Evaluating Cement Industry

Topics: Porter five forces analysis, Complementors Pages: 6 (1570 words) Published: September 18, 2012
The model of the Five Competitive Forces was developed by Michael E. Porter in his book “Competitive Strategy: Techniques for Analysing Industries and Competitors” in 1980. Since that time it has become an important tool for analysing an organizations industry structure in strategic processes.

Porter's Five Forces Model is probably the most widely used tool in business strategy. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

Entry barriers are not too high in cement industry. The key barriers are: - As cement industry is capital –intensive, Capital is the biggest constraint, which only big player will have access to.

Economies of scale are an important factor of the industry and this will reduce the cost of cement which would favour the bigger players, like Birla group or Gujarat Ambuja. Knowledge to this fact will discourage the new entrant.

Price plays an important factor, as differentiation in cement industry is low. Thus, Cost advantage is critical. Companies, which can have a sustainable low cost position, will have a competitive advantage. The major players in India do seem to have a similar cost position. Gujarat Ambuja has been able to sustain a low cost position.

Cement, being a bulk commodity, is a freight intensive industry and transporting cement over long distances can prove to be uneconomical which acts as an important constrain to enter the cement industry. High capital costs and long gestation periods is also an important factor for an entry in cement industry.

Not an easy access to limestone reserves (principal raw material for the manufacture of cement) also acts as a significant entry barrier. IMPACT OF ENTRY BARRIER OF CEMENT INDUSTRY ON AMBUJA
This element is in favour of Ambuja cement - as the companies in cement industry needs to be capital intensive so not every one can enter the industry easily.
Secondly as brand does not play an important role in the industry but price is a very important factor to sustain in the industry it favours Ambuja cement, as it is the cost –leader in the industry.

Thirdly as high capital cost, long gestation period and difficulty in accessing to raw material like limestone reserve etc helps the company to avoid intense competition.

The cement industry is dependent on three major infrastructural sectors of the economy: coal, power and transport. The inputs from these three sectors account for roughly 50% of the cost of cement. Both the availability and the cost of these inputs have a vital bearing on the fortunes of the cement players. As the raw material required by cement industry are in control of the government, so government pricing would have an impact. As government largely controls all these sectors, thus cement companies have no control on the cost and the availability of these inputs.

Suppliers have a low impact in cement industry. As this would be common to all companies there would be the similar kind of impact on all the companies in the cement industry.
Licensing of coal and limestone reserves, supply of power from the state grid and availability of railways for transport are all controlled by a single entity, which is the government. However, Ambuja cement is relying more on captive power as power consists over 40% of the production cost of cement. The company improved efficiency of its kilns to get more output for less power. Thereafter Ambuja Cements has set up a captive...
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