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Applying Michael Porter's Five Forces Model to assess industry attractiveness.
(Taniya Gupta, MBA 2010-2012, I Year, First India School of Business)
Michael Porter's five force model is a business strategy tools that is used to make an analysis of the attractiveness of an industry. This tool has been used for over two decades around the world and is as relevant today as it was ever. The attractiveness assessment is done by doing in-depth study of 5 fundamental competitive forces at the level of the industry:
1. Competitive rivalry within an industry.
2. Threat of new entrants.
3. Threat of substitute products/services.
4. Bargaining power of suppliers.
5. Bargaining power of customers.
What is the level of competition prevailing in a particular industry is a question of very much importance to determine the attractiveness of that industry. If the industry has intense competition with number of players in each space vying for the same pool of customers, the industry is less attractive. Even in context of a competitive rivalry, If a company has cutting edge technologies, outstanding quality of products or services, range of services, cost advantage or any other USP or competitive advantage, it would still do better than others in the industry. However, if we were to compare companies in a more competitive industry vs. those in a less competitive one, the companies in the former industry would be worse off for an equivalent effort. Also there will be fewer companies doing well in a more competitive industry.
If the rivalry among the organization is low, the industry is considered to be more attractive. It is generally in the interest of everyone if the rivalry in moderate so that different companies focus on respective segments, have different prepositions to each other and serve their customers comfortably without everything being governed by low prices, thin margins and low flexibility and low creativity and innovation.
Threat of new entrants:
Players in an industry have to analyze the possible threats in terms of new players coming in and competing for the same pie, markets, customers and market share. What are the possible entry barriers? How easy is to enter the particulars industry in terms of investments, experience, technology, approvals, customer switch ability, distribution channels etc.
An industry is more attractive if the entry barriers are high. In fact, many incumbent players sometimes collude to create those barriers for the future entrants.
For the entrant players it is easy to enter an industry where there is less need for high end technology, complex distribution channels, approvals, capital investment, people competence etc.
Threats of substitute products/services:
|The extent and ease with which new products/services could replace the industry products and services is a major force on the industry and affects industry attractiveness. To mitigate this risk and to face the threat, the incumbent players invest in R&D and are on the look out for substitutes so that they are the first ones to bring out substitutes.
Bargaining Power of suppliers:
For its factors of production for its goods and services, each industry requires suppliers. How few, strong, organized and united are the suppliers is a critical element in the industry's attractiveness. In addition, if there is demand-supply gap for supplies, the bargaining power of the suppliers enhances.
Bargaining power of suppliers means how strong are the suppliers in that particulars industry? It depends upon the number of suppliers. if the number are large, then their power to bargain is less and if there are few, then they will be in a strong position to bargain for price, terms of business, time duration, product specification, hence making life tough for the industry under question.
Some players in the industry try to blunt the bargaining power of suppliers by integrating backwards, establishing long term contracts of having multiple suppliers.
Bargaining Power of customers:
It depends upon the numbers of customers, their ability to unite and influence, how evolved, how much is their mobility (or lack of loyalty and ease of switching) to the next supplier and how demanding they are.
If customers are more and there is only one or two players in the industry, then the customers will have less power to negotiate and if the players are more and customers have options with ease& low cost of switching, they have strong power to bargain in terms of price, quality, delivery schedule, terms of business, specifications level of service etc.
Porter's model provides useful insights for finding out attractiveness of an industry and strategies for players in the industry to move to a stronger and competitive position within the industry.
The model may be used by existing players, entrants to the industry as well as investors to the industry.
An industry which is more attractive than others will attract a number of players and eventually profitability for all the players will go down. So in an equilibrium state, the attractiveness across industries tends to even out. This could however take time due to market imperfections and people perceptions. And it is this time that industrialists, investors (direct and stock market), entrepreneurs and strategists could leverage
Retail sector provides tremendous opportunities- Rajesh Rai, Director United Colors of Benetton.
(Sneha Yadav, MBA 2010-12 -I year, First India School of Business)
Students of FISB had an interactive session with Mr. Rajesh Rai, Director (HR), United Colors of Benetton (UCB). Mr. Rai discussed on multiple aspects including the growth of United Colors of Benetton in India, His experience in the Corporate Sector and Scope and opportunities in the retail sector.
UCB has its own garment retail outlets in most of the high-end markets of India. It has established it’s presence and brand in the market over a period of time. The Company’s Image is built on the quality and range of its garments for the whole family. Those are its differentiators. According to Mr. Rai, the quality, range and the designs are company's USPs. Mr. Rai also shared his corporate experience. He started with Consultancy Firms like E&Y and Arthur Andersen and after some years joined United Colors of Benetton.
Mr. Rai said that there is tremendous scope in Retail Sector and it’s a growing sector which is providing lots of job opportunities. He also said that it is one of those three sectors where 90% of MBA will be working after completing their MBA -the others being Telecom and Financial insurance services. He further added that the best way to start in this industry is to first understand the basics of retail by working at the retail store at the frontline sales where one can interact with the end-users to understand the needs of the market and customer. By doing so, one will be in better position to take right decision at senior levels of management.
Mr. Rai also explained that excellence in both Marketing and Retailing are critical aspects of building a market presence. According to him, Marketing is about branding, creating a mind share and making the customers aware about the product whereas retailing is reaching out to the customers and completing the sale.
This session with Mr. Rajesh Rai was indeed very informational for the budding managers of First India School of Business.
Micro Finance: Solution for unbankable people.
(Sneha Yadav, Manita and Ranjan Bhagat, MBA 2010-12 -I year, First India School of Business)
Microfinance is one of the most talked about emerging sector of the Banking and finance sector particularly in developing countries for the last 10 years.
This article discusses the basic principles on which Micro Credit or Micro finance works, compares it with traditional banking finance and establishes the importance of Micro finance in societies like India.
The article is based on the learning and discussions the students of First India School of Business had from the guest lecture by Mr. Mukul Harmilapi, CEO, and First Capital who delivered the lecture at the institute on August 28, 2010.
The key aspects discussed here are basic characteristics of Microfinance, starting a Microfinance venture, About Microfinance Companies, Functioning of Microfinance Company, Advantages of Microfinance vis-a- vis a traditional Bank and relevance of Micro Finance to India.
Microfinance Companies are for the non-bankable people which could be as high as 60- 70% in our country. Therefore, Microfinance has a huge potential in India. People in rural area are unemployed; they need money for taking up any economic activity. Traditionally the money lender has played this role leading to lifelong exploitation of the borrowers. Microfinance provides these people a better alternative. In most models, it not only provides money but also provides training, marketing and raw material support and general life mentoring.
It can be started by anyone with small investment. Its objective is to increase the economic base for poor villagers so as to give them an opportunity to come out of the cycle of poverty and free them from the clutches of 'Sahukar'. And to earn profit and do well by doing good.
Microfinance creates a huge employment opportunities as the entities are people intensive. Microfinance institutions generically charge 24-28% rate for the loans given. They use different approach for rural and urban area. Microfinance companies prefer to lend to Women as they found women as more trustworthy' less mobile and more responsible as compared to men. They lend only to groups of people known as Self- Help Groups (SHG) and that to for productive and income generation activities only. They also train the borrowers on how to utilize the loan. Their Per ticket lending varies from Rs. 5000- 10,000 and Collection is on a daily or Weekly basis.
There are four ways of starting a Microfinance company (a) NGO (b) Corporate entity (c) NBFC (d) Trust Some success stories in the field of Microfinance are the Grameen bank in Bangladesh and SKS Microfinance in India. SKS started functioning as a NGO in 1994 with seed capital of Rs. 5000 and later converted itself into a trust, acquired a NBFC and then entered the share market and today in 2010 post its IPO it is a 1300 crore market cap company having 30 million employees; First Capital provides loans up to Rs. 50,000 in urban areas while the global pioneers and success story Grameen Bank (Bangladesh) started by Muhammad Yunus provides loans mostly to women. Grameen Bank and Mohammad Yunus were awarded the Nobel Peace Prize in 2009 for their work.
Micro finance companies take loan from commercial developmental banks (for example NABARD in India) at approximately 10% and give loan to SHGs at 24-28% out of which about 10% is the cost of loan administration.
Swot Analysis of ITC Limited- 100 Years Journey.
(Manita Yadav & Ankur Awasthi, MBA 2010-12 -I year, First India School of Business)
ITC Ltd. is one of the India’s largest multinational corporate enterprises. It was registered in ‘Calcutta’ with a small office in Radhabazar Lane, with one expatriate manager and one acquired cigarette manufacturing facility in Munger, in 1910. Now, ITC is one of India’s biggest and best-known private sector companies. In fact it is one of the World's most high profile consumer operations organisations.
This article is a SWOT analysis of this organisation in its 100th year of operation.
The organisation has some major strengths that give it a competitive advantage over its rivals.
1. Strong Financial Performance: On 31st march, 2010, ITC’s market cap was Rs. 114000 crores with a Gross income of Rs. 26,863 crores and Profit after tax of Rs. 4061 crores. The company continues its impressive record of financial performance.
2. Products Portfolio: ITC’s portfolio of products and services is represented by over 50 energetic Brands in a range of more than 650 stock keeping units (SKUs).
3. Distribution Network: ITC’s products are available in over 6 million retail outlets in the country. Its formidable Distribution organisation directly services more than 2 million of these retail outlets. It used its experience of transporting and distributing tobacco products to remote and distant parts of India to the advantage of its FMCG products.
4. Environmental Friendly: ITC has a status of being ‘Water Positive’ for the 8th consecutive year, ‘Carbon Positive’ for the 5th year in succession and ‘solid waste recycling positive’ for 3 years in a row. ITC is the only enterprise in the world of its size to have achieved and sustained these three global environmental distinctions. As consumers and investors become more environment friendly, these considerations will provide the organisation an opportunity to create USPs and stronger brand loyalty and brand equity.
5. Research & Development: ITC recognises that cutting edge R&D can foster breakthrough innovation and create powerful sources of sustainable competitive advantage. This vision has led to the establishment of a state of the art R&D centre at Bengaluru with over 50 world- class scientists. Its R&D program will create new game changing business opportunities.
6. Socially Responsibility: ITC’s initiatives to build social capital through extensive community engagement have led to the creation of sustainable livelihood opportunities for over 5 million people. ITC has helped create more than 20,000 rural women entrepreneurs. ITC’s supplementary education initiative has reached out to over 200000 school children in rural areas. ITC’s value chain supports over 5 million livelihoods.
7. Brand Equity: ITC is one of the best known brands in India. The above factors definitely make the company a strong corporate organisation.
Weaknesses: In spite of several strengths, there remain some areas of weakness and concern for the organisation.
1. Dependency on the tobacco business:
To fund its cash guzzling FMCG start-up, the company is still dependent upon its tobacco revenue. Cigarettes account for 47% of the company’s turnover and for 80% of its profits. So there is an argument that ITC’s move into FMCG is being subsidised by its tobacco operations.
2. Not present in many important sectors:
Although ITC is a diversified company trading in a number of business sectors such as cigarettes, hotels, paper, agriculture, packaged foods and confectionary, branded apparel, personal care and other FMCG products, greeting cards, Information Technology, safety matches, incense sticks and stationery etc. Yet, it does not have presence in many important sectors such as insurance, infrastructure, banking and financial services, BPO, telecom, automotive etc. and thus becomes comparatively weak when compared with other conglomerates like the Bharti group, the Tata group and the Ambani groups.
3. Local Company:
ITC is a local company. It does not have a large portfolio of exports in either products or services. This makes the company comparatively weak in terms of being able to leverage global opportunities, talent & financing.
The above represent some of the major weaknesses the company has.
Opportunities What does the future have as areas of opportunities for the company?
1. Leveraging its brand equity :
ITC’s products & services are of high quality. If ITC enter into any business or launch any product, consumer know its ITC’s product, consumers shall trust these to be of good quality. ITC’s brand equity would make ITC successful in most sectors.
2. Right size at the right time:
A corporate must have the right organisational and investment capability and this must coincide with a growth stage in the economy in which it operates. This seems to be a perfect setting for ITC. Given the consumption of most products and services in India at a level far below the global standards and that the Indian economy is on a roll make it a perfect platform for a company like ITC which already is at a fairly strong stage in its own growth with the necessary organisational and financial muscle. For example, the FMCG sector is expected to triple in size to over Rs. 355000 crores by 2018. ITC is a major player in this sector. ITC has investment opportunity of up to Rs. 8000 crores over the next 7 to 10 years to drive growth in this sector.
For example, in Personal Care Products, Per capita consumption in India is among the lowest in the world offering an opportunity for ITC’s soaps, shampoos and fragrances. Similarly, India’s consumption of Paper, Paperboard & Packaging is one of the lowest in the world at around 5 kg. per year compared to nearly 300 Kgs in US, 200 Kgs in UK and 45 Kgs in China. With spread of education and economic growth, demand is expected to grow. ITC has an investment opportunity of up to Rs. 6000 crores for growth. Further, ITC’s Hotels are at the vanguard of service excellence and are an embodiment of Responsible Luxury. International arrivals in India are only 5 million a year, compared to around 80 million in France, 58 million in US and 55 million in China. At conservative estimates, India needs 50000 rooms in next 2 to 3 years. This sector too carries an investment opportunity for ITC of up to Rs.9000 crores in the next 7 to 10 years to fuel its growth.
ITC FMCG brands such as Aashirvaad, Mint-o, Bingo, Sun feast and others operate in such high growth segments that given ITC’s strengths in market development, product development and marketing penetration, the company can script its own growth targets and achieve it.
3. Synergies across businesses and leveraging domain expertise for growth in other sectors:
ITC’s fast growing Information Technology subsidiary is founded on a strong base of domain knowledge derived from ITC’s multiple businesses. It will continue to add significant value to ITC’s business by providing solution and by enabling them to leverage Information Technology as a source of superior competitive advantage.
Similarly, ITC’s agri-business with its deep rural linkage is well poised as a supply chain partner to create value for ITC’s Food and Tobacco businesses. Its large presence in rural India, with the unique e-choupal infrastructure, will be progressively leveraged to widen ITC’s FMCG distribution network. ITC uses the network to source and create the raw material from the farmers.
4. The unique reach and distribution network of E-choupal:
E-choupal is a community of practice that links rural Indian farmers using the internet. It is also an ambitious project that has a goal of reaching 10 million farmers in 100000 villages. It has already benefited 4 million farmers in 40000 villages. This platform provides ITC an opportunity, virtually unmatchable, to ride the rural growth that India in witnessing for the current sets of products and services and additional ones that can be offered from the same network.
The above opportunities beckon the organisation as it gets into its second century of operations.
Threats Are there any threats the company needs to be watchful about?
1. Competition: The obvious threat is from competition, both domestic and international. The law of economies dictates that if competitors see that there is a solid profit to be made in an emerging economy, more and new products and services will be made available. Global companies will see India as an exciting opportunity for themselves to find new market segment for their own offerings. This will put ITC under constant and sustained competitive pressure from international offerings with deep pockets for a long battle.
2. Pressure groups and Government Policy:
Tobacco and allied product businesses, a major cash cow for ITC, will remain under public, anti-tobacco, health lobbies and governments through higher excise duties, advertising restrictions, and packaging guidelines, point of sale restrictions, cancer and TB campaigns with even a remote possibility of complete ban.
3. General threats:
Wide income disparities leading to social tensions, terror acts, political risks, legislation changes, tiffs with taxation and excise authorities and public outrage from negative impacts of products d services remain general treats for the company. The above, though few, could be potent threats to the company. In summary, ITC will need to overcome its weaknesses, leverage the opportunities through its multiple strengths and be wary of the threats to march into another 100 years of its glorious journey.
Leadership lessons from conducting an Orchestra.
(Fayeza C. P & Khitiz Rawat, MBA students, First India School of Business Gurgaon)
Leadership is the art of getting things done by others who take pride in having done it. This article is based on the leadership lessons through an orchestra show conducted by the famous leadership guru and orchestra conductor Roger Nuremberg. He explains various aspects of teamwork and leadership with the practical example from an orchestra.
The various learning’s for effective leadership and winning organizations are as follows:
1. Individual skills are the building blocks of an organisation:
The first building block for any organization is the individual skills of the employees in the organizations in their respective areas of work. Coordination, teamwork, leadership and delegation will have little meaning unless the members of the organisation are competent in doing their respective work. For example in case of the orchestra unless the drummers, guitarists, and violinists can play their instruments well with fingers, muscles and all the sense engaged, quality music cannot be created whatever the other enabling factors. Similarly, in a corporate organisation, the people must be skilled in their functional work- that\\\'s the first requirement- the building block.
2. Teamwork and Coordination is the key to organizational achievements:
Team work needs to be very intense with the right communication- verbal and non-verbal through the right body language. It is always important to ensure that there is proper coordination in the team. As in an orchestra, lack of team work will not provide proper rhythm and this will kill the spirit of the music.
3. The organisation has different realities at local and global levels:
There are different places in the organisation by levels, geographies and functions. Each of these has its local realities in the organisation. Then there is the podium that every organisation has- the place for the leader with its global reality. The information available, views and perceptions are different at different places leading to the creation of a global reality with its big-picture view for the leader and the local view and local realities for the others. The leader must understand that what he sees others don’t. Incorporating the local realties and being able to take global decisions based on that and communicating global realities to the organisation are key leadership roles. In an orchestra, the audience in a flute corner will hear a different music than the audience standing with the conductor. The place in an organization is an important aspect with the local reality i.e. the individual department or the global reality which refers to the overall perspective of the organization. For instance, for a CEO, the leader, it is important to know that others don’t know what he knows.
4. The true leadership is when the leader is not required:
The best leaders are not those who are indispensable. The leader must train, motivate, empower the team and creates systems and processes such that the team performs as well in his absence as in his presence. The best leader is the one who makes himself redundant. If the orchestra can perform well even when the conductor is away, we would say that is a great conductor.
5. Every word and message from the leader will be keenly observed: Every message sent by the leader has a great impact on the organization. People in the leadership should be careful because their messages mean a lot to the organization and creates immediate responses. The messages could be through smallest of words or actions.
6. Leadership is about committing first to something which has not happened and trusting the organisation to do it:
The leaders create a vision- many a times this is something that’s new. The leader commits himself to this vision first and communicates this vision to the organisation. When the vision or goal of the team is well described it is easier for the team to produce best result. The leader cannot wait endlessly to see what the organisation will do because then the organisation and leader will keep waiting for each other. The leader trusts his decision and trusts the ability of his team to execute his decision.
7. Delegation works better than micro-management for leaders:
The leaders should let the members work according to their ideas rather than micromanaging and pointing mistakes. He just has to fix the goals and let the team perform. The role of the leader is to create a space within which the team can perform. People lose their creativity when too many detailed instructions are given. Leader should have the confidence in the ability of his followers to be able to delegate. In an orchestra, if the conductor is bossy and if the directions from him are too many, too often and too detailed, the musicians would not be able to create soulful music freely.
8. Leadership is incomplete without trust:
One of the key qualities of leaders is to have trust in the capabilities of his team. He should believe that when he launches a new product that his team will support him. If the leader believes the organisation has stars or if he believes that it has non-performers, the team will prove him right in both cases. This is the Pygmalion effect in leadership and management.
9. Great leaders create meaning for their people:
One of the key qualities of leaders is that he or she should create a sense of meaning among the team members about what they do- he broadens the frame from- just doing a job to creating an institution, saving lives, moving the soul of the audience through music or reducing suffering through their products and services. When people find meaning in what they do they are able to achieve great results.
10. Leaders create external focus:
If each department in an organization is focused only on the satisfaction of their individual department, their objectives and its department head, then it is as internal focus. But for an organization to have better result it is important for the all the people in all the departments to focus on the end result i.e. the final outcome from the organisation and the customer satisfaction. Leaders create an organisation that is externally focused or customer focused. An orchestra creates better music when they are focused on how it will sound to and move audience rather than each of the instrument teams playing their part well irrespective of anything else with an objective to achieve the drummers were technically right’.
There are the qualities required for a leader to be effective lead an organization successfully. Thus the aspects discussed about will produce a smooth running organization as well as create great music for an orchestra.