PORTER’S SIX FORCES MODEL

Porter’s Six Forces Model

Porter's six forces" is a framework for the industry analysis and business strategy
development developed by Michael E. Porter of Harvard Business School in 1979. It Page | 1
uses concepts developing Industrial Organization economics to derive five forces
that determine the competitive intensity and therefore attractiveness of a market.
Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one where the combination of forces acts to drive down
overall profitability. A very unattractive industry would be one approaching "pure
competition”. Porter’s six forces include three forces from 'horizontal' competition:
threat of substitute products, the threat of established rivals, and the threat of new
entrants; and two forces from 'vertical' competition: the bargaining power of
suppliers and the bargaining power of customers and also Government which is the
sixth force.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL

1. Threat of Rivalry
• Concentration ratio is low in our industry due to few companies in this
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industry.

• Highly competitive industries generally earn low returns because the cost of
competition is high.

• The auto industry is considered to be an oligopoly, which helps to minimize

the effects of price based competition.

• Market growth is slow so companies fight fiercely to gain or prevent losses in

market share.

• Concentration includes brand image, number of units and market share of

the companies.

• In brand image, Honda is considered to be a number brand in quality in

across Pakistan, the second one is Toyota and Suzuki on third level.

• But on the other hand the sale of Suzuki is higher than Toyota and Honda and
Suzuki has also higher market share.

• In Automobile Industry Fixed cost is higher due to heavy machinery and

assembling plant.

• Variable cost depends is dependent on taxes, auto parts and other raw
materials like steel and other accessories.

• But the overall cost of car is not higher in Pakistan but due to taxes and the
profit prices of cars are very higher than other countries.

• Differentiation capacity is not as higher as compare to other countries,

because in Pakistan, people are price sensitive as well as brand sensitive.

• They make the decision of buying the car on the image of the brand in their
mind as well as in the market.

• Price behavior is high ,the prices of cars increasing day by day and due to
increase in prices most of the people moving towards second hand cars
rather than the new one.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL

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2. Power of Buyers
• Customer may easily and with a normal cost switch to another product.

• Switching to an alternative product is relatively simple and is not related to

high costs

• Consumers are very price sensitive.

• Now with more choice with models, premium affecting the buyers is limited
to certain models out of which maximum premium is of Rs 60,000 is on
Corolla Xli.

• Thus the power of buyers in Pakistan our auto sector is does not play a
significant part in determining how policy is determined.

• In Pakistan the people are brand conscious, there are some buyers in the
market who will emphasize on the brand name, image rather than price.

• Switching Cost is high.

• Backward integration is also low.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL

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3. Power of Suppliers
• Market is dominated by a few large suppliers

• There are no substitutes for the particular input.

• The suppliers customers are fragmented, so their bargaining power is

low

• Medium switching cost.

• There is the possibility of the supplier integrating forwards in order to

obtain higher prices and margins.

• Forward integration provides economies of scale for the supplier

• Suppliers can influence the industry by deciding on the price at which

the raw materials can be sold. This is done in order to capture profits
from the market.

• Steel is a major input in this industry and so steel prices have a sharp
and immediate impact on the product price.

• Many suppliers rely on one or two automakers to buy a majority of

their products.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL
• Supplier concentration ratio is high in Pakistan, the cars assembled in
the plants and rest of the materials is purchased from the local
vendors. So whole of the business are relying on the automaker plant.

• Substitutes supply is low, because there are very expensive for Page | 5
automaker for purchasing raw material whole from overseas, due to
high duties.

• Buyer information is medium because every vendor has some of

information about their buyers because the buyers buy a huge amount
of material from the vendors.

4. Threat of Substitutes
• There are available alternatives of four wheelers like motorcycles, three
wheeler rickshaws but these are not suitable for those people who use to
travel in four wheelers. The consumer will not go for these alternatives
because of his/her status, personality.

• Switching cost is high because the cost of motorcycle and three wheelers are
low

• In Pakistan, the main problem is that alternatives are available but the
customer of four wheeler cars will not go for these alternatives the main
reason is in Pakistan the people are status conscious.

• In Pakistan people is price sensitive.

• The price of petrol has a large effect on consumer’s decision to buy vehicles.

• The new technologies available also affect the demand of the product

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL

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5. Threat of New Entrants

• Scope of economies is high due to status difference, Innovation,
Commercialization, Imported vehicle etc.

• Lack of supplier and distributors can create problem for new entrants

• Brand equity is also high because Honda, Toyota and Pak-Suzuki have a good
reputation in the market.

• Switching costs depends on the new entrants that what it will charge and
what are its cost determinants.

• Capital requirement is very high because of the infrastructure, purchasing

high equipment etc. and specially assembling plant or manufacturing plant is
the main investment area which requires a huge investment.

• It is very difficult for new entrants to capture the market and use their
resources because current competitor will be utilizing at maximum level

• In Pakistan people are brand conscious so switching towards another brand is

low.

• Price factor can help the new entrants to access the market easily.

ANALYSIS OF PAKISTAN INDUSTRY (9099)

 PORTER’S SIX FORCES MODEL

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6. Government
• The development of automobile industry like other industries is too
depending on consistent government policies.

• Any sudden change in the official priorities certainly affects the long-term
investment patterns.

• Inconsistent government policies and uncertain decisions not only discourage

the foreign investment but also create insecurity among local manufacturers.

• Government policies have played an important role in the auto sector based
primarily on the effects of duties and deletion level policies.

• Even though this has remained core policy, due to unprecedented increase in
demand has made the government rethink its policy.

• AIDP (AUTO INDUSTRIAL DEVELOPMENT PLAN) was launch by government of

Pakistan after 2005.

AIDP

Following objectives were agreed;

 Long term investment

 Encourage growth
ANALYSIS OF PAKISTAN INDUSTRY (9099)
 PORTER’S SIX FORCES MODEL
 Promote domestic competition

 Enhance competitiveness

 Stimulate innovation
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 Facilitate auto industry’s

 integration into the global

 supply chain

 The used vehicles import policy

 will be regulated so as not to

 impede the growth of the local

 industry while protecting

 consumer interest.

• Setting up two Auto Cluster /SEZ near Pakistan Steel mill, Port Bin-Qasim,
Karachi and the other near Motorway at Lahore.

• AIDC (Establishment of Auto Industry Development Council): Institutional

Mechanism including industry representatives for regular assessment and
Review of progress under the policy.

• AIDP encourages the companies to corporatize its affairs and to make their
accounts transparent as certain incentives would be allowed only if the
investment or technology acquisition has been duly capitalized in their
financial statements.

• In the modern world, open companies attract more investment, strategic

partners and global customers for its products.

ANALYSIS OF PAKISTAN INDUSTRY (9099)