What is Porters Five Forces Analysis of tata motors?

Porter's 5 forces model is a powerful way of analysing the competitive forces that shapes every industry in general. This was developed by Michael E. Porter of Havard Business School in 1979. This tool helps you to identify whether a new product, investment, services or business have the potential to be profitable.

The 5 competative forces that are taken into consideration are:
  • Competition in the Industry
  • Potential of new entrant into Industry
  • Power of Suppliers
  • Power of Customers
  • Threat to substitute products

Lets discuss each of these points in detail:

  • Competition in the Industry:

This describes the competition between the existing firms in an industry. Greater the competitive riverly (companies providing equally good products or services) lesser are the profit margin. The price of the product/services is the single most defining factor that influences the customer's buy decision. Hence to maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly.

Lets try to explore these points in more detail. Look at the current senario, the small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Huyndai etc. which was preety much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted. Now to be competitive in market other companies have to either slash rates of their existing model or have to go back to the drawing board and build again. Now look it from Tata Motor's perspective what price they had to pay to gain such advantage. Building new production plant, raw material & equiptments, labor etc. which accounts to huge capital expenditure. And as mentioned earlier price is the most important thing, you have to offer lower price to the customers. Huge inital expenditure and lower price leave very less profit margin. The bottom line is a competitor's single innovation can change the whole senario of the industry.
Lets take an example of a monopoly industry. Chocklate industry in India has just one big player Cadbury. Go to any Big Bazaar or a D-Mart outlet you will find 90% of chocklate by Cadbury. When you go to purchase chocklate what you look for ...Dairy Milk, Perk, Eclairs, Temptation, Celebration,Halls all are produced by Cadbury. As far as I remember I have seen Dairy Milk's ad on TV when I was 5 years old and its still there in market and in all probability it will be there for next 20 years.The current market share of Cadbury stands at impressive 71% even the 2003 worm were not able to eat its market share. What we can conclude a monopoly and a great business!!

  • Potential of new entrant into Industry:

Its not only the existing players in an industry pose threat to each other, a new entrant can also affect the competition. The easier it is for a new firm to enter in a business, the more cut-throat competition there will be.The factors that can limit threat of new entrant are called as Barriers to Entry. Following are some some barriers to entry:

Government Restrictions and legislations: Although government's job is to preserve free competitive market, it restricts competition through regualtions and restrictions. Oil sector in India is an example. Pre liberization era it was a dominated by Public sector. However after liberization the sector has opened up for private players and FDI but it still remains highly regulated sector. Also the telecom sector, first to make an entry you need TRAI's approval and licensing also you have to compete for the finite radio spectrum available.

Patents: Ideas and Knowledge that provides competitive advantage over others when patented, preventing others from using it and thus creates barrier to entry. Pharma and Software sectors sees maximum number of patents being filed making it difficult for new firms to replicate their products.

High Entry Cost: If the initial cost to set up a new firm is difficult, then the chances of new entrants are very less. Once again coming back to oil sector, Exploration and Production of oil and gas involves a highly capital and technology intensive process of finding oil reserves, assessing its feasibility, drilling and extracting.Hence creating a very high entry cost

Existing loyalty to major brands: If the existing brands are very well-established, then chances of a new firm giving them competition is minimal. Pepsi and Coca Cola dominate the soft drinks industry worldwide making it difficult for any new entrant to survive in front of them.

On the other hand, if the industry uses common technology, there is little or no brand franchise and if the entry cost is low then it is very easy for a new entrant to enter into the industry.

  • Power of Suppliers:

A company to manufacture its products requires raw material, labor etc.This creats a buyer-supplier relationship in an industry.If there are few suppliers providing material essential to make a product then they can set the price high to capture more profit. Take a look at the PC industry, it faces a monoplistic power of an operating system supplier. Yes you guessed it right Microsoft. Go to purchase a Dell, Toshiba or HP's laptop it will come with Windows Vista. PCs have to be compatible with Windows platform.On the other hand if there are lot of suppliers competing for few buyers, then the buyers take control of the price. Walmart has a monoploy over its suppliers. If your product is not in Walmart, then you are out of business. To give its customers a better buy, Walmart can control the prices of the suppliers.

  • Power of Customers:

This is the pressure a customer can place on a business. If there are few buyers then they are able to dictate the terms. For example, defence contractors have to approach Governments to sell their aircrafts, submarines, missiles and amunutions. Also if switching to another product is simple and cheap. An example can be telecommunication industry. The bargaining power of buyer is high as there are lot of choice available to the buyer and the service do not vary from one service provider to the other. Switching to another service provider is also simple and cheap. Some industries such as retail industry has very weak or almost no power. It is very difficult to bargain for the rate of potatoes at say Reliance fresh store.

  • Threat to substitute products :

Substitute products refer to to products in other industry. The threath that consumer will switch to a substitute product if there has been an increase in price of the product or there has been a decrease in price of the substitute product. Suppose if the price of coffee increases substantially then consumers may switch to other beverages like tea. In early times print media was the only way of advertisement. But the advent of electronic media and internet provides alternative medium to advertise and market products. The strong 2 wheeler market in India can face a stiff competition from a substitute Tata Nano which is providing a car which is just shade costlier than the bikes. Travelling by airlines or by railway AC -II tier can be a substitute for each other depending on the factors like time, money, personal prefrence etc.