Porter’s Five Forces Model
Porter five forces model is basically a framework for industry analysis. It helps in business strategy development. It was presented by Micheal Porter. According to this framework, there are 5 forces that determine the competitiveness of a market and its attractiveness and profitability. These forces are threat of substitute products, bargaining power of buyers, bargaining power of sellers, threat of new entrants, competitive rivalry within an industry. Any industry can be taken as an example of this model. Take for example, the Pakistani Textile industry. The threat of substitutes is high, the bargaining power of buyers is high, the bargaining power of seller is low because there are many of them, the threat of new entrants is high because it is easy to set up a textile mill. So the competitive rivalry in the industry is high because the set up cost is low and there are a number of substitutes available to the customers.
The Indian textile industry is one of the oldest and most significant industries in the country. It accounts for around 4 per cent of the gross domestic product (GDP), 14 per cent of industrial production and over 13 per cent of the country's total export earnings. In fact, it is the largest foreign exchange earning sector in the country. Moreover, it provides employment to over 35 million people. The Indian textile industry is estimated to be around US$ 52 billion and is likely to reach US$ 115 billion by 2012. The domestic market is likely to increase from US$ 34.6 billion to US$ 60 billion by 2012. It is expected that India's share of exports to the world would also increase from the current 4 per cent to around 7 per cent during this period.
Textile industry provides one of the most fundamental necessities of the people. It is an independent industry, from the basic requirement of raw materials to the final products, with huge value-addition at every stage of processing . Infact , it is estimated that one out of every six households in the country directly or indirectly depend on this sector.
Here we analyze the sector's dynamics through Porter's five-factor model.
1)Threat of New entrants
Indian Textile Industry is very dependent on personal contacts and experience. The new actors would have to bring some kind of client base along with the new establishment. Product differentiation may constitute a barrier of entry as manufacturers are heavily dependent on references and word of mouth. Without any established client portfolio it is difficult to attract, endure increased costs in creating sample collections to show potential customers. Hence, in startup phase costs are not only associated with the manufacturing required but also with the costs for designers and creating samples. In the sense of reference dependency, barriers of entry are considered as very strong.
As the new entrant has limited experience in textile manufacturing and there are no built up relationships with customers, they might experience disadvantages relative to the established competitors.
Governmental policies do affect the business environment to some extent. An example of this is subsidies, which are offered to companies establishing production in certain regional areas.
In addition to these potential barriers of entrance, new entrants may have second thoughts about entering the new market, if existing manufacturers may retaliate on new entrants. The Indian textile industry though, has such a large population of manufacturers so any new actors may hardly be noticed by the competition, which minimizes the risk for retaliation.
2)Bargaining power of customers (demand scenario)
Global textile & clothing industry is currently pegged at around US$ 440 bn. US and European markets dominate the global textile trade accounting for 64% of clothing and 39% of textile market. With the dismantling of quotas, global textile...
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