TOOLS FOR IDENTIFYING INVESTMENT OPPORTUNITIES

Porter model Life cycle approach Experience approach

PORTER MODEL: Profit Potential of Industries

Michael Porter has argued that the profit potential of an industries depends on the combined strength of the following basic competitive forces:

Threat of new rivals Rivalry among existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers

The purpose of Five-Forces Analysis

The five forces are environmental forces that impact on a companys ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

PROFIT POTENTIAL OF INDUSTIRES PORTER MODEL

Potential Entrants Threat of New Entrants Bargaining Power of Suppliers THE INDUSTRY Rivalry Among Existing Firms Threat of Substitute Products Substitutes
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Suppliers

Bargaining Power of Buyers

Buyers

Threat of New Entrants

Economies of Scale Product Differentiation Capital Requirements Access to Distribution Channels Government Policy

Bargaining Power of Suppliers

Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if: Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product

Bargaining Power of Buyers

Buyers compete with the supplying industry by Bargaining down prices Forcing higher quality

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Buyers face few switching costs Buyer presents a credible threat of backward integration Buyer has full information

Threat of Substitute Products

Products with similar function limit the prices firms can charge Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

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Rivalry Among Existing Competitors

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

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Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs

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LIFE CYCLE APPROACH

Pioneering stage Rapid growth stage Maturity and stabilization stage Decline stage

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THE EXPERIENCE CURVE

The experience curve is a useful tool for planning investments The experience curve shows how the cost per unit behaves with respect to the accumulated volume of production The accumulated volume of production is the total number of units produced cumulatively from the very beginning In general, the cost per unit decline with the accumulated volume of production
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PROJECT RATING INDEX

SOURCES OF POSITIVE NET PRESENT VALUE Economies of Scale Product Differentiation

Effective Advertising and Superior Marketing Exceptional Service Innovative Product Features High Quality and Dependability

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Cost Advantage

Accumulated Experience Monopolistic Access to Low Cost Materials A Favourable Location More Effective Cost Control and Cost Reduction

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Technological Edge Government Policy

Restrictive Licensing Import Restrictions Environmental Controls Special Tax Reliefs

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