Porter's Five Forces Model Example

Threat of New Entrants / Entry Barriers

Economies of Scale

The trend continued towards dedicated manufacturing facilities combining product line production in fewer large plants to gain economies of scale. All the major home appliances manufacturers were heavily engaged in renovating and building production facilities to gain economies of scale, improve quality, and reduce labor and material costs. So it would be a high barrier for the new entrant.

Capital Required

The huge capital investment is required to start up new business and in the continuous process and technological improvements in order to lower manufacturing costs and make their products more unique efficient, durable and reliable from their competitors was the largest barrier to enter in the home appliance market.

Expected Retaliation

New entrant cannot be easily entered the industry because existing sellers are really active in launching fresh moves to boost their market standing and business performance. So they will not let other firms to enter easily in the market and snatch their market share from them.

Differentiation

The competitors in the market are really struggling hard to differentiate their products from their rival firms by applying different strategies but they are not being able to keep their new innovation with themselves for more than one year.

Government Action and environmental issues

Environmental issues and Governmental regulations are also playing important role in making energy efficient appliances, as the home appliance manufacturers around the world faced increasing regulations regarding their products. In order to ensure the global quality standards, appliance manufacturers, have been going through the process of International Organization for Standards (ISO) 9000 and 1400 series certification.

Brand Loyalty

In home appliance industry customers are not brand loyal with the products (which is only 35%) as the competitors are not getting success to differentiate their products from their rivals firm for a long time even after huge investments. So it will not be as such a great barrier for the new entrants.

Building a network of distributors and retailers

As we know that there are only few buyers’ sources in this industry and they only prefer to the well established brands.

Exit Barriers

Specialized Assets

Each product requires specialized assets. e.g., refrigerators plant can’t be used for washers.

Strategic Interrelationship with the suppliers of inputs

The purchasing function and relationship with the suppliers had changed considerably from the 1980s as more companies used fewer suppliers and more long term contracts to improve quality and ensure JIT delivery. The 2000 update to ISO 9000 series pushed appliance manufacturers to further integrate their supply chains to ensure total quality management. So it becomes a great barrier for those firms who want to get out of the game.

Govt. Barriers

Not as such any govt. barrier to exit

Competitive Rivalry            

Composition of Competitors

There are four major players in the industry including Whirlpool, Maytag, GE and Elextrolux. These major players together occupy 99% share. Out of these Maytag is a domestic firm and the others are global firms. The global firms are big in size as compared to the domestic firms in terms of financial resources and capabilities.

Market Growth Rate

After more than 50 years of rising sales both in units and dollars the U.S and Canadian market had reached maturity. Market maturity was leaving limited avenues for home market growth Aside from the normal short term fluctuations, future unit sales were expected to grow only 1.9% annually from 2000 to 2005 in the U.S and Canadian markets.

Scope of Competition

Globalization by some manufacturers created significant differences in strategic situations. As the major home appliance industry became increasingly global, industry analysts wondered if regional and domestic major home appliance companies concentrating on white goods (such as Maytag in North America) would continue to be successful as independent firms. Appliance expert Paul Roggema wondered such a company was a big enough to play the global game, in terms of purchasing and advertising power.

Degree of Differentiation

The competitors in the market are really struggling hard to differentiate their products from their rival firms by applying different strategies but they are not being able to keep their new innovation with themselves for more than one year.

Strategic Stake

Whirlpool and Maytag are concentrated firm. Their stake is very high in home appliances as compared to other businesses.

Power of Buyer                              

Number of Important Buyer

There were two major distributors’ channels for major home appliances in the United States: contract and retail. Contract sales were made to large home builders and to other appliance manufacturers. Direct sales accounted for around 80% of contract sales. From the retail sales national chains and discount stores were selling over 60% of all retail appliances in the United States. In such a way we can say that there is little number of important buyers to the home appliance industry.

Threat of Backward Integration

Threat of backward integration is very low in the home appliance industry. Because it is not as such easy job for the distributors and retailers to have their own manufacturing plants and machines as huge investment and specialized assets and skills are needed.

Product Supplied

The industry is the overall commodity industry because it has reached at the maturity level and everyone has the same offerings.

Switching Cost

As the market is the commodity market, so, there is likely that buyers can switch from one supplier to the other, except the strategic interrelationship between the buyers and suppliers.

Availability of information

Buyers are also well informed about the seller’s products, prices, and costs through their websites. So they easily can compare prices and features of different well existing competitors in the industry. So the more information buyers have the better bargaining position they are in. The mushrooming availability of product information on the internet is giving added bargaining power to the buyers in the industry.

Power of Supplier

Number of Important Suppliers

As the major home appliance industry had consolidated so too had its supplier, which means there are only few suppliers of particular input are presence in the market.

Threat of forward Integration

As huge investment and specialized skills are required, so it would not be easy for suppliers to start up their own manufacturing facilities.

Availability of substitute

Due to the consolidation in the market only few suppliers are available in the home appliance industry, so it would be little bit difficult for the buyers to switch from one supplier to another.

Switching Cost

Switching cost for the buyers of inputs is very high due to long term contracts and relationships with suppliers.

Importance of buyer industry to Supplier

U.s major home appliance industry purchased 22% of total coated coil metal,2^nd highest purchase, which means buyer industry is important for the supplier of the steel(primarily in sheets and coil form).

Supplier product an important input to buyers’ business

Key materials purchased by U.S. appliance industry were steel plastics coating, motors, and glass. By weight major appliances consisted of about 75% steel, which means supply of steel is very important input to the buyers business.

Threat of Substitute Products                              

Threat of Obsolescence of industry’s product

Life expectancy is very high.

Aggressiveness of substitute products in promotion

Not aggressive because not as such substitutes are available.

Switching Cost

No any direct substitute is available.

Perceived Price/Value

Perceived value doesn’t exist as there is no any close or direct substitute of home appliance products.