Amjad hammad

1165230

Porter six forces for aluminum industry in Palestine

Any firm is concerned with the intensity of competition within the industry. The level of
intensity is determined by basic competitive forces described by Michael Porter. These
forces are threat of new entrants, rivalry among existing firms, threat of substitute
product or service, bargaining power of buyers, bargaining power of suppliers, and
relative power of other stakeholders. When scanning an industry, a firm must assess the
importance to its success of each of six forces. The stronger each of these forces is, the
more limited firms are in their ability to raise prices and earn greater profits.

I will be discussing these forces on the aluminum industry in the Palestinian market
assuming I represent the top management in NAPCO Inc.

Threat of new entrants: low

Threat of new entrants in aluminum industry in Palestine is considered low. When
analyzing the entry barriers we find that this industry have high entry barriers and it is
not easy for others to compete in the industry meaning that high profits are generated
by existing firms. Some of the entry barriers are as follows:

 Product differentiation: aluminum industry in Palestine created high entry

barrier. NAPCO Inc. for example produces aluminum in high quality and has
earned certificates of good quality products.
 Capital requirements: the need to invest huge financial resources in
manufacturing aluminum made it hard for investors to compete in this industry
because you need costly assets and raw materials in addition to big sized factory.
 Access to distribution channels: it is not easy to import aluminum and export it
to surrounding countries due to Israeli restrictions. Also agreements for
importing raw materials are not easily conducted due to the occupation whereas
Israeli products are available in the market. This barrier is one of the biggest
barriers.
  Economies of scale: NAPCO is a lead in national aluminum industry and if
economies of scale are reached profits are increased and cost advantage is
reached.
 Cost disadvantages independent of size: NAPCO has earned sufficient market
share in the Palestinian market (about 35% of the market) and became a
standard for this type of industry.
 Government policy: in the Palestinian situation the Israeli side put restrictions on
importing raw materials of aluminum and also on exporting to other countries.
Some aluminum products are prohibited from being imported while it is allowed
to Israeli aluminum factories. On the other hand, taxes put by Palestinian
authority on aluminum industry are heavy. These restrictions make it hard for
other competitors to get in this industry.

Rivalry among existing firms: low-medium

Rivalry in aluminum industry is related to the presence of several factors, including:

 Number of competitors: competitors are very few, the Israelis are the major
competitor in the Palestinian market, even though the Israeli industry is much
bigger than the Palestinian and they are controlling prices and exporting.
 Rate of industry growth: the demand for aluminum in the Palestinian market is
fast growing because we are building a new state and needs houses and
buildings for the new state such as ministries, hospitals, schools, universities, etc.
this growth will increase the chance for investors to compete in aluminum
industry and start thinking about getting involved in the industry.
 Product characteristics: aluminum is considered a unique product and quality
matters to customers. NAPCO is producing high quality aluminum close to the
quality of Israeli aluminum which differentiates it from newly coming
competitors.
 Amount of fixed costs: there are fixed costs such labor and utilities and rent, so
the factory is running no matter the demand.
 Capacity: the aluminum factory is running on its full capacity because it is taking
a big share in the market. Supply and demand is balanced according to the CFO
of NAPCO
 Height of exit barriers: exit barriers are high due to huge machines and
equipment’s invested in the factory and this will cost the industry a lot to shut
down the factory and making workers go home and selling equipment will make
a big loss.
  Diversity of rivals: the diversity in aluminum industry in Palestine is moderate
because design and quality is being competed and not much different ideas are
presented, also we are talking about local market not global.

Threat of substitute products: low

A substitute product is a product that appears to be different but can satisfy
need as another product. We can clearly notice the rareness of sources of
aluminum raw material in Palestine and so there is no substitute product for
aluminum so the threat tends to be low.

The bargaining power of buyers: low-medium

Buyers affect an industry through their ability to force down prices, bargain for higher
quality, and play competitors against each other

 In aluminum industry in Palestine buyers purchases large proportions of

aluminum but this is not a power because the aluminum providers are
few and customers have not much choices in buying aluminum.
 The buyer is not able to produce aluminum.
 Alternative buyers are limited because Israeli aluminum is more
expensive and imported aluminum is not of a better quality of the
Palestinian.
 Profit margin is high in aluminum industry according to statistics.
 The final product is very important to buyers because aluminum products
should not be replaced for life so it needs to be of high quality, even
though some buyers prefer cheaper and lower quality aluminum.

The bargaining power of suppliers: high

Suppliers can affect an industry through their ability to raise prices or reduce the quality
of purchased goods.

 Suppliers of aluminum are limited due to Israeli restrictions on imports

and thus not much suppliers are available, also prices are controlled by
suppliers because they know that you are forced to import from them
 or import from the Israeli side. So a Palestinian aluminum industry is not
able to easily switch between suppliers.
 The product is unique and switching cost will be high and new
agreements will need to be signed when switching to other aluminum
supplier.
 Substitutes are not really available due to restrictions on importing raw
material. Also sources of raw material are rare in Palestine.
 No large purchases are made from suppliers due to that Palestine is a
small market share relative to other countries, also not all suppliers
especially from arab countries are exporting raw materials to
Palestinian aluminum industry because they don’t want to deal with
Israeli borders and agreements, as CEO of NAPCO declared.

The relative power of other stakeholders: moderate-high

The sixth force that should be added is related to variety of stakeholders groups from
the task environment including governments, local communities, unions, etc.

Israeli government regulations on importing raw materials and exporting finished goods
to other countries are very strict, preventing aluminum industry from expansion. Also
high taxes paid by aluminum industry is lowering profits and not helping the industry to
survive. Also trade agreements signed by the Palestinian authority with Israelis are
limiting the industry’s ability to grow and expand because Israeli side is not
implementing these agreements. Nowadays there is a trend in local communities to
support the aluminum industry as a national product, In addition to the rareness of
sources of raw material preventing industry growth.

Conclusion:

After conducting this analysis, we as NAPCO top management will continue in this
industry and will work on growing and expanding inside and outside the country, so
even if rivalry grew, we will at that time be a huge industry and reach economy of scales
and increase our share in the market. We will also work on limiting barriers and get an
advantage of globalization to go global. Our aim will be to come up with highest quality
products with least costs. All threats those are moderate to high will be worked on to
minimize it to the lowest.

We will work on bargaining power of suppliers to be minimized by pushing the

Palestinian authority to sign fair agreements with Israelis in order to give us a chance to
export raw materials from different sources. Also we will work on advertising to
encourage people buy aluminum from the national industry and will increase R&D to
come up with best quality products.

References:

Official website of NAPCO Inc. : www.napco.ps

Official website of APIC group: www.apic.ps

General federation of Palestinian industry report, April 2009.

Palestine investment conference report, May 2010.

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