EVALUATING COMPANYS EXTERNAL ENVIORNMENT

INTRODUCTION

Firstly in order to estimate a companys external environment we first need to know the external forces which affect the working and the operations of the company and as all companies operate in macro environment they all are affected by factors such as 1. Economy at large; 2. Demographic condition; 3. Social values; 4. Lifestyles; 5. Technology; 6. Government regulations and legislations. Although these factors are beyond the control of the company, but for smooth and regular functioning and also to complete in the world market, the company manager needs to upgrade themselves with these factors and consider them while drafting their goals, making policies, giving directions and planning objectives.

For example: Many automobile companies are coming up with the strategy of using LPG in the automobiles looking at the continuous increase in fuel prices.

The companies need to keep a track of these changes because unlike internal factors of the internal environment, the smallest of change in the external factors affects the demand of there product.

Therefore while a companys manager scans the external environment, he must be alert for potential important outer ring development, assess their impact and influences and adapt the companys directions and strategies as needed to prosper.

Where as, the industrys dominant economic features, which helps in knowing the company better and feature which makes then distinct from others because of huge competition in the market, the factors supporting the cause are:

Market size and growth rate states how big is the industry and how fast it is growth (i.e. rapid development, rapid growth and take off, early maturing and slow growth, saturation and stagnation, decline). Number of buyers as the demand for the product is known by the number of buyers for the product, the buyers play a very important role, also as the buyers have bargaining power which they attain on purchasing goods in large volume. Degree of product differentiation Due to increase in competition, in the global market it is important to have certain features which makes ones product different from others to create their product demand. Product innovation this factor helps to know the pace of product innovation that is the R&D conditions of the company which eventually leads in determining the PLC. Pace of technology As technologies keeps on advancing within short spans, it is important for a company in order to withstand its product, to adapt such changes or it would lead to its decline. Economies of scale this factor helps in knowing whether the industry is characterized by economies of scale in purchasing, manufacturing, advertising or shipping, which help the companies with large production to have a cost advantage over the others.

And as per Michael Porter a companys macro environment is particularly affected by factors such as:
1. 2. 3. 4. 5.

Companys immediate industry and competitive environment competitive pressure, The action of the rival firms, Buyer behavior, Supplier-related consideration, Potential New Entrants.

Consequently these 5 factors by M.Porter form the 5- Forces. Which can be pictured us beneath.

Where as the way to use these 5-forces model to determine the nature and strength of competitive pressure in a given industry is to build the picture of competition in the three steps:

 Step 1 Identify the specific competitive pressure associated with each of the five forces. Step 2 Evaluate how strong the pressure compromising each of the five forces are (fierce, strong, moderate, normal or weak). Step 3 Determine whether the collective strength of 5 competitive forces is conducive to earning attractive profits.

INTENSITY OF RIVALRY AMONG THE COMPETING SELLERS: The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each others profit potential. If rivalry is fierce, competitors are trying to steal profit and market share from one another. This reduces profit potential for all firms within the industry. According to Porters 5 forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry. How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology, are able to charge higher prices and achieve higher profits, until competitors imitate them. Examples of recent technology advantage in have been mp3 players and mobile telephones. Vertical integration is a strategy to reduce a business' own cost and thereby intensify pressure on its rival... Rival sellers are prone to employ whatever weapons they have in their business arsenal to improve their market position, strengthen their market position with buyers, and earn good profits.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves: Changing prices - raising or lowering prices to gain a temporary advantage Improving product differentiation - improving features, implementing innovations in the manufacturing process and in the product itself. Creatively using channels of distribution - vertical integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market. Exploiting relationships with suppliers - for example, from the 1950's to the 1970's Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price. The intensity of rivalry is influenced by the following industry characteristics: A larger number of firms-increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry. High exit barriers place a high cost on abandoning the product.The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services. At other times, local hospitals are highly cooperative with one another on issues such as community disaster planning. Industry Shakeout.A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures.

THREAT OF SUBSTITUTES: Substitute goods are goods which, as a result of changed conditions, may replace each other in use (or consumption). Substitutes matter when customers are attracted to the products of the firms in other industries. Competitive pressures from the sellers of substitute products:

Companies in one industry come under competitive pressures from the action of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes. For example the producers of eyeglasses and contact lenses are currently facing mounting competition from growing consumer interest in corrective laser surgery. Newspapers are feeling the competitive force of the general public turning to cable news channels for late breaking news and using internet sources to get information.

Just how strong the competitive pressures are from the sellers of substitute products depends on 3 factors:

1) Whether substitutes are readily available and attractively priced : the presence of readily available and attractively priced substitutes creates competitive pressure by placing a ceiling on the prices industry members can charge without giving customers an incentive to switch to substitutes and risking sales erosion. This price ceiling , at the same time, puts a lid on the profits that industry members can earn unless they find ways to cut costs. When substitutes are cheaper than an industrys product, industry members come under heavy

competitive pressures to reduce their prices and find ways to absorb the price cuts with cost reductions.

2) Whether buyers view the substitutes as being comparable or better in terms of quality,performance and other relevant attributes: the availability of substitutes inevitably invites customers to compare performance, features, ease of use, and other attributes as well as price. For example camera users consider the convenience and performance trade offs when deciding whether to substitute a digital camera for a film based camera. Competition from good performing substitutes unleashes competitive pressures on industry participants to incorporate new performance features and attributes that make their product offerings more competitive.

3) Whether the costs that buyers incur in switching to the substitutes are high or low : high switching costs deter switching to substitutes while low switching costs make it easier for the sellers of attractive substitutes to lure buyers to their offering. Typical switching costs include the time and inconvenience that may be involved, the costs of additional equipment, the time and cost in testing the quality and reliability of the substitute, the psychological costs of severing old supplier relationships and establishing new ones, payments for technical help in making the changeover, and employee retraining costs. High switching costs can materially weaken the competitive pressures that industry members experience from substitutes unless the sellers of substitutes are successful in offsetting the high switching costs with enticing price discounts or additional performance enhancements. As a rule , the lower the price of substitutes, the higher their quality and performance , and the lower the users switching costs, the more intense the competitive pressures posed by substitute products.

Other market indicators of the competitive strength of substitute products include :

a) whether the sales of substitutes are growing faster than the sales of the industry being analyzed( a sign that the sellers of substitutes may be drawing customers away from the industry in question) b) whether the producers of substitutes are moving to add new capacity c) whether the profits of the producers of substitutes are on the rise.

Factors affecting competition from substitute products

Competitive pressures from substitutes are stronger when :

- good substitutes are readily available or new ones are emerging - substitutes are attractively priced - substitutes have comparable or better performance features - end users have low costs in switching to substitutes - end users grow more comfortable with using substitutes Competitive pressures from substitutes are weaker when :

- good substitutes are not readily available or dont exist - substitutes are higher priced relative to the performance they deliver - end users have high costs in switching to substitutes

Competitive pressures associated with the Threat of New Entrants

Several factors determine whether the threat of new companies entering the marketplace poses significant competitive pressures. One factor relates to the size of the pool of likely entry candidates and the resources at their command. The bigger the pool of entry candidates, the stronger the threat of potential entry. This is especially true when some of the likely entrants have ample resources and the potential to become formidable contenders for market leadership. Existing industry members are often strong candidates for entering market segments or geographic areas where they currently do not have a market presence. A second factor concerns whether the likely entry candidates face high or low entry barriers. High barriers reduce the competitive threat of potential entry, while low barriers make entry more likely, especially if the industry is growing and offers attractive profit opportunities. The most widely encountered barriers include:

The presence of sizable economies of scale in production

or other areas of operation - when incumbent companies enjoy cost advantages associated with large scale operation, outsiders must either enter on a large scale which is a costly and risky move or accept a cost disadvantage and consequently lower profitability. Trying to overcome the disadvantages of small size by entering on a large scale at outset can result in long term overcapacity problems for the new entrants. Cost and resource disadvantage not related to scale of operation industry incumbents can have cost advantages that stem from learning or experience curve effects, the

possession of key patents or proprietary technology , partnerships with the best and cheapest suppliers of raw materials and components, favorable locations and low fixed costs(because they have older facilities that have been mostly depreciated). Strong brand preferences and high degrees of customer loyalty- The stronger the attachment of buyers to established brands, the harder it is for a newcomer to break into the marketplace. In such cases a new entrant must have the financial resources to spend enough on advertising and sales promotion to overcome customer loyalties and build its own clientele. If it is difficult or costly for a customer to switch to a new brand, a new entrant must persuade buyers that its brand is worth the switching cost and provide them the products at discounted prices or an extra margin of quality or service. All this can mean lower profit margins for new entrants which increase the risk of start up. High capital requirements- The larger the total capital investment needed to enter the market successfully, the more limited pool of potential entrants. The capital investments relate to manufacturing facilities and equipment, introductory advertising and sales promotion campaigns. Working capital requirements. Customer credit and sufficient cash to cover start up costs. The difficulties of building a network of distributors or retailers and securing adequate space on retailers shelves- A potential new entrant can face numerous distribution channel challenges. Wholesale distributors may be reluctant to take on a product that lacks buyer recognition. Retailers have to be recruited and convinced to give a new brand ample display space and an adequate trial period. Potential entrants sometimes have to buy their way into wholesale or retail channels by cutting their prices to provide dealers and distributors with higher markups and profit margins. As a consequence their profits may be squeezed until its product gains enough consumer acceptances. Restrictive regulatory policies Government agencies can limit or even bar entry by requiring licenses and permits. Regulated industries like cable TV, telecommunications, electric

and gas utilities and television broadcasting, liquor retailing and railroads entail government controlled entry. In international markets, host governments limit foreign entry and must approve all foreign investment applications. Tariffs and international trade restrictions national governments commonly use tariffs and trade restrictions (anti dumping rules, local content requirements, quotas, etc.) to raise entry barriers for foreign firms and protect domestic producers from outside competition. The ability and inclination of industry incumbents to launch vigorous initiatives to block a newcomers successful entry- Even if a potential entrant has or can acquire the needed competencies and resources to attempt entry it must still worry about the reaction of existing firms. Sometimes the incumbents do all they can to make it difficult for a new entrant using price cuts, increased advertising , product improvements and whatever else they can think of to prevent an entrant from building a clientele. In evaluating whether the threat of additional entry is strong or weak, company managers must look at:
How formidable the entry barriers are for each type of

potential entrant- startup enterprises, specific candidate companies in other industries, and current industry participants looking to expand their market reach. How attractive the growth and profit prospects are for new entrants. Rapidly growing market demand and high potential profits act as magnets, motivating potential entrants to commit the resources needed to hurdle entry barriers. When growth and profit opportunities are sufficiently attractive, entry barriers are unlikely to be an effective entry deterrent.
The best test of whether potential entry is a strong or weak

competitive force in the market place is to ask if the industrys growth and profit prospects are strongly attractive to potential entry candidates.The stronger the threat of entry, the more that incumbent firms must seek ways to fortify their positions against newcomers and make entry more costly or difficult.

 The threat of entry changes as the industrys prospects grow

brighter or dimmer and as entry barriers rise or fall. For example, in the pharmaceutical industry the expiration of a key patent on a widely prescribed drug virtually guarantees that one or more drug makers will enter with generic offerings of their own. Use of the Internet for shopping is making it much easier for web bases retailers to enter into competition against some of the best-known retail chains. In international markets, entry barriers for foreign-based firms fall as tariffs are lowered, as host governments open up their domestic markets to outsiders, as domestic wholesalers and dealers seek out lower-cost foreign-made goods, and as domestic buyers become more willing to purchase foreign brands

Entry threats are stronger when: The pool of entry candidates is large and some of the candidates have resources that would make them formidable market contenders. Entry barriers are low or can be easily hurdled by the likely entry candidates. When existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence. New comers can expect to earn attractive profits. Buyer demand is growing rapidly. Industry members are unable or unwilling to strongly contest the entry of new comers. Entry threats are weaker when: The pool of entry candidates is small. Entry barriers are high. Existing competitors are struggling to earn healthy profits. The industrys outlook is risky or uncertain. Buyers demand is growing slowly or is stagnant.

 Industry members will strongly contest the efforts of new entrants to gain a market foothold.

COMPETITIVE PRESSURES FROM SUPPLIER BARGAINING POWER AND SUPPIER- SELLER COLLABORATION:

The supplier-seller relationship represents a weak or strong competitive force depending on: 1) whether the major suppliers can exercise sufficient bargaining powers to influence the terms and conditions of supply in their favor ,and 2) the nature and extent of supplier-seller collaboration in the industry. Whenever major suppliers have leverage in determining the terms and conditions of supply in their favor, then they are in a position to exert competitive pressure on one or more rival sellers. For example, Microsoft and Intel are known for charging premium prices for personal computers(PC) and leverage PC makers in other ways due to their dominant market status. Microsoft pressures PC makers to load only Microsoft products in Pcs and to position the icons for Microsoft software prominently on the screens of new computers. Intel pushes greater use of Intel microprocessors in Pcs by granting PC makers sizable advertising allowances on PC models equipped with Intel Inside stickers.The ability of Microsoft and Intel to pressure PC makers for a preferential treatment effects competition among rival PC makers. Small-scale retailers must contend with the power of the manufacturers whose product enjoy prestigious brand names.When a manufacturer knows that a retailer needs to stock a product that the consumers look for then the manufacturer has some degree of pricing

power.For example,the operators of Mc Donald's, Dunkin' Donuts and Pizza Hut frequently agree to source some of their suppliers from franchisor at the prices and terms available to that franchisor as well as operate their facilities in a manner as dictated by the franchisor.

The factors determining whether any of the suppliers to an industry are in a position to exert substantial bargaining power or leverage are:

1)Whether the item being sold is a commodity that is readily available from many suppliers at the going market price:Suppliers have little or no bargaining power or leverage when industry members have the ability to source their requirements at competitive prices fro alternative suppliers.The suppliers of the commodity item only have market power when supplies become tight and industry members are eager to secure what they need at terms favorable to the suppliers.

2)Whether a few large suppliers are the primary sources of a particular item: The leading suppliers have pricing leverage unless they are plagued with overcapacity,Major suppliers with good reputation who have high demand for their suppliers are harder to concessions from than struggling suppliers.

3)Whether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to attractive substitute inputs: High switching costs show strong bargaining power on supplier's part whereas low switching costs and ready availability of good substitutes show weak bargaining power.

4)Whether certain needed inputs are in short supply:Suppliers of items in short supply have some degree of pricing power, whereas if the items are readily available then the bargaining power is weak.

5)Whether certain suppliers provide a differential input that enhances the performance or quality of the industry's product:The more valuable a particular input is in terms of enhancing the performance or quality of the products of the industry members or of improving the efficiency of the production process,the more bargaining leverage its suppliers possess.

6)Whether certain suppliers provide equipment or services that deliver valuable cost saving efficiencies to industry members in operating their production process :Suppliers providing cost saving equipment or other valuable or necessary production related services possess bargaining leverage.Industry members who do not source from such suppliers have a cost disadvantage.

7)Whether suppliers provide an item that accounts for a sizable fraction of the cost of the industry's product: The suppliers raise and lower the prices depending on the bigger the cost of the component or part.

8)Whether industry members are major customers of suppliers:Suppliers have less bargaining leverage when their sales to one industry member constitutes a big percentage of their total sales because the well being of the customer then becomes the well being of the supplier.Suppliers then have a big incentive to protect and enhance their customers competitiveness viz. reasonable prices,exceptional quality and advancement in their technology.

9)Whether it makes good economic sense for industry members to integrate backward and self manufacture items they have been buying from suppliers: This issue generally boils down to whether suppliers who specialize in the production of a particular part or component in volume for many customers have the expertise and scale economies to supply as good or better component at a lower cast than industry members could achieve via self manufacture.

How seller-supplier partnership create competitive pressures: In more and more industries sellers are forming strategic partnership with select suppliers in effort to : 1)reduce inventory and logistic costs(e.g. Through just in time deliveries). 2)speed the availability of next-generation components. 3)enhance the quality of the parts and components being supplied and reduce defect rates, 4)squeeze out important cost savings for both themselves and their suppliers.

COMPETITIVE PRESSURES FROM BUYER BARGAINING POWER AND SELLER-BUYER COLLABORATION: Whether seller-buyer relationships represent a weak or strong competitive force depends on: 1)whether some or many buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms and conditions of sale. 2) the extent and competitive importance of seller-buyer strategic

partnerships in the industry. Individual customers rarely have much bargaining power in negotiating price concessions or other favorable terms with sellers like in consumer goods but an exception is price haggling in buying new motor vehicles,a house and other luxury goods.Whereas large retail chains like Wal-Mart,Home Depot typically have considerable negotiating leverage in purchasing products from manufactures because of manufacture's need for broad retail exposure.Retailers may stock two or three competing brands of a product so competition among rival manufactures for visibility on the shelves of popular multistore retailers gives such retailers bargaining strength.

Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige they gain a degree of bargaining leverage in the following circumstances:

1)If buyers' switching cost to competing brands or substitutes are relatively low: buyers who can readily switch brands have more negotiating leverage than buyers having high switching costs.When the products of rival sellers are virtually identical,it is relatively easy for buyers to switch from seller to seller at little or no cost and anxious sellers give concessions to win buyers.

2)If the number of buyers is small or if a customer is particularly important to a seller: The smaller the number of buyers,the less easy it is for sellers to find alternative buyers when a customer is lost to a competitor and if that customer is not replaced it makes a seller grant concessions of one kind or another.

3)If buyer demand is weak and sellers are scrambling to secure additional sales of their products:Weak or declining demand creates a buyers market,conversely strong or rapidly growing demand creates a sellers market and shifts bargaining power to sellers.

4)If buyers are well informed about sellers' products,prices and costs:The more information buyers have, the better bargaining position they are in.The availability of product information on the internet is giving bargaining power to individuals.Buyers can easily use the internet to compare features and prices of different products and packages.Further,internet has created oppurtunities for manufactures,wholesalers,retailers and individuals to join online buying groups to pool their purchasing power and approach vendors for better terms than they would have got individually.

5)If buyers pose a credible threat of integrating backward into the business of seller:Companies like Heinz have integrated backward into metal can manufacturing to gain bargaining power in obtaining the balance of their can requirements from otherwise powerful metal can manufacturers.

6)If buyers have discretion in whether and when they purchase the product:.Many consumers,if their are unhappy with the present deals offered on major appliances or hot tubs can delay purchase until prices and financial terms improve or they can wait for next generation products.

Lastly it should be remembered that not all buyers of an industry's product have equal degree of bargaining power with sellers, some

maybe less sensitive than others to price,quality or service differences.

How seller-buyer partnership create competitive pressures:Partnership between sellers and buyers are an important element of the competitive picture in business to business relationships.Many sellers providing items to business customers have found it beneficial to collaborate in matters of just-in-time deliveries,order processing,data sharing.

Porter's Five Forces, also known as P5F, is a way of examining the attractiveness of an industry. It does so by looking at five forces which act on that industry. These forces are determinants of that industry's profitability.

The five forces are:

1. The threat of new entrants In the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threat include all barriers to entry such as

-Upfront capital requirements -it costs a lot to set up a car manufacturing facility,

- brand equity -a new firm may have none,

- Legislation and government policy -safety, EPA and emissions,

- Ability to distribute the product -Alfa Romeo has been out of the US since the early 90s largely due to the inability to re-establish a dealer network

-Customer loyalty to established company brands -product quality is the most important factor effecting customer loyalty of automobile industry. In India maruti Suzuki has the highest customer loyalty(according to International Journal of Trade, Economics and Finance, Vol. 2, No. 4, August 2011 by U. Thiripurasundari and P. Natarajan)

-switching cost car companies offers to purchase the owners present car in exchange for a discount to reduce the switching cost

However, given India's incredible growth forecasts, infrastructure progress (especially new and better roads), and ever-expanding financing options to rural residents, the market is attractive. As such, we expect the threat of new entrants to be high

2. The bargaining power of buyers/customers While quantity purchases of a buyer is usually a good factor in determining this force, even in the automotive industry when buyers only usually purchase one car at a time, they still wield considerable power.

Buyer volume- Indian auto industry, which is currently growing at the pace of around 18% per annum, has become a hot destination for global auto players like Volvo, General Motors and Ford.

Also the automobile industry has a high buyer information availability, numerous magazines (top gear, auto India), and TV shows give the buyer with detailed comparisons and up coming models

Buyers in India have a wide variety of choice. There are more than 20 foreign manufacturers selling in India (including ultra high-end such as Rolls-Royce and Lamborghini). Of course there are also a plethora of incredibly cheap choices, like the famous Tata Nano

Even though a customer might have a wide choice of cars to choose form in the low end and mid sized cars(tata, fiat, Chevrolet, maruti, skoda, Volkswagen, Honda, Hyundai, ford, Toyota etc), choices are narrowed down when a customer looks for a high-end and ultra luxury car (Mercedes Benz, Audi, BMW, and Jaguar)

Generally, the customers buying power depend on the market.

3. The threat of substitute products If buyers can look to the competition or other comparable products, and switch easily (they have low switching costs) there may be a high threat of this force. With new cars, the switching cost is high because you can't sell a brand new car for the same price you paid for it. A P5F analysis of the car industry covers the new market, not used or second-hand. -Threats of substitute products - One need to know whether the market you are analyzing has many good alternatives to new cars such as a vibrant used car market. Used cars threaten the new market or also a very good mass-transportation system.

Purchasing a second hand car has lot of benefits such as

the value of a used car is considerably lower than a new car, the depreciation cost is lesser as compared to the new car, loans are simpler, easily available and cost lower than the new car loans Used car can be modified according to the owner's preference.

Mass transportation may not offer the utility, convenience, independence, and value afforded by automobiles the switching costs associated with using a different mode of transportation, such as AC Metro train, may be high in

terms of personal time convenience, and utility (e.g., luggage capacity),

but not necessarily monetarily (e.g., train fare is a lot cheaper than the cost of fuel consumed on a similar round trip, daily parking, car insurance, and maintenance).

The rate of substitution may depend on the buyers propensity to substitute

-Product differentiation is important too. In the car industry, typically there are many cars that are similar if we are looking at any mid-range Ford we easily find a very similar Volkswagen, Chevrolet, Hyundai or fiat. However, if you are looking at amphibious cars, there may be little threat of substitute products (this is an extreme example!).

India is famous for its two-wheelers (bikes and mopeds) and threewheelers. These are very real and obvious threats to auto manufacturers.

4. The amount of bargaining power suppliers have In the car industry this refers to all the suppliers of parts, tires, components, electronics, and even the assembly line workers (auto unions!). Labor unions are important sources of supplier power. Where an industry has a high percentage of its employees unionized as in automobiles protability is reduced.

Number and Size of Suppliers A company to manufacture its products requires raw material, labor etc. If there are few suppliers providing material essential to make a product then they can set the price high to capture more profit. Powerful suppliers can squeeze industry profitability to great extend. Incase of NANO the supplier are limited and the size of the suppliers are big enough to bring about the controlling power in the price of the car. The NANO car has more than 128 suppliers in all and the major portion of the building cost of the car is the parts supplied by the suppliers But we also know that some suppliers are small firms who rely on the carmakers, and may only have one carmaker as a client.

Suppliers products have high switching costs. In many case even when substitute are available its not that easy to opt for substitute as the next product in the assembly line depends upon it. If the change in the any part is brought about the long list of depended parts also have to be changed, which in most cases is not feasible to do.

5. The intensity of the competitive rivalry

Number and Diversity of Competitor - This describes the competition between the existing firms in an industry. the current scenario, the small car market in India is very competitive with players like Maruti

Suzuki, Tata Motors, Hyundai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1lakh car the whole momentum of the market has shifted. Now to be competitive in market other companies have to either slash rates of their existing model or have to go back to the drawing board and build again

Price Competition - Advertising battles may increase total industry demand, but may be costly to smaller competitors. Products with similar function limit the prices firms can charge. Price competition often leaves the entire industry worse off. NANO is the only player so it has the price freedom but as the Maruti and Honda are also planning to launch the car in the same segment the price competition will start

Product Quality - Increasing consumer warranties or service is very common these days. To maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly