrants is low which could infer that the existing players in the industry would be competing for maximum market share.
Implication of the Five Force Analysis To A New Player In The Diamond Jewellery Industry With the help of the above information and analysis we will now try and see how these implications would affect a new player in this industry. To start with, the new player would have a high threat from the existing competitors as they are well established and have a greater brand loyalty.
Diamonds are usually considered as a luxury product and thus the consumer would prefer a brand which is reliable and has been a part of the market for a while. Also, since there is a shift in the market share according to the economic scenarios the existing players would try and resist the entry of a new player in this market. Another limitation that the new player might have to face are the entry barriers such as a high investment cost and difficulties in competing with the established brands.
Another limitation is that most of the established brands have contacts with the diamond suppliers which are few and to get in touch with these suppliers may be difficult for a new player. Also since the jewelry industry is on a growth platform many of the established international brands are opening up physical outlets throughout the world, thanks to globalization which could make an entry and survival of a new player very difficult in the existing market.
Another point that would hold back the entry of a new player could be the rise of substitutes that make the market seem unattractive. Since this industry is facing a major challenge of coping up with substitutes such as semi precious jewelry, zircon gemstones or other gold and silver jewelry this may be a set back for a new player since the market is full of substitutes of the diamond jewelry. Next, is the threat from the bargaining capacity of the buyer as well as the supplier.
As mentioned above there are few suppliers of diamonds in the world thus the bargaining power of the supplier is extremely high that can make it tougher for a newer player to enter the market. The last aspect that needs to be taken into consideration is that the bargaining power of the buyer may also vary from one market to another, for example if there are many suppliers of diamonds in a market selling a similar variety, the bargaining power of the consumer increases.
Thus overall, the entry of a new player in this industry may face many limitations starting from a brand image to a high initial investment and further down making contacts with the supplier and bearing their costs and lastly bearing the costs of the buyers bargaining process. With the above discussion, where we mentioned most of the limitations that a new player could face while entering the diamond jewelry industry, we would now make an attempt to give recommendations that could help the new player in a competitive existing industry.
One of the recommendations can be, if firms merge together this can reduce the degree of rivalry. A way to get into thjis market could be to buy distributorship of existing companies, as mentioned earlier with the help of globalisation many international established companies are willing to expand there base thus it can be a good idea for a new player to tie up with existing market holders. Another recommendation can be, if firms differentiate their product perhaps by trying to generate some form of Unique Selling Proposition (USP) that makes it stand out from the competition.
Another recommendation could be to enter markets that have an emerging market of diamond jewellery such as India and Latin America, where newer players may be more welcomed than the markets that are steady and saturated. Another way to enter this market can be the e-commerce route, since not many established companies in this industry deal with online selling a novel idea may work to a new player’s benefit. Conclusion: Diamond industry is a favourable industry and trends show that it is a lasting industry.
This industry has gone through up’s and low’s in the economic crisis and fluctuating economies but according to the market forecasters of various established brand like Bulgari, Tiffiny Co. and Harry Winston this industry will survive in the long run and will cope up with the economic crisis. Thus it is an attractive industry for a new player and also the existing companies to expand their market share Reason to Choose the Diamond Industry
My main reason to choose the diamond industry is mainly because I belong to family of jewellers and I wanted to understand the five force model better with help of an industry for which I could input from my family’s experience and not only rely on the internet for information. Also the jewellery industry generally also been in a lot of news recently with the gold prices fluctuating so it although more interested me to understand and research on the ongoing scenario and not just for the project.
Bibliography: Kotler P. , Keller K. L, Brady M. , Goodman M. , Hansen T. (2009). Marketing Management. ISBN 978-0-273-71856-7. , pp. 861 Kotler, Philip and Pfoertsch, Waldemar (2006). B2B Brand Management, ISBN 3-540-25360-2. http://www. oup. com/uk/orc/bin/9780199296378/01student/additional/page_11. htm http://www. diamondne. ws/2011/05/09/indian-diamonds-gems-and-jewellery-industry-back-on-the-shining-trail/ http://www. scribd. com/doc/37667620/Pestal-Analysis-and-Porters-Five-Force-Mod